See this article for evidence that (a) for the Chinese, Copenhagen (and climate-change generally) is about getting as much out of the developed countries as possible without committing to any major effort on its part, and (b) Chinese media is simply the propaganda arm of the state and not inclined to independent, critical analysis. Where are the counterbalancing considerations?
The All Party Parliamentary Group On Peak Oil (APPGOPO) has released a report backing Tradable Energy Quotas (TEQs) as "the fairest and most productive way to deal with the oil crisis and to simultaneously guarantee reductions in fossil fuel use to meet climate change targets". This should serve as a warning to classical-liberals that (a) not everything that uses market mechanisms is a free-market or liberal concept, and (b) despite the presence of one or two saner members in their midst (such as Vince Cable and David Laws), the Liberal Democratic party (to which APPGOPO's chairman, John Hemming MP, belongs) is still fundamentally a beard-and-sandals, Fabian, Rawlsian, meddling, fiddling, egalitarian bunch of moralizing whackjobs, who would happily suck all the fun and reward out of life in the name of "fairness".
TEQs, as the name suggests, is "an energy rationing system" where each adult receives an equal quota of energy (measured in carbon terms) that they are entitled to use annually, calculated as equal shares of 40% of the total amount of energy/carbon permitted to be consumed annually under a falling profile set by the Committee on Climate Change in accordance with the national Carbon Budgets that have recently been enshrined into law. This system is allegedly designed "to prevent the intense competition for fuels that will otherwise develop, and to ensure that every energy-user can access their fair share".
So far, so student-socialist, but the cunning of the modern socialist is that he has learned to dress his communist wolf in a capitalist fleece. So the remaining 60% is bought in weekly government auctions by banks and brokers (no rent-seeking opportunities there) on the instructions of their clients in all those organizations who want to be allowed to use energy. And trading is allowed between possessors of the initially-egalitarian personal quotas and of the auctioned rights. The system thus lays claim to be a "market mechanism", combining "social justice" with the efficiency of capitalism in the approved manner of the Third Way prophets.
It is, in this way, different only in detail of implementation, from other cap-and-trade mechanisms, though the details are particularly draconian and deluded. Capitalists (of the type that we need to save capitalism from) who extol the virtues of cap-and-trade and yet look at personal rationing like this and shudder, ought to ask themselves if they haven't been fooled by the inclusion of the word "trade" in an approach that is fundamentally about overriding the efficient allocation of scarce resources by means of state-imposed rationing. Trading mechanisms within these rationed systems are no more than publicly-authorised black markets, which have the same benefits as real black markets under state-rationed systems, but do no more to eliminate the inefficiency and iniquity caused by the distortions that result from such a system.
We are already familiar with a system that distributes resources on the basis of social utility and provides incentives for people to use more or less of the resource depending on its scarcity. It is called the free market.
There are lots of good arguments for a carbon tax. Trust The Economist to come up with a bad one.
"A tax on carbon is hardly going to stop the lights going out in a few years, but it would provide a floor price for power, giving investors a clearer sense of likely profits."
Is that just a typo? Did they mean "a floor price for carbon"?
If not, they are confused. A carbon tax will only give investors a clearer sense of likely profits by removing one component of their costs that has a volatile price - the cost of carbon, particularly under the EU-ETS (if they replace these mechanisms with a carbon tax, rather than supplement them as companies like EDF would prefer). To the extent that it increased the minimum price at which power could be produced from the cheaper, fossil-fired technologies, it would increase the confidence of producers of low-carbon energy, but not the confidence of those who must pay the carbon tax, who would have to raise their prices accordingly, aiming to retain similar margins, but more exposed to competition from volatile producers like wind energy, and just as exposed to other inherently volatile components, such as fuel costs and demand.
What a carbon tax would do would be to make alternatives to fossil fuels relatively more competitive, displacing the use of fossil fuels in the most marginal applications, reducing demand, prices and dependence on imports of fossil fuels. That is all good and wise, but it is related only peripherally to a floor price for power and greater certainty about profits, other than for low-carbon producers.
According to the Guardian:
"The government will today demonstrate its willingness to exert influence over Royal Bank of Scotland and Lloyds Banking Group by announcing £1bn of lending to wind farm developers whose schemes have been becalmed by a lack of cash... The £1bn cash arranged by the government is part of the additional £4bn of EIB lending to support UK energy projects announced in the spring budget."
This brings together several threads I have been following recently: the Government's coopting of EIB funds for their political objectives, the hype, ignorance and political-preference surrounding wind power, the resurgence of "industrial policy", delusional confidence in some quarters about the returns from and security of investments in "green technologies", and the disaster for the effective operation of markets that was the bale-out and nationalization of our most incompetent financial institutions.
