Missing the point: The emissions trading scheme
Posted November 19, 2008
on:A recent opinion article by Graeme Edwards on the NBR site clearly articulated a critique of the emissions trading scheme that I have heard in various forms over the past year. Not only have I heard this critique from politicians and the media, but people commenting on the blog and other economists have used this critique. As a result, it is important to point out why this critique is simply wrong.
The critique is simply that the emissions trading scheme is a “scam” because global warming is not the result of carbon emissions.
Even if we agreed with this view the critique is still wrong. The reason this critique is wrongheaded is simple – the ETS is not supposed to prevent global warming, it is supposed to raise funds to pay for/reduce a liability we owe thanks to the Kyoto protocal. Now that we are in the Kyoto protocal, we want to look at two simple choices – what is the cost if we stay in, and what is the cost if we leave? The ETS was determined to be the least cost way of paying for the liability if we stayed in the scheme, and it was also determined to be of a lower cost than leaving the scheme (relative to losing international prestige and possible new trade barriers if we leave).
As a result, even if it was true that man wasn’t warming the planet with carbon introducing an ETS is still the best policy – as long as we believe that it is of a lower cost than these other potential options. The debate should lie with the cost of different options – whether global warming actually exists is irrelevant.
20 Responses to "Missing the point: The emissions trading scheme"
Brave of you to venture into the vexed world of the ETS.
This is an area where rational analysis is too often drowned-out by rhetoric and polemic from all sides. Indeed, the “debate” is often categorised as only having two sides – that climate change is an eminent disaster of biblical proportions or is a scam – when it is really a subtle and multi-faceted area, involving science, economics, politics, engineering and many other fields.
What is often missing from debates is a good analysis of risk. Too often, statements are made as if outcomes are certain.
The IPCC reports are very clear that there is considerable uncertainty (in the Frank Knight sense of unknown probabilities) around expected outcomes.
Given this, we should not be proceeding on the basis that we have a binary choice (climate change is real or not real), but how to make decisions on the basis of extreme uncertainty around potentially extreme outcomes.
Put in more traditionally economic terms, what is the expected value of an event when the probability tends to zero, while the cost tends to positive infinity? How much should we be prepared to pay to avoid this event, when there is also uncertainty around both the cost and efficacy of the insurance?
My view, for what it is worth, is that we enough about the possible consequences of climate change for it to be prudent for there to be less greenhouse gases than at present in the atmosphere. How much less and how quickly we should be looking to stabilise concentrations are still open questions.
Moving to the issue of the ETS itself, not only is it about the least cost method of meeting our international obligations, it is also about how we can encourage and support international efforts to address the risks of climate change. So while it is true that New Zealand’s efforts alone cannot address the risks of climate change, we are not alone. The risks cannot only be address by concerted international efforts, from both developed and developing countries. So what New Zealand needs to do is act domestically in a way that encourages other countries, especially in the developing world, to also act to address the risks.
An excellent point and one that I’m amazed keeps getting ignored.
TVNZ7’s news show last night had someone from the Business Council for Sustainable Development bringing up similar issues and the newsreader actually said at one point “all the coverage seems to assume that by delaying the ETS we’re delaying the cost, but really we’re just loading it on the taxpayer aren’t we?”. How that hasn’t always been the main thrust of the media coverage I don’t know.
And Mr Bolwing, an excellent use of Knightian uncertainty =)
The initial National Interest Analysis done for us on joining Kyoto was partly based around how our prosperity is relatively dependent on a stable climate, given our exposure to primary production and the like. The uncertainty of what climate change may do to that was a significant part of the thinking behind that.
Of course, they also thought we were in for an economic windfall from post-1990 forestry unit sales, which didn’t pan out so well…
Canada abandoned Kyoto. There’s been zero international sanction or penalty. We ought quit scaring ourselves about retribution and flattering ourselves about the effect we have on other folks’ commitment to the system. End it now.
Eric, note that Canada have NOT withdrawn from Kyoto.
Emissions trading was criticized in a study (I never keep references! what a bum!) which showed that income from emissions drecits would simply go to the general fund and be used to fund government without regard to government efficiency in energy use.
Two points:
Canada is still a party to the Kyoto Protocol, but its emission levels are well ahead of its obligations (its Kyoto target is to be at 94% of 1990 emissions over the 2008-12 period, and the report out yesterday had its 2006 emissions at 154% of the 1990 baseline). Their domestic policy is a complete muddle, made worse by an infestation of beetles that are destroying large tracts of forests. It is unclear what they are going to do.
On revenue recycling, the economic literature favours market instruments like emissions trading and carbon taxes because they produce a “double dividend”: they correct a market failure and generate revenue that can be used to reduce other, distorting, taxes. But in reality, governments are not so pure and tend to (a) put in place instruments that don’t (fully) correct market failures and (b) use the revenue to fund further programmes that create further distortions. This is one of the National Party’s criticisms of the New Zealand ETS: that it is not revenue neutral.
Smart revenue recycling is something I’m all for. The creation of a “ClimateCo” standalone unit of the MoE and Treasury that administers, receives and keeps a carbon tax, and is the body responsible for meeting our Kyoto commitments (and beyond) is superficially attractive (although I’m not deep enough in the detail to really compare it other methods). All “carbon-money” could then go to emission-reduction programs, incentives and R&D and obviously any payment of an excess over obligation. Keep it out of the general fund and focussed purely on minimising the obligation…
Of course that’s a huge deviation from current ETS thinking and I’d much prefer we just got on with SOMETHING that exposed the creators of our liability to at least some of that cost…
(Thanks for the blog by the way Matt, and the chance to have a decent level of discussion over this stuff).
[…] See the rest here […]
[…] Read the rest of this great post here […]
[…] Read more here […]
1 | goonix
November 19, 2008 at 8:47 am
So even if man-made climate change is rubbish we should keep introducing a measure to reduce carbon emissions?! Missing the point indeed.