June 11, 2009

Pathetically weak target from Japan puts Australian coal exports on the agenda

Posted by Peter Wood under International Cooperation and Prisoner's Dilemmas | Tags: , , , , , , , |
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The Japanese Prime Minister Taro Aso has announced it’s 2020 greenhouse gas emissions target — “I have decided to aim at a 15 percent reduction from 2005,” Aso told a news conference. This is a reduction of 8 percent compared to the international baseline year of 1990. Japan’s Kyoto target is a reduction of 6 percent compared to 1990 levels over the commitment period 2008-12. Japan’s 2020 target therefore translates to a 2 percent reduction compared to it’s Kyoto target.

When asked about Aso’s target, Yvo do Boer, executive secretary of the UNFCCC said “I think for the first time in two and a half years on this job, I don’t know what to say”. Activists unveiled a giant photo of “George W. Aso” and honoured Japan as “special fossil of the day”.

How should other countries respond to this proposed target? They certainly should not accept it. This suggests that any proposed agreement needs a higher target for Japan, whether it signs on or not. In order for an international environmental agreement to stop climate change from being a prisoner’s dilemma, there needs to be credible punishments for non-compliance or non-participation with an agreement. Japan imports large amounts of coal, both for steel making and electricity generation. Japan is Australia’s largest coal customer; Australia is Japan’s largest coal supplier. In 2007-08, 46 percent of Australian coal exports went to Japan. In 2005, 57 percent of Japanese coal imports were from Australia. The emissions from a years worth of Australian coal exports to Japan would be equal to roughly 290 million tons of carbon dioxide.

If Australia wants to do something constructive about Japan’s weak target, Australia should either levy a carbon tax on coal exports to Japan, or stop exporting coal to Japan. The other main exporters of coal to Japan are Indonesia and China. If Australia could get these countries to do the same thing, that would be a powerful incentive for Japan to get its act together. Australia may not have to actually do this, the threat to do so, if it is credible, could be enough.

Coal and Safety, no. 28, March 2006

Coal and Safety, no. 28, March 2006

 

June 6, 2009

Waxman-Markey has a price floor

Posted by Peter Wood under Carbon Price Signals | Tags: , |
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The American Clean Energy and Security Act, also known as the Waxman-Markey bill, has a reserve price for permits that are auctioned. This functions as a type of price floor. It is not a strict price floor, because there is nothing preventing the market price for permits from getting lower than than the auction reserve price. Also, only something like 15% of permits will initially be auctioned [Actually significantly more than 15% of permits are likely to be auctioned, because entities that are allocated permits for free have the option of having them auctioned by the Administrator. However, firms may buy international permits from other qualifying cap and trade schemes, which could drive the US market price to less than the reserve price.]

This is what the bill has to say:

Section 791 (d) RESERVE AUCTION PRICE.—The minimum reserve auction price shall be $10 for auctions occurring in 2012. The minimum reserve price for auctions occurring in years after 2012 shall be the minimum reserve auction price for the previous year increased by 5 percent plus the rate of inflation (as measured by the Consumer Price Index for all urban consumers).

The fact that the reserve price increases by 5% above the CPI is very important. This sends a strong long term signal to investors. People will think twice about investing in new coal plants when they know that the carbon price will be at least $39 in 2040, $63 in 2050, and $100 in 2060. If the initial price was higher (say $20 or $50), there would be an even stronger signal. A higher floor price would also send a stronger signal to developing countries that the US is prepared to play its fair share in reducing global emissions.

 

May 19, 2009

Paul Krugman discusses the Waxman-Markey legislation

Posted by Peter Wood under Carbon Price Signals, International Cooperation and Prisoner's Dilemmas, Politics, Uncertainty, Probability and Risk | Tags: , , , , , |
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In a New York Times column, Nobel prize winning economist Paul Krugman has written some commentary on the Waxman-Markey legislation that proposes to introduce an emissions trading scheme in the United States. It is well worth reading. In his column, when Krugman discusses some of the objections to the scheme, he states:

One objection — the claim that carbon taxes are better than cap and trade — is, in my view, just wrong. In principle, emission taxes and tradable emission permits are equally effective at limiting pollution. In practice, cap and trade has some major advantages, especially for achieving effective international cooperation.

Not to put too fine a point on it, think about how hard it would be to verify whether China was really implementing a promise to tax carbon emissions, as opposed to letting factory owners with the right connections off the hook. By contrast, it would be fairly easy to determine whether China was holding its total emissions below agreed-upon levels.

I agree with Krugman that cap and trade has major advantages in terms of achieving international cooperation. This is the main reason why I support cap and trade. However, because carbon dioxide is more or less a stock pollutant, it has been argued that setting a price by introducing a carbon tax will be more likely to reduce emissions by an appropriate amount. I therefore disagree with Krugman that setting a tax is equivalent in principle to having tradable permits, because of uncertainty.