Why should the banks prefer one technology over another? Presumably, they should look critically at the business models for projects of all kinds that fall within the EIB's objectives, and disburse the money on the basis of the credibility and suitability of the proposal, not simply on the basis that it uses a technology that the Government seems determined to favour almost to the exclusion of other, often more practical, alternatives.
It's utterly corrupt and stupid. And the Tories and LibDems wouldn't do much different, also having been blinkered by VILE-company rent-seeking.
This is our money they're burning, and our freedom they are destroying. How long before we can have a political option that takes government out of where it doesn't belong? Or (as some people whose political judgment I respect have depressingly concluded) is it hopeless? Must we resign ourselves to continuous decline into a patronage state, where success is achieved not by anticipating correctly and providing efficiently what people need and want, but by influencing governments to implement policy in your favour?
Who will speak for those of us who are aware of the lessons of history and know what that latter world brings? How do we fight it?
UPDATE: By coincidence, I was sent a link today to an article on EIB funds being used to bale out a bankrupt project for a Belgian offshore wind-farm. Financial services are only going to get more politicized and corrupt in the current climate.
For connoisseurs of government tripe on energy and the environment, the last couple of days have been like a banquet. The releases of the UK Low Carbon Transition Plan, the Low Carbon Industrial Plan, the Carbon Reduction Strategy for Transport, the Renewable Energy Strategy, the Renewable Energy Financial Incentives consultation, and the announcement of the new "eco-towns" are such a smorgasbord of cant and delusion that I am struggling to digest them all. In the long-run, they should provide tasty morcels of insanity for weeks to come, but in the meantime, here are a couple of choice cuts that others have spotted, just in case you missed them:
- The Times noticed that the claims of job-numbers currently in the green-energy industry and to be added by the Government's new measures are just slightly over-stated - including such jobs as slipper-makers, "workers in the North Sea gas industry as well as suppliers of wallpaper and animal bedding".
- Grant Shapps, shadow minister for housing, noticed (unusually sharply for a Conservative spokesman on green issues) that the minimum standards to which houses in the new eco-towns must be built are lower than the standards that will be required of all other developers by the time the first eco-towns are expected to be built (2016).
That'll do for the starters. Now, what shall I have to follow...
Carbon-capture and storage (CCS) is already one of the biggest political lies around. The Government is poised to grant permission to the development of several coal-fired power-stations, so long as they are "CCS-ready". They don't actually have to do any capturing, just be capable of having the carbon captured. My car is capable of having the carbon captured. It's doing it that means something. This is just a fig-leaf, to allow the Government to permit installations that they know are important to our future energy-security. I wouldn't have a problem if they'd just be honest. It's the attempt to greenwash it that makes me want to vomit.
One of the many problems with CCS is that it is energy-intensive, which means it reduces the net efficiency of power stations (possibly by as much as one-third), which means that you have to use a larger amount of fossil fuels for the same amount of power supplied to the grid. Not exactly a smart response to over-dependence on fossil fuels.
But that's not wasteful enough. Now, the Sunday Times reports, they are not just looking at capturing and liquefying the gas and sticking it in the ground (crossing their fingers that the acidic, pressurised, liquid CO2 doesn't dissolve the rock and leach out). No, that would be too simple. Now they are looking to capture it where there is nowhere to store the liquid CO2, and stick it on boats to travel halfway round the world (or whatever distance it is from Japan to the Middle East), to store in spent oilfields.
They won't be able to use existing tankers, because these ships' tanks will have to be kept cooled and pressurised. That will need energy (i.e. fossil fuels), not just at loading, but all the time the ship is in transit. And it's not obvious what return-loads they would share. So, in the name of reducing our carbon footprint, we will have boats sailing halfway round the world and back to bury a gas that will probably leak out again, and for which we don't have remotely enough storage capacity to last more than a few years, before the process becomes redundant.
Naturally, CCS is hugely popular with policy-makers the world over. In the UK, Labour, Tories and LibDems are racing each other to bid up the number of projects that should be backed. The EU is throwing money at multiple "demonstration" projects in many different countries (isn't the point of demonstration projects that you only have one or two and then go commercial?). And Obama thinks it is the magic bullet.
As the petition explains:
"The tax payer and/or energy consumer is currently paying to subsidise low carbon technology through a variety of levies and subsidies that share no common price for their efficacy in reducing carbon (or C equivalent) emissions. A well designed tax on carbon emissions, in concert with internationally agreed application methodology, would deliver huge cost and carbon savings to society, with parity and without excessive and costly bureaucracy. We the undersigned urge Government to press to replace costly local, regional and national policies with a global approach that reflects the unity achieved in the removal of CFC emitting products."
There are many details not covered in this petition, but that is the nature of an online petition. I understand that Nick wanted to add a detail that I suggested (to address many people's fears with regard to the impact on "fuel poverty"), but the system wouldn't let him.