A cap and trade system with a price floor has the same advantages to emissions trading when it comes to international cooperation; it also has the same advantages of carbon taxation (and is probably superior to carbon taxation) when it comes to managing uncertainty. Unfortunately,it is very to find a serious discussion about price floors in the peer-reviewed economic literature since 1976 (but Roberts, M. J., Spence, M., 1976, ‘Effluent Charges and Licenses under Uncertainty’ is well worth reading). Most of the discussion on hybrids between cap-and-trade and carbon taxes has been about schemes with price ceilings.

See also:

Update: The Waxman-Markey bill does in fact have a price floor.

 

May 17, 2009

The next iteration of the CPRS legislation

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The Carbon Pollution Reduction Scheme legislation was introduced into Parliament on Thursday May 14, 2009. This legislation includes new measures that were announced on May 4, which includes a delay of a year before firms must purchase permits. Below are some of the changes to the bill compared to the Exposure Draft Legislation.

The object of the act has been changed, with the addition of 4(a) to Section 3 of the legislation:

(4) The third object of this Act is: (a) if Australia is a party to a comprehensive international agreement that is capable of stabilising atmospheric concentrations of greenhouse gases at around 450 parts per million of carbon dioxide equivalence or lower—to take action directed towards meeting Australia’s target of reducing net greenhouse gas emissions to 25% below 2000 levels by 2020;

The government’s has announced policies (not in the bill) for what it would expect of developing and developed countries before agreeing to a 25% reduction:

The Government will adopt a 25 per cent target only as part of an ambitious international agreement involving comprehensive global action capable of stabilising greenhouse gases in the atmosphere at 450 ppm CO2-e or lower. Such a comprehensive and ambitious agreement must meet following conditions:
1. comprehensive coverage of gases, sources and sectors, with inclusion of forests (e.g. Reducing Emissions from Deforestation and forest Degradation – REDD) and the land sector (including soil carbon initiatives (e.g. bio char) if scientifically demonstrated) in the agreement;
2. a clear global trajectory, where the sum of all economies’ commitments is consistent with 450 ppm CO2-e or lower, and with a nominated early deadline year for peak global emissions no later than 2020;
3. advanced economy reductions, in aggregate, of at least 25 per cent below 1990 levels by 2020;
4. major developing economy commitments to slow growth and then reduce their absolute level of emissions over time, with a collective reduction of at least 20 per cent below business-as-usual by 2020 and a nominated peak year for individual major developing economies;
5. global action which mobilises greater financial resources, including from major developing economies, and results in fully functional global carbon markets.

There has also been a very minor modification to the sections of the legislation that deal with scheme caps and gateways (which describe how Australia will set its trajectory), with the addition of sub-sections 14 (7) (relating to the caps) and 15 (6) (relating to the gateways):

14 (7) If: (a) regulations are made for the purposes of this section; and (b) on a particular day (the tabling day), a copy of the regulations is tabled before a House of the Parliament under section 38 of the Legislative Instruments Act 2003; then, on or as soon as practicable after the tabling day, the Minister must cause to be tabled before that House a written statement setting out the Minister’s reasons for making the recommendation to the Governor-General about those regulations.

Subs-section 15 (6) is identical to 14 (7) except that it applies to a different section of the legislation. This changes are extremely minor and do not address the serious problems with this aspect of the legislation that I have raised before.

The most significant changes to the legislation relate to how the price cap (fixed price permits) will work, which is in Section 89 of the legislation. In the first year of operation, 2011-2012, the price of carbon will be set at $10 per tonne CO2-e — in this year the CPRS will function like a carbon tax; between 2012-2013 and 2015-2016, the government will issue fixed price permits that will initially be at $40, and increase by 5% above the CPI in subsequent years. As well as everything being shifted back by a year, the method in which the fixed price permits is set is slightly different. Previously, the price was set precisely in the legislation, and increased by 7.5% each year.

 

May 7, 2009

Fairness and the Ultimatum Game

Posted by Peter Wood under International Cooperation and Prisoner's Dilemmas | Tags: , , , |
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In the ultimatum game, there are two players and a sum of money. The first player proposes how to divide up the sum of money, and the second player chooses whether to accept or reject the proposal. If the second player rejects the proposal, neither player receives anything. This game has a unique subgame perfect equilibrium where the first player receives all of the money, or almost all of the money when payoffs are discrete.