Fundamentally, carbon tax is the best way to internalize carbon externalities, and showing support for the principle is important. If you would like to see our myriad nit-picking, micro-managing, counter-productive, bureaucratic, supposedly-green interventions replaced with one simple mechanism that applies equally to all carbon emissions regardless of source, then sign up to this petition now.
Naturally, the pro-EU-ETS brigade have hailed this as evidence that the EU-ETS is working. I think they should be a little more cautious.
We need to know to what extent the reduction was the result of the economic downturn, to what extent it was the result of increased energy prices, and to what extent it was the result of the incentives provided by the EU-ETS.
The data is not yet available for the purposes of comparison, but there will be an easy way to test the effect of the EU-ETS, if not the relative roles of the other two factors (and there are probably others).
If we see emissions carry on up in those developed countries not covered by a cap-and-trade scheme while they fell in the EU, it will be reasonable to attribute some of the success to the EU-ETS. If, on the other hand, emissions fell in 2008 in countries that were not subject to a cap-and-trade scheme, we may reasonably infer that the fall was more the result of other factors such as economic tightening and higher prices, and less to do with the EU-ETS.
We also ought to look at emissions relative to indicators of economic health, not in abstract form. Most economic indicators of national prosperity are unsatisfactory in one way or another, but if we take GDP as an imperfect but widely-accepted measure, we should compare the change in emissions relative to changes in GDP in the different areas, not simply the absolute changes in emissions.
We should probably also take account of changes in population, as each additional head in developed countries tends to increase emissions by the per capita average.
Another give-away would be if the reduction over the course of a Phase of the EU-ETS were more than required by the mechanism. The mechanism is designed only to deliver just enough, and provides absolutely no incentive to go further, so if we see emissions fall to well below the cap, we will know that something else (e.g. economic decline or offshoring of industry) was up.
And we ought to remember that one swallow does not make a summer. We would need sustained evidence over several years that industries covered by the EU-ETS were reducing their emissions relative to their output by more than industries outside the EU-ETS (or other cap-and-trade schemes), to be able to attribute the reductions to the EU-ETS rather than to other factors.
The preliminary figures for 2008 emissions strongly suggest that the price of EUAs (allowances under the EU-ETS) should fall further than their already low level (at which many large companies are already saying that there is insufficient incentive to invest in emissions-reducing technologies). With a minimal carbon-price, delivering further emissions-reductions over the coming years, other than as a result of a general reduction in output due to the state of the economy and the cost of energy, will be a challenge.
Attention focused on the renewables component of Obama's stimulus plan today. But the Americans aren't the only ones using the credit crunch as an excuse to plough vast sums of public money into their pet projects.
The European Commission today issued a revised draft list of
white elephants projects to be supported under its proposal for a Regulation "establishing a programme to aid economic recovery by granting Community financial assistance to projects in the field of energy". The programme is to cost €3.5bn. The money is to be drawn from the Common Agricultural Policy, which is obviously swimming in so much cash that several billion can be siphoned out at short notice without affecting its intended recipients.
In the Explanatory Memorandum at the start of the Commission Communication accompanying the proposal, the budgetary implication (p.4) is described in the following words:
A financial envelope of €3,500 million is foreseen in total for the three sub-programmes, consisting of €1,500 million for 2009 and €2,000 million for 2010.
The main volume of payments will be made between 2009 and 2012 with the last payments, notably for carbon capture and storage projects, foreseen for 2014/2015.
So this is a package "to aid economic recovery" in which some of the payments will be made in 2014/15. And if we look at the draft list, we see that the share for carbon capture and storage (the money to be spent at that late date) is €1,150m, one-third of the total.
The text is a little obtuse, with the budget envelope being assigned to 2009 and 2010, but the spending parcelled out over a number of years upto 2015. The only sense I can make of that is that the money will be drawn from the 2009 and 2010 budgets, but spent over a wider number of years. So, in the name of aiding economic recovery, we are drawing money out of current budgets in order to spend them on white elephants in the future, one-third of it a full five years later. How exactly is that supposed to help ameliorate the current economic difficulties?
There may be an argument for some of these projects, particularly some of the Eastern European infrastructure projects. But why are they justified in the name of economic recovery rather than energy security? Is it because it would have been impossible to justify tacking on the CCS white elephants for Western European governments' favourite oligopolists (EDF, RWE, Eon, Centrica, Enel, & co)?
How much assessment was carried out on whether these particular projects provided the best stimulus effect or the best value for energy security and carbon reductions? If we have €1.15bn available to stimulate the economy by spending tax to reduce our carbon emissions (which is the only point of CCS), there are many other options that could be delivered sooner and would provide a better bang for the buck.
Or better still, we could return this money to taxpayers, create rational incentives that value carbon fairly and appropriately, break up the vertically-integrated utilities to create a genuinely competitive and liquid market, and leave it to the economy to work out where the money can be most effective. The market certainly wouldn't pick CCS, which is why it takes a political behemoth manned by apparatchiks whose only understanding of energy and environment comes from what they are spoon-fed by the oligopolists to blow this much money to such negative effect, at a time when we can least afford it.