Experiments where people have played the ultimatum game have consistently found that the first player will usually offer significantly more money to the other player than the subgame perfect equilibrium, and the second player will be unlikely to accept the offer if they are offered less than 30% of the total amount.[1]

It has been argued by Fehr and Gächter that the ultimatum game provides evidence that economic agents don’t just base their decisions on pure self interest, and reciprocal considerations play an important role in people’s actions. It has been argued by Barrett that the ultimatum game also provides evidence that an international environmental agreement is more likely to be self-reinforcing if it is perceived by its parties to be fair. [2]

[1] Güth et al. (1982), An Experimental Analysis of Ultimatum Bargaining, Journal of Economic Behavior and Organization, 3, pp. 367-388

[2] Fehr and Gächter (2000), Fairness and Retaliation: The Economics of Reciprocity, The Journal of Economic Perspectives, 14 (3), pp. 159-181;  Barrett (2003), Environment and Statecraft – The Strategy of Environmental Treaty-Making, pp. 299-301.

 

May 4, 2009

Changes to CPRS legislation

Posted by Peter Wood under Carbon Price Signals, International Cooperation and Prisoner's Dilemmas, Politics | Tags: , , , , , , , |
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Australia’s Prime Minister, Kevin Rudd, has announced some changes to the proposed carbon pollution reduction scheme legislation. In short, this is what is being proposed:

  1. The scheme will be delayed until July 2011;
  2. In 2011-2012 the carbon price will be set at $10/tonne and there will be an unlimited amount of permits;
  3. Emissions trading will be begin proper in July 2012 — I don’t know if there will be any price caps or floors after July 2012.
  4. There will be “recession buffer” where industries eligible for assistance at the 60% rate “would receive a 10% buffer for a finite period”, while those eligible at the 90% rate “will receive a 5% buffer for finite period”.
  5. The 5%-15% target reduction range will be kept unless an agreement consistent with 450ppm CO2-e is agreed to, in which case Australia will agree with a 25% reduction on 2000 levels.
  6. Some token measures that enable households to buy and cancel permits — something that they probably would be able to do anyway.

Some of the fine print on how the targets will work is here.

I’ll reserve my final opinion until I see whet the new legislation looks like next week, but it does seem like overall it is a slight improvement. There is stuff in the scheme that is unfortunate, such as the delay, the $10 carbon price in 2011-12, and the extra 5-10% free permits to emissions intensive industries. But the targets for 2010-11 and 2011-12 in the White Paper were so weak that I wouldn’t have been surprised if the carbon price was less that $10 in those years anyway. The 5-10% extra free permits to emissions intensive industries won’t affect the overall target, but is an equity issue and a waste of taxpayers money.

In my opinion the conditional target is more important than the unconditional target, because that is what makes the most of a difference for international cooperation. The willingness to go beyond 15% emission reductions is very good news, the government has partially fixed what was the worst problem with the CPRS. Unfortunately a 25% reduction for Australia would only consistent with 450 ppm CO2-e that was very generous to Australia, and unlikely to be acceptable to developing countries, low per-capita emitters, and countries responsible for low amounts of historical emissions — in other words Australia would be getting a “special deal”, which is similar to free-riding. What Australia should be doing is be willing to accept a reduction of at least 25% by 2020 as part of an agreement consistent with a stabilisation target of 450 ppm CO2-e or less.

One way to respond to this development would be to put on the table proposals that have not been on the agenda so far. A steadily increasing price floor should be at the top of the list, as should be overhauling the scheme caps and gateways approach for setting the target (too inflexible), and the ability of firms to buy an unlimited amount of CDM credits (which have additionality problems). Only a steadily increasing price floor will drive the investment in renewable technologies that we need.

On whether the legislation should be passed, I would be very reluctant to pass it unless something was done about the scheme caps and gateways approach to setting the trajectory. The problem with the gateway approach is that the minister can set lower (and upper) bounds on Australia’s emissions forever. It is not appropriate for the minister to set any lower bound for emissions, let alone forever.

 

April 30, 2009

The Coming Climate Crunch

Posted by Peter Wood under Climate Science | Tags: , |
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The scientific journal Nature has released a special issue on climate change – The Coming Climate Crunch. It has a good editorial, and some important papers. According to the editorial:

Nations urgently need to cut their output of carbon dioxide. The difficulty of that task is manifest: emissions have continued to rise despite almost two decades of rhetoric, diplomacy and action on the matter. But that unhappy fact should not be taken as a licence for fatalism. Governments have a wide range of pollution-cutting tools at their command, most notably tradable permit regimes, taxes on fuels, regulations on power generation and energy efficiency, and subsidies for renewable energy and improved technologies. These tools can work if applied seriously — so citizens around the world must demand that seriousness from their leaders, both within their individual nations and in the international framework that will be discussed at the United Nations Climate Change Conference in Copenhagen this December.

There is also a good blog post at RealClimate about the issue, which states:

At the heart of it are the two papers which calculate the odds of exceeding a predefined threshold of 2°C as a function of CO2 emissions. Both find that the most directly relevant quantity is the total amount of CO2 ultimately released, rather than a target atmospheric CO2 concentration or emission rate.

 

April 23, 2009

Submission to the Senate Select Committee on Climate Policy

Posted by Peter Wood under Carbon Price Signals, International Cooperation and Prisoner's Dilemmas, Politics, Uncertainty, Probability and Risk | Tags: , , , , , , |
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My submission to the Senate Select Committee on Climate Policy is here. Here is the abstract:

This submission is on the Australian Government’s Exposure Draft Legislation for the implementation the Carbon Pollution Reduction Scheme (CPRS), and Australia’s climate policy in general.

This submission is primarily concerned with two issues. Firstly we shall look at the issue of achieving international cooperation to reduce greenhouse gas emissions. We shall examine how this relates to the targets in the CPRS, and the approach for choosing targets, based on “scheme caps and gateways”. This relates to items (1) (c) and (1) (d) of the terms of reference.

Secondly we examine the issue of what is the best instrument for a carbon price signal. We conclude that an emission trading scheme with a “price floor” is the most appropriate policy for Australia. This relates to items (1) (a) and (1) (d) of the terms of reference.

Summary of Recommendations

We have two key recommendations.

  1. To not set a lower bound for Australia’s emissions after 2015. We therefore recommend the removal of paragraphs 2(b) and 3(b) from Section 15 of the Exposure Draft Legislation.
  2. To introduce a floor in the carbon price. The price floor could be implemented by either altering Section 129 of the Exposure Draft Legislation, or by altering Section 103 of the Exposure Draft Legislation.
 

April 14, 2009

How the CPRS could be modified to have a price floor

Posted by Peter Wood under Carbon Price Signals, Politics, Uncertainty, Probability and Risk | Tags: , , |
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The proposed Australian Carbon Pollution Reduction Scheme is a policy that seeks to reduce greenhouse gas emissions by introducing a price on carbon. Possible policies for carbon pricing include cap and trade schemes, carbon taxes, and hybrid approaches. Cap and trade schemes involve setting the quantity of emissions, with this quantity and the market determining the carbon price; carbon taxes involve setting the carbon price directly, with the market determining the amount of emissions. Hybrid approaches can usually be thought of as cap and trade schemes but where there is either a minimum price – a price floor, a maximum price – a price ceiling, or both.

The CPRS is a cap and trade scheme, but there is a transitional ceiling on the carbon price (Section 89 of the Exposure Draft Legislation). This ceiling will be phased out by 2015. While this ceiling exists, the emissions cap can always be exceeded by firms buying permits that are at the value of the price ceiling. To this extent the CPRS has similarities to a carbon tax.

One of the main arguments in favour of cap-and-trade is that international negotiations are based on a “target-and-timetables” approach. Emissions trading (on a national scale) has the advantage that there is much more certainty that a given target will be reached. This increases the credibility of targets under international negotiations, more so than a carbon tax.

There are other advantages to a carbon tax. If the cost of mitigation is lower than expected, then there will be more mitigation with a carbon tax. There will be no limit to the amount of low cost mitigation that occurs. Under a carbon tax, voluntary measures that reduce emissions will add to Australia’s total emissions reductions.

A emissions trading scheme with a price floor has many of the advantages of a carbon tax and many of the advantages of a cap and trade scheme.

There are two ways that the CPRS legislation could be modified so that a price floor is introduced:

  1. The price floor can be maintained by having firms pay an extra fee when they surrender their permits, based on the amount of their emissions. The carbon price then becomes equal to the sum of the permit price and the extra fee. This could be achieved by altering Section 129 of the Exposure Draft Legislation.
  2. The price floor could be maintained by having a reserve price when permits are auctioned. This could be achieved by altering Section 103 of the Exposure Draft Legislation.

The approaches to introducing a price floor above are different to what was discussed in the Garnaut Review. The Garnaut Review considered and rejected a mechanism for introducing a price floor by having the government buy back permits. The Garnaut Review did not consider the approaches examined above.

If a price floor was introduced, changes may also be needed to be made to the legislation with regard to international trading of permits. If a price floor was introduced, what price should it be set at? There are two possible approaches to this:

  1. One approach would be to set it so that it is relatively low, but is high enough to mean that the amount of low cost emissions reductions is not limited, and high enough to provide some certainty to investors in low emission technologies. Under this approach, the emissions cap would be expected to be the main policy that drives emissions reductions.
  2. Another approach would be to have a significantly higher price floor, that is close to the social cost of carbon. Under this approach, the price floor is likely to be what drives emissions reductions. Under this approach the main role of the emissions cap is to provide certainty that a given target will be achieved, and add credibility to international negotiations.