For numerous reasons (some set out on other posts on this site), heat is a huge, vital, yet ignored sector of our energy systems. It is responsible for nearly half the carbon emissions from the energy sector. It is the reason we are so dependent on imported gas. Twice as much of our gas goes to producing heat as producing electricity. Europe could replace all its gas-fired electricity generation, and would still be as badly affected as this winter if there were further interruptions to one of its major gas supplies during a cold spell in winter.
Despite this, the British government has so far done almost nothing to reduce our carbon emissions and insecurity in the heat sector. Indeed, policy to date has been to keep gas heating so cheap that alternatives are not viable. As a result, we have grown steadily more dependent and inefficient (no point spending money or changing habits to conserve something so cheap).
The Government has finally proposed to consult on a possible support mechanism for green heat, but unlike the simultaneously announced policy to support largely-irrelevant micro-generation, it has refused to commit to a timetable to introduce the heat mechanism by April 2010. It will be 2011 at the earliest, they say.
The eagle-eyed may spot a slight problem with that: 2011 will be after the next election. In current circumstances, a promise by a Labour government to implement a mechanism in April 2011 should be more heavily discounted than a Ukrainian bond. It is unlikely that any new government, possibly apart from another Labour government with a big majority, will place support for green heat at the top of its legislative agenda. Most flavours of government (of the options likely to result from the next election) would not be likely to implement a green-heat mechanism in the form developed under this government. The upshot is that it is unlikely that any effective action on heat will be taken before 2012 at the earliest.
As it follows from this that Tory policy on green heat is likely to be more important, I went to see what they had to say. They have put so much effort into Energy and Climate Change that I had first to look up who their spokesman was. It is Greg Clark. (Readers may be equally surprised to learn that the LibDems' spokesman on the brief is now Simon Hughes. The Minister, Ed Miliband, has at least achieved a degree of visibility in presenting his brief to the public.)
Clark regards the DECC policy consultations on heat and energy efficiency as both "a knock-off copy" of Tory policy, and as "dithering" (which says what about Tory policy?). Instead of dithering, he wants the Government to "adopt the green policies outlined in our plan for a low carbon economy".
The only component of those plans, announced by Cameron in January, to deal with green heat are to "enable biogas, methane produced from farm and food wastes, to replace up to 50% of our residential gas heating". It looks like National Grid's bullshit has not been in vain, but has been swallowed whole by the Tories. In fact, the Tories have gone further, probably because they didn't read or understand the National Grid paper (perhaps because they only saw a pre-publication draft), which at least assumed that some of this gas would have to be ACT (advanced combustion technology) syngas, not just biogas.
Our company knows a bit about green heat and anaerobic digestion (AD, the process that produces biogas). One of our subsidiaries is the largest AD business in the country, producing more power from biogas than the rest combined (it's a big fish in a small pond). Another is a leading supplier of wood pellets for heating. I am the heat man, my brother is the AD man. What follows is my first stab to demonstrate how absurd this Tory "ambition" is. I will probably post again later with refinements based on more detailed and accurate figures from my brother, but the following figures are not unreasonable for illustrative purposes.
Don't take the following the wrong way. AD and green heat both have an important contribution to make (we wouldn't be leading the efforts to develop them if we didn't believe so). I am pointing out that they cannot contribute what the Tories think they can contribute, not arguing that a more achievable contribution from them would not be valuable. There is a strange perversion of logic in political circles, where something is only interesting if it can solve the whole or most of the problem on its own. Dismissing options that only make a partial contribution is like dismissing carrots because they only make a partial contribution to our diet. But it is an attitude regularly exhibited by politicians of all colours.
Anyway, with that said, let's proceed to the preliminary assessment of the Tory policy on biogas heating...
Residential gas consumption in the UK is around 350 TWh p.a. (more than total electricity consumption in all sectors). So the Tories' target is around 175 TWh of biogas. (1 TWh = 1,000 GWh = 1,000,000 MWh = 1,000,000,000 kWh or units.)
All the landfill gas produced and captured in the UK each year would provide around 1% of that target. Our sewage gas would provide another 0.2% or so. Just another 98.8% to find, then (and that's assuming these two sectors stop producing electricity).
If we need around 400 m3 of biogas for a MWh, 175 TWh for heating would need 70,000,000,000 m3 of biogas p.a. That's around 8,000,000 m3/hr.
A m3 of good putrescible waste @ 12.5% solids produces around 175 kWh. So to produce that much gas, we will need around 1,000,000,000 m3 p.a. of good putrescible waste.