If the role of the floor price was merely to provide insurance against the carbon price being exceptionally low (as was the case in the EU ETS during 2006 and 2007), it would not be necessary – there are better mechanisms from preventing this, such as banking, and making sure that there is scarcity when setting the cap. The idea of setting the floor price to be equal to the social cost of carbon is that the floor price has just as important a role as the permit price in driving emission reductions. There is a good chance that the slope of the marginal cost function of mitigation is higher than the slope of the marginal benefit function over short time scales, which suggests that the floor price will be a better driver of emission reductions.

Another issue with carbon pricing is how much should the price floor increase each year? An appropriate choice may be to have the price indexed by a discount rate of 4%, which is the discount rate used in Treasury modeling.

For more on why we need a price floor, see also:

 

March 25, 2009

Scheme Caps and Gateways under the CPRS

Posted by Peter Wood under Climate Science, International Cooperation and Prisoner's Dilemmas, Uncertainty, Probability and Risk | Tags: , , , , , , , |
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We turn our attention to the issue of scheme caps (Part 2, Section 14 of the Carbon Pollution Reduction Scheme Exposure Draft Legislation) and gateways (Part 2, Section 15 of the Exposure Draft Legislation). The legislation states that the regulations must set a scheme cap for five years or more into the future; and may set a scheme gateway, with upper bounds and lower bounds for the scheme cap for the financial year beginning on July 2015, and any later financial year. This is slightly different to what is stated in the White Paper, which is that “the Government intends to provide up to 10 years of gateways beyond the minimum five years of certain Scheme caps, taking into account progress in international negotiations” (Policy decision 10.3).

There are two issues here. Firstly, are the caps and gateways that are in the government policy (the White Paper) appropriate? Secondly, is the framework for caps and gateways (the Exposure Draft Legislation) appropriate? Let us focus on the second issue.

Suppose for a moment that there was a comprehensive international agreement that not only reduced greenhouse gas emissions, but also reduced emissions in an optimal way. Reducing emissions in an optimal way would take into account the climate science, as well as the costs of mitigation and damages from climate change. The economics of climate change suggests that we should do our best to avoid even a low probability of potentially catastrophic outcomes1. The science, according to the NASA climate change scientist Dr James Hansen, suggests that if we maintain carbon dioxide concentrations of 450 ppm or more, for sufficiently long, the Earth would be pushed toward an “ice-free state”, and “the passing of climate tipping points and dynamic responses that could be out of humanity’s control”. Hansen therefore recommends that “an initial CO2 target of 350 ppm, to be reassessed as effects on ice sheet mass balance are observed, is suggested”2.

What sort of emission reductions are required to stabilise CO2 levels at 350 ppm or less? For any particular target, there is more than one trajectory to that target, and more than one way of allocating emissions between countries for any particular global trajectory. Most studies that have been done so far have focused on higher stabilisation targets, but there have been some that have included trajectories that stabilise at 350 ppm CO2. One of the more recent studies has OECD countries reducing their emissions by 5.17% per year3. No one has modelled in any detail (as far as the author is aware) what the mitigation costs of stabilisation at 350 ppm or less of CO2 are. However, there have been studies that suggest that the cost of stabilising at 450-500 ppm CO2-e of greenhouse gases are low.4

If optimal international cooperation on reducing greenhouse gas emissions was achieved, Australia could have reductions in emissions allocations of over 5% per year. This may be expensive, but an approach that is optimal globally is likely to have net benefit for Australia, more so than for most other countries. It would not in in Australia’s interest to rule out such a possibility.5

  • what the science is saying about the climate situation,
  • Australia’s high per-capita emissions,
  • Australia’s high historical emissions,
  • and Australia’s high capacity to reduce emissions or pay for emissions reductions because of its high per-capita GDP,

it is not appropriate to rule out any level of emissions reductions beyond 2015, and certainly not for an unlimited amount of years into the future. It is appropriate to have an upper bounds on Australia’s emissions for years beyond 2015, but not lower bounds. Part 2, Section 15 of the Exposure Draft Legislation should therefore be changed to reflect this issue. This could be easily achieved by removing paragraphs 2(b) and 3(b) from Section 15 of the legislation.

There are also problems with setting weak targets five years in advance: The targets for 2010-2013 are extremely weak, with the 2010-2011 target probably being greater than the amount of emissions. When combined with the 5-15% target range, there will probably be a very low carbon price. The only thing that is likely to prevent the price from collapsing is the banking of permits. It could also be argued that flexibility in emissions reductions could facilitate unforeseen international circumstances, either in the science, or in negotiations. Being able to tighten targets within shorter time-spans could also facilitate voluntary measures to reduce emissions. It is therefore recommended that Section 14 of the legislation is changed so that instead of an exact cap being set for five years, a gateway of upper and lower bounds is set for five years.

It could be argued that measures that reduce the certainty of the scheme cap provide uncertainty for investors. This is true in a limited sense, but there is also severe risk and downside uncertainty on impacts from climate change, there are uncertainties in the damage function. There is uncertainty in international negotiations. There are uncertainties in what carbon price will be required to achieve a certain level of emission reductions. There are uncertainties in the costs of emission reductions. There is uncertainty in whether the targets specified by the Australian government will be sufficient to drive sufficient to drive investment in low emission technologies. Some of these uncertainties could be managed by price based approaches, such as by having a floor on the permit price.

Measures that shift risk and uncertainty from investors to the climate are not appropriate any more, and may not be credible. This is particularly the case when it comes to measures that are not consistent with international cooperation on reducing emissions. This is because a world with poor cooperation on climate change policy is a far more uncertain world than a world where good cooperation is achieved.

1Weitzman (2009), On Modeling and Interpreting the Economics of Catastrophic Climate Change, The Review of Economics and Statistics, 91(1): pp. 1—19.

2Hansen et. al. (2008), Target CO2: Where Should Humanity Aim? The Open Atmospheric Science Journal, 2, pp. 217—231.

3Meinshausen (2006), Multi-gas Emissions Pathways to Meet Climate Targets, Climatic Change, 75, pp. 151—194 — p. 166.

4McKinsey Global Institute (June 2008), The carbon productivity challenge: curbing climate change and sustaining economic growth

5There are huge barriers to this level of international cooperation, but it is not unheard of. The Montreal Protocol on Substances That Deplete the Ozone Layer achieved a level of cooperation that was not far from optimal, this is discussed in Barrett (2003), Chapter 8.

 

March 24, 2009

Why Australia’s 15% conditional target undermines cooperation

Posted by Peter Wood under International Cooperation and Prisoner's Dilemmas, Uncertainty, Probability and Risk | Tags: , , , , , , , , , |
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The Carbon Pollution Reduction Scheme is likely to rule out net emissions reductions of more than 15% of 2000 levels by 2020 (Part 1, Section 3 (4) of the Exposure Draft Legislation). This reduces the likelihood of any international agreement that stabilises greenhouse gas levels at 550 parts per million or less, because it rules out Australia playing its proportionate part in emissions reductions.

It has been suggested in the Treasury modeling that the 15% target is consistent with global stabilisation of greenhouse gases at 510 ppm, but this is unlikely to be true. This modeling claims that the CPRS -5 and CPRS -15 “multi-stage” scenarios are more realistic than the Garnaut “contraction and convergence” scenarios because the multi-stage scenarios assume that different countries start taking on emissions reductions at different times1. But there is another difference, the CPRS scenarios assume that when a group of countries start making emission reductions, they all do so at the same rate relative to the reference scenario. Because emission reductions do not relate to per-capita emissions, this is unlikely to be perceived as equitable by developing countries and low per-capita emitters, and therefore unlikely to be an approach that would be accepted by developing countries.

The Garnaut scenarios are based on all countries eventually converging to the same per-capita emissions allocations in 2050. After 2050 different countries may have different gross amounts of per-capita emissions, but they are allocated the same number of permits per person. Is a convergence date of 2050 likely to be acceptable as part of an international agreement? In his Targets and Trajectories Supplementary Draft Report, Garnaut stated

A relatively gradual convergence to equal per capita allocations, with the year 2050 proposed by the Review, could be seen in developing countries as developed-country-biased, as it perpetuates for some time the current unequal patterns of use of the atmosphere. What is outlined is probably at the limits of acceptability to developing countries—it demands a modest departure from developing countries’ current emissions growth path in the short term, and strong deviations in the medium term.

It is important for Australia to be flexible on issues that relate to equity, including whether an agreement is based on per-capita emissions, and the convergence date for an agreement based on per-capita emissions. This is because it is more likely that a large number of countries will agree to an international environmental agreement if it is perceived to be equitable.3 For Australia, a developing country and a high per-capita emitter, to not be flexible on equity issues that favour high per-capita emitters, would undermine the likelihood of a comprehensive international agreement that reduces greenhouse gas emissions.

There is also the possibility that an international agreement is reached that is not consistent with Australia’s targets. Australia would then have two choices: It could accept the agreement and change its targets; it could not accept the agreement and face the consequences of being perceived to be a free-rider. The CPRS White Paper argues for scheme caps and gateways because they provide certainty to investors4, but they do not provide certainty if there is a risk that Australia will have to change its targets in order for it to participate in an international climate agreement.