Most waste isn't good putrescible waste of course, and one of the largest categories on which they hope to rely - agricultural slurry - produces little gas and needs a much higher ratio of waste and tank space to volume of gas produced. We could grow more, but we would need vast areas of land sacrificed to production of energy crops, which wasn't exactly a success recently even at smaller scale (proportionately) than required by the Tory policy. But for the sake of simple calculation, let's assume for a moment longer that this much waste of this quality could be found.
A m3 of digester tank can process around 13.5 m3 of waste @ 12.5% solids in a year. So we will need 74,000,000 m3 of digester tank to achieve their target. That's 9,260 Holsworthys (our AD plant in Devon - comfortably the largest plant in the UK, responsible for half of all UK biogas production outside the water industry); one for every 26 km2 and every 6,480 people.
And this assumes that no biogas is consumed or lost in the process of clean-up for grid-injection, and that no biogas is used for other purposes (e.g. electricity generation). Nor does it consider what we would do with that volume of digestate (nitrate vulnerable countries, anyone?).
The upshot is that we'd better grow and eat one hell of a lot of food if the Tories get in; an utterly impossible amount, in fact. Our current obesity epidemic has nothing on what they have in mind for us.
The reason they've gone for this technological "winner", of course, is that it seems painless (as all magic bullets do, until you have to explain why you missed the target), and it is promoted by a big company (National Grid), supported by a report from a big consultancy (Ernst & Young). Plus ça change, plus c'est la même chose.
We have tried to engage with political parties on these sorts of subjects. But as we won't encourage their delusions, but will actually challenge them, they find that the best approach is to ignore us and cling to their delusions.
There is no point small companies, or others of independent mind, trying to engage directly with major political parties. They are not interested in the truth. They are blinded by money and power, and deaf to reason. It doesn't matter which flavour, they are all the same, other than in the choice of which interests to favour and lies to believe.
Prices in the EU Emissions Trading Scheme (EU-ETS) have hit new lows in Phase 2 (just over €10/tCO2). The mechanism became worthless in Phase 1. It looks likely to do the same in Phase 2 (as some of us predicted). It is not providing sufficient incentive for anyone to invest in any carbon-reducing projects. But it is still handing nice rents and market-protection to the beneficiaries of the allocation process. Uncertainty about its value, so vulnerable to political whim and economic fortune, is a significant factor in the reluctance of power companies to invest not only in renewables, but even in new coal, gas and nuclear stations, because their relative competitiveness depends on EU-ETS prices, and any investment can therefore be made uneconomic in the tap of a legislators' pen.
Naturally, Stavros Dimas (EU Environment Commissioner) has taken this confirmation of the irrationality and harmfulness of the scheme as a signal to try to draw others, particularly America, into a global ETS.
Robert Cialdini, in his book Influence, briefly recounts a real incident that was witnessed and analysed by the social scientists Leon Festinger, Henry Riecken and Stanley Schachter, recorded in their book When Prophecy Fails. The details are hilarious and illuminating in equal measure. I highly recommend you to read Cialdini at least, if not Festinger et al. But I will try to precis here the already potted version in Cialdini. A doomsday cult formed around a man with a long interest in mysticism, the occult and flying saucers, and a woman who claimed to channel messages from extra-terrestrial spiritual beings via the device of automatic writing. These messages started to foretell a disastrous flood that would engulf the world. However, they also reassured the members of the cult that they would be rescued by flying saucers that would be sent a few hours before the flood was due to commence. During the period leading up to the appointed date, the members of the cult retreated into themselves, making little effort to warn others of the impending disaster. Of course, the spaceships failed to materialise, as did the flood. In the immediate aftermath of the non-appearance, there was silence, then introspection and despair, then signs that the group was starting to dissipate. At this point, the woman received a message from the extra-terrestrial spirtual beings, telling the group that "the little group, sitting alone all night long, had spread so much light that God had saved the world from destruction." A second message instructed her to publicize this news. The group set about contacting newspapers and trying to persuade as many people as possible of the truth of their experience.
Festinger et al and Cialdini provide a convincing explanation for this bizarre switch from secrecy to proselytization, at precisely the moment that it had become obvious that their beliefs were unfounded. The members had invested hugely in the cult's belief-system. The psychological cost of admitting it had been for nothing was too great to contemplate. Yet the evidence clearly indicated that it had indeed been a foolish waste. To avoid the spiritual cost of facing reality, they needed another way of maintaining their belief. Their best hope was in persuading others to share their views, for, if enough people agreed with them, it must (psychologically) be true, whatever the evidence seemed to suggest. The proselytizing was not a sign that they were now more confident of the truth of their beliefs, but precisely the opposite - it was the conscious response to the subconscious awareness of their folly.
Of course, people outside the cult could see the flaw in their beliefs, and the desperation that underlay their efforts. Not a single new member was attracted. Let's hope that those in the White House and elsewhere can spot the equally obvious evidence of the failure of the EU-ETS, and the motives for Mr Dimas's promotion of the cult of carbon-trading.