Because Australia should be flexible on the issue of contraction and convergence, and the convergence date, international scenarios with an earlier convergence date should be considered. This should include a 2040 convergence date and a 2030 convergence date. Ball-park estimates5 suggest that a convergence date 10 years earlier (i.e. 2040 instead of 2050 or 2030 instead of 2040) would require Australia to have its 2020 emission allocation reduced by 8-16%.

1Treasury (2008), Australia’s Low Pollution Future – The Economics of Climate Change Mitigation, Page xi.

2Garnaut (September 2008), Targets and Trajectories – Supplementary Draft Report, Page 14.

3See Barrett (2003), Environment and Statecraft – The Strategy of Environmental Treaty-Making, pp. 299-301, for a game theoretic discussion on why fairness is perceived to be important by participants in a cooperative outcome.

4Department of Climate Change (December 2008), Carbon Pollution Reduction Scheme – Australia’s Low Pollution Future (White Paper), Chapter 10.

 

March 5, 2009

Ten Problems with the Carbon Pollution Reduction Scheme

Posted by Peter Wood under Carbon Price Signals, Politics | Tags: , |
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The Carbon Pollution Reduction Scheme (CPRS) is the centre-piece of the Rudd governments climate policy. It aims to reduce Australia’s emissions to between 5 and 15% of 2000 levels by 2020. It involves setting a cap (but not a strict cap) on emissions, and distributing permits that can be traded. Some of these permits will be auctioned, some will be handed out for free. Firms will also be able to purchase an unlimited amount of international permits to meet their obligations. Permits will be treated as property rights, so if Australia wishes to reduce its emissions by more than the specified targets, then firms will have to be compensated.

Unfortunately, because the CPRS wants to provide “certainty for investors”, it locks many of the bad decisions in, making it extremely difficult to improve later. In effect, this shifts risks from investors and firms to the taxpayer, future generations, and the environment. Below are some problems with the CPRS, as described in the White Paper:

  1. The CPRS pretty much rules out Australia accepting emissions allocations that correspond to reductions in emissions of 15% or more by 2020. This is effectively using “precommitment” to attempt to rule out Australia’s participation in an international agreement that is equitable and comes anywhere near what the science says we need to do (Policy Position 4.2).
  2. The fact that there is a “gateway”, that rules out net emissions reductions that are greater than a particular level in 10 years after the gateway is set is not appropriate. Given what the science is saying about the emergency that we are in, it is not appropriate to rule out any level of emissions reductions. There are also strong equity arguments for this. Australia’s high historical and per capita emissions, and capacity to invest in reducing emissions are all arguments for allocating low amounts of emission allocations to us. Australia should be flexible when it comes to equity in international negotiations and any form of “gateway” undermines this (Policy Positions 10.1-10.14).
  3. Land clearing and logging native forests have significant emissions that are not dealt with, but carbon sink forests attract an offset. At relatively low carbon prices, it will be more profitable to manage plantations as carbon sinks than use them for wood. This will increase the demand for native forest timber, increase native forest logging, and increase total emissions (Policy Position 6.22). Because deforestation and native forest logging is not addressed, the CPRS could also promote the burning of native forest biomass (Policy Position 6.14), because emissions from such activities are “zero rated”.
  4. Emissions permits are treated as a property right, rather than a compliance instrument. This makes it much more difficult to improve the CPRS, because firms will have to be compensated. It is also totally inappropriate for the present government to create property rights that infringe on the rights of future generations (Policy Position 8.1).
  5. The absence of a price floor means that public goods from activities such as home insulation, developing new technologies, voluntary measures and so on are not realised. Instead more permits are freed up for big emitters. The CPRS should have a price floor, otherwise it would be better to replace it with a tax. The price floor (or tax) should increase each year by a certain amount (e.g. 4%).
  6. The 5% unconditional target is far too weak (Policy Position 4.2).
  7. Exact yearly targets are set 5 years in advance and cannot be tightened (Policy Position 4.4). The targets for 2010-2013 are extremely weak, with the 2010-2011 target probably being greater than the amount of emissions (Policy Position 4.5).
  8. There will be a price cap on permits, so the emissions cap can be exceeded by firms buying more permits at a price of the level of the cap (Policy Positions 8.9—8.12). According to the White Paper:
    • The scheme will have a transitional price cap for the period 2010–11 to 2014–15.
    • The level of the price cap will rise in real terms by 5% per year.
    • The level of the price cap will be set at $40 commencing in 2010-11.

    From an environmental perspective, the Carbon Pollution Reduction Scheme has the same disadvantage that a carbon tax has, there is no real cap on emissions. It has none of the advantages that a carbon tax has. The Carbon Pollution Reduction Scheme is not a cap-and-trade scheme, because there is not a strict emissions cap. It is a hybrid between an emissions trading scheme and a carbon tax – but it is not a very good hybrid.