I've been beating a fairly solitary path on this for a while, and in the process making myself unpopular with the major players in the electricity industry (which provides another clue to the huge rent-seeking potential of cap-and-trade) and their representatives. But, judging by this article in this weekend's Sunday Times, it looks like others may also be coming to share my view.
My policy of paying no attention to the news had been going well, and then the boss decided that we simply had to respond to an article in The Times. So it's temporarily back to banging my head against a brick wall, as you may have guessed from the appearance of this post.
The article in question was a Guest Comment by Sam Laidlaw, Chief Executive of Centrica, whose heading summarises his argument pretty well: "Put a price on carbon, but not a tax". This might seem to be a reasonable, even a liberal argument. Unless you are close to the energy industry, you would probably not realise how this was just another example of the way that energy policy has become a plaything for the energy corporates to try to gain commercial advantage. The Government's policy is practically being dictated by the positions of companies like Centrica, who are very clever in dressing up self-interested positions as plausible, apparently impartial and principled arguments. I will let the letter I sent to The Times explain how so in this case:
Sam Laidlaw says that we must "put a price on carbon". He does not differentiate between sources of carbon, and rightly so. Our climate does not, and neither should we.
One of the many failings of cap-and-trade, unlike a carbon tax, is that it is not practical for highly-fragmented markets, such as the very large market for domestic heating. The domestic consumer of 'natural' gas (or heating-oil or LPG in remote areas) is therefore not "forced to pay", which reduces incentives for householders to act sensibly and to consider alternatives like renewables.
Mr Laidlaw opposes the intervention of government(s) in setting the price of carbon, but in fact such interventions pervade the system of cap-and-trade. In the absence of a carbon-tax, the only other levers that the Government can pull in the domestic sector are either partial, bureaucratic and poorly-funded grant-mechanisms (such as the Low-Carbon Buildings Programme, in which Centrica’s subsidiary British Gas has been given a privileged position), or regulations and obligations (such as the Energy-Efficiency Commitment, in which again only the major energy suppliers, such as Centrica, can participate).
Mr Laidlaw presumably prefers these mechanisms to a tax that is the only practical way of pricing carbon equally across all types of consumers, large and small, but he then must accept that most of his customers are insulated from the cost of carbon, an approach that he says is wrong. Policymakers and consumers ought also to be concerned that those measures embed the power of the incumbent energy suppliers, and inhibit innovation and competition from new entrants.
It was not published, of course. I have no complaint - that is their prerogative. But more strangely, I also tried, when it wasn't published, to post this message (in two parts, because of the 1000-character limit) to their website, but it hasn't shown up there either. Another message that I posted afterwards, in response to another poster who suggested we should have a government-subsidised investment fund rather than carbon-pricing, has appeared, which makes me wonder why the earlier posts didn't show. Was this a technical hitch, or was it moderated? It seems unlikely to be a technical issue, as the later post got through fine, and it is strange for both halves of the first message to suffer a technical glitch that other messages did not experience. My guess is that it was moderated, but why?
The government has made a sensible choice on the issue of light bulbs, I believe. The headlines ran that traditional light bulbs will be phased out by 2012 - but the key here is that the initiative is voluntary. Supermarkets and energy suppliers have agreed to gradually phase out incandescent bulbs from next year. It is supposed that while energy saving bulbs cost more to buy they last up to 12 times as long and use nearly 80% less electricity. Which can only be a good thing. Other countries have introduced an all out ban, such as Australia who will ban conventional bulbs beyond 2009.
There was a flurry of triumphant snorts on Friday when some libertarian blogs picked up a post from earlier in the month, which had commented on the recent paper by William Nordhaus on carbon-pricing. The ASI got it from voluntaryXchange, who got it from Newmark's Door, who had spotted the original post at ReasonOnline. The excitement was because Nordhaus, described variously as "perhaps the world's leading expert on the economics of climate change" and "the economic expert on global warming", had done some modelling of the optimal profile of carbon-pricing, and had concluded that, as the ASI put it, "the suggestions of both the Stern Review and Al Gore don't cut it". Rather, Nordhaus estimates that the optimal level in 2010 for the price of carbon is $34 per tonne (tC), equivalent to around 9 cents per gallon of petrol (i.e. bugger all in the grand scheme of things).
Just a couple of points:
1. Apart from the original article (Reason) they conveniently forgot to report that Nordhaus was not advising a static price, but one which should increment in real terms by around 2.5 per cent per year, to $42/tC in 2015, $90/tC in 2050, and $207/tC in 2100. Those later prices would be felt more keenly, if it weren't for the likelihood that they will be dwarfed by higher fossil-fuel prices by then.
2. More importantly, although Nordhaus's paper dresses the analysis up in a great deal of elaborate academic clothing (and very much more substantial clothing than Stern and Gore, it has to be agreed), it all pretty much boils down to the usual culprit - the discount rate. If, like Stern, you believe that it is wrong, on moral grounds, to discount the costs of future disaster, then you choose a very low (almost zero) discount rate and end up with enormous present costs for future risks attributable to global-warming, and therefore a rationale for taking strong, immediate action based on a high present cost of carbon. If, like Nordhaus, you believe that close-to-zero discounting is irrational, you set a modest discount rate which, over the timescales over which the impacts of global-warming might be felt, reduces the present costs of even catastrophic events to quite low values and results in a steady-as-she-goes policy prescription.
The funny thing is that both Stern and Nordhaus can present simple illustrations that demonstrate the irrationality of the opposing perspective. Stern can say, as paraphrased by Nordhaus, that "a positive time discount rate would lead societies to ignore large costs that occur in the distant future." In other words, if one combines economists' willingness to put a value on life with a modest discount rate, one can end up with a low present value for the deaths of even millions of people sufficiently far in the future (and thanks to the wonders of compounding, not that far into the future). It follows that it isn't worth doing much now to avoid large numbers of deaths, even if our actions make those deaths inevitable, provided that those deaths are not too soon.
On the other hand, Nordhaus gives his "wrinkle experiment" illustration of the absurdity of Stern's use of minimal discounting. "Suppose that scientists discover a wrinkle in the climate system that will cause damages equal to 0.1 percent of net consumption starting in 2200 and continuing at that rate forever after", he muses. "How large a one-time investment would be justified today to remove the wrinkle that starts only after two centuries? Using the methodology of the Review, the answer is that we should pay up to 56 percent of one year’s world consumption today to remove the wrinkle. In other words, it is worth a one-time consumption hit of approximately $30,000 billion today to fix a tiny problem that begins in 2200."
So we have two competing approaches, both of which yield absurd results. Should we just choose the version of absurdity that we prefer? Or argue that, in medio veritas, the truth must lie somewhere (but who knows where) between two absurd positions? Or should we stop and consider whether the problem lies with what these two approaches have in common?
What this is telling us is that we have reached the limits of the usefulness of mathematical economics. Though it came to dominate economics over the course of the twentieth century, it was always a dead end. Now we see exactly how sterile and ridiculous is the idea that you can model human action with numbers and formulae. Climate-change theory turns out to be the perfect reductio ad absurdam test of neo-classical, welfare economics. And it fails.
Cap-and-trade mechanisms scored early successes when deployed within national boundaries against pollutants like SO2 and NOx. That success led politicians and economists to think that the approach could be extended to all emissions, and to international arrangements. In particular, they hoped it would provide a relatively pain-free way of tackling carbon emissions. They should have consulted sports scientists: no pain, no gain.
We have seen recently the failure of the most high-profile of the carbon cap-and-trade mechanisms - Phase 1 of the EU Emissions Trading Scheme (EU-ETS). This was, apparently, unpredictable, and anyway Phase 1 was just a trial period. Phase 2 will be much better, we are told.
Except EU-ETS wasn't the first, and it isn't the last. In July 2006, two economists (David A. Evans and Joseph A. Kruger) published a paper titled "Taking up the Slack Cap: Lessons from a Cap-and-Trade Program in Chicago", looking at Chicago's Emissions Reduction Market System (ERMS), and its lessons for larger mechanisms like the EU-ETS. They summarize its performance thus:
"ERMS is particularly relevant to the questions outlined above because the first years of its operation reveal a curious outcome. Despite expectations to the contrary, emissions have been significantly below the annual allocation of emission allowances, and allowance prices have been much lower than predicted. Trading has been limited and many allowances have expired unused. Essentially, it appears that a fundamental prerequisite for a tradable allowance program is missing - there is no scarcity of allowances."
Sound familiar? Now we hear that the Regional Greenhouse Gas Initiative (RGGI), "the United States' first foray into cap-and-trade programs for greenhouse gases", is "over-allocated by 24 million short tons or 13 per cent of the cap in 2009".
Three cap-and-trade mechanisms that were all over-allocated, leading to a collapse of prices in the market. And all of these were a surprise? Or did we need three trials, because no one could work out beforehand that if the cap was set higher than the level of emissions that industry could easily achieve, the market would collapse?
Tim Worstall has challenged, in a recent post, the logic of the DfT's suggestion that Air Passenger Duty (APD) needs to be increased further to take full account of the contribution of aviation to carbon-emissions. By Tim's calculations, taking Stern's figure of $85 as the social cost of a tonne of carbon-dioxide emissions, the cost of carbon emitted by air travel is "around and about the amount currently charged" under the APD.
One could raise a number of reservations about this estimation, but let's say (for the sake of argument) that he is right. It raises interesting questions, either about Stern's calculations, or about this approach to welfare economics.
Tim cites approvingly the DfT's explanation of the principles underlying Pigovian taxation. The DfT does indeed reduce the idea to its most basic essentials, but it seems to me that the essence has been corrupted or lost to some extent in the act of reduction. Let me see if I can set out the idea clearly, so we can judge mechanisms like the APD for how well they embody the economic theory that underlies them.
Economics, if it treats only of monetary values, is subject to the Wildean criticism that it knows the cost of everything and the value of nothing. Economists have therefore felt it important to consider the impact of actions on utility (or, simplistically, happiness). Welfare is the notional sum of utility or happiness amongst a group (ignoring for the moment that it is ridiculous to aggregate something incommensurable like happiness). Welfare economics is the study of economics from the perspective of maximizing welfare.
In theory, if all participants in a transaction agree voluntarily to its terms, then they must all feel themselves at least to be no worse off from the transaction, and some of them presumably feel themselves to be better off, or why would they have agreed to it voluntarily? This satisfies the condition needed to demonstrate that an action has increased general welfare. By definition therefore, free markets increase welfare. This (and the inability to make the same case for coerced actions, such as those obliged by the state) is the basis of the libertarian philosophy.
In practice, however, it is often the case that people not party to a transaction may be affected by it. The classic example is a factory whose effluent is discharged into a river. No matter whether all parties engaged in commercial transactions with the factory-owner do so voluntarily, the contribution of the factory to the general welfare may be negative, if the benefit to the direct participants is outweighed by the impact on those who use the river downstream from the factory. The pollution of the river is, in the language of economists, an externality - a value (negative in this case, but they can be positive too) that is attributable to someone's activities, which they are not able to capture (if positive) or obliged to incur (if negative).
Externalities skew decisions, such that the options that provide the greatest benefit to society (maximize welfare) may not be the ones that offer the greatest benefits to the participants in transactions. The way to ensure that markets provide the optimal outcome for society is to internalize the externalities. In effect, this means ensuring that the party responsible for the externality is attributed the cost or value of that externality.
A Pigovian tax (named after Arthur Pigou, the Cambridge economist who first set out a detailed exposition of welfare economics) is a mechanism whereby the cost of a negative externality can be internalized to the producer of that externality. If the impact of the effluent from the factory results in losses to those downstream at a rate of £100/litre, a government may impose a Pigovian tax of £100/litre on the factory, so that the factory-owners' decisions take into account the full costs of any choice, and not just those incurred directly. The Pigovian tax provides an incentive for the factory-owner to minimize the discharge of effluent or even to locate elsewhere where the external costs of disposing of the effluent are lower.
However, the application of the Pigovian tax is not sufficient in its own right to ensure that welfare is maximized. It may be that the factory-owner has few feasible alternatives, and decides to continue to discharge and pay the tax. In that case, the damage (or disutility) to those downstream is no less than before, and the utility of the factory-owner has also been reduced by application of the tax. The utility of the government (or taxpayers generally) may have been increased by the revenue from the Pigovian tax, but it is not the government or taxpayers generally who were being harmed by the externality. The Pigovian tax can only be said to have achieved its objective if it represents an accurate valuation of the harm and if it is distributed as compensation to those on whom the harm is inflicted, proportionately to their share of the harm. In other words, a tax (or charge) cannot be said to be an effective mechanism to internalize externalities unless it either deters the externality or fully compensates those who experience the effect of the externality (or a bit of both).
Greenhouse-gas (GHG, or, in the vernacular, carbon) emissions are an externality. They are a particularly difficult example, because the impact of the harm is uncertain and because most of those who may experience the harm are remote, both geographically (e.g. inhabitants of vulnerable countries) and temporally (i.e. future generations). It is important that mechanisms to internalize the carbon externality reflect the remoteness and uncertainty.
If we applied that tax of £100/litre to the factory-owner in the above example, but recycled the revenues to him by some subsidy or tax-break, there would have been no point applying the Pigovian tax in the first place. Similar could be said if we recycled the tax-revenues to his customers - the amount that he had to increase his prices would be balanced by the extra amount that his customers were able to pay for them. The tax would be neither an effective deterrent, nor an effective means of compensating those who experience the harm. It would simply be an inefficiency in the market, perhaps effective at salving consciences, but of no real value. Indeed, if it is effective at salving consciences, it may exacerbate the harm, because customers may consume more of the good, freed (superficially) from the responsibility of considering the impact of their choices on those affected by the externality.
In the case of carbon emissions, most of us, metaphorically, own shares in the factory, and most of us live downstream. But some own more shares in the factory and suffer less of the impact of the pollution than others (e.g. rich world vs poor world, this generation vs future generations). If we impose a Pigovian tax on the factory, but recycle the revenues to those who own most of the shares, we have not effectively internalized the externality. We may have exacerbated the harm by letting the factory's customers think that they now need not worry about the impact of the factory's externalities. This is exactly what most of the rich-world mechanisms to internalize carbon externalities, including the APD, are doing.
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