  9. Much money is being squandered on assistance to emissions intensive industries (EITEs – Chapter 12, coal fired generators – Chapter 13, gassy coal mines). The coverage of assistance to “emissions intensive trade exposed” industries has been expanded to include industries that made the most noise, such as liquefied natural gas. Rentseekers have been rewarded. There will also be $3.9 billion dollars (assuming a $25 carbon price) in free permits handed out to coal-fired electricity generators. This is money that could have been invested in low emission technologies, reducing emissions from deforestation or forest degradation, or assistance to low income households. Instead it does nothing more than line the pockets of shareholders.
  10. The large amounts of assistance to polluting industries have meant that there much less funding available for compensating households. The distribution of assistance to households is strange, households with incomes of less than $20,000 are given less assistance than households with incomes between $20,000 and $120,000. Newstart recipients will recieve $14.20 more per fortnight; people on the minimum wage will recieve $14.95 more per fortnight.

There are some good things about the design of the CPRS. The coverage is greater than the EU ETS. Less permits are handed out for free than with the EU ETS. If the issues above are addressed, then we will have a well designed emissions trading scheme that could be used to efficiently make deep emissions reductions. If Australia put together some good carbon pricing policies, then these policies could be adopted elsewhere.

Update: The exposure draft legislation Carbon Pollution Reduction Scheme Bill 2009 is now available from the Department of Climate Change website here.

 

February 25, 2009

Turnbull’s estimate that we can reduce emissions by 150 Mt CO2 through land use is conservative

Posted by Peter Wood under Carbon Price Signals, Politics | Tags: , , , , , , |
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When the leader of the Liberal Party, Malcolm Turnbull, announced that the Liberals will go for stronger targets than Labor, he mentioned that 150 Mt of carbon dioxide could be sequestered through land use, including a technology known as biochar. How likely is it that we can do this? Does Malcolm Turnbull have the right policy for achieving this?

It is hard to tell whether Turnbull has the right policies because not much has been revealed about how this will be achieved. One issue with land use emissions and sequestration is that it is hard to measure. For example, to accurately measure carbon in soil, you need to dig a lot of holes. This makes it highly unlikely that soil carbon could credibly be included in an emissions trading scheme. Treating biosequestration as an offset is also problematic. For offsets to be credible, they need to be permanent, measurable, verifiable, and additional. Many emissions associated with land use are not accounted for under the Kyoto Protocol, but are nonetheless very real.

Another problem with the above approaches is that if large amounts of carbon are sequestered, and they contribute to a given total target, then unless the target can be strengthened, the credits could flood the market. This could lead to the emission reductions from fossil fuels that are necessary for decarbonisation not taking place.

We shall now examine how many emissions reductions are possible from different land use areas. These numbers are just estimates, but they allow us tio arrive at a ballpark figure.

Related posts:

* Greenhouse Gas Emissions from Agriculture and Land Use Change
* Green Carbon

Estimated potential for sequestering carbon in terrestrial ecosystems

Sequestration or emissions reduction activity

 Estimated annual sequestration potential (CO2-e yr-1)

Notes

End to land clearing

63 Mt

Emissions in 2006 from land clearing were 63 Mt CO2-e (using Kyoto accounting).

Protection and regrowth of native forests

136 Mt plus

 Mackey et al. (2008)1 consider a study area consisting of 14.5 million hectares of native forests in south-eastern Australia. They estimate that it is possible to sequester 7.5 Gt CO2-e in these forests if logging is halted. This is converted into 136 Mt CO2-e per year for 100 years using an equivalence factor derived by Costa and Wilson (2000)2. Scope for considerable more storage with all native forests protected.

Rangelands sequestration

250 Mt

Garnaut (2008)3 has an estimate of 250 Mt CO2-e per year for several decades, for “comprehensive restoration of degraded, low-value grazing country in arid Australia”. Garnaut also includes an estimate of a sequestration potential of 286 Mt CO2-e per year in soil for 20-50 years for changed practices to rehabilitate previously degraded rangelands.

Soil carbon – cropped land

68 Mt

Garnaut (2008).

Environmental mixed species plantings

44 – 143 Mt

Polglase et al. (2008)4 presents three scenarios, each of which has a net annual equivalent return of over $150 per hectare per year for a carbon price of $20 per tonne CO2-e:

  1. Water yield reduction < 150mm yr-1, and sequesters 143 Mt CO2-e yr-1 using 9.1 million hectares;
  2. Land previously has a low biodiversity score, and sequesters 88 Mt CO2-e yr-1 using 5 million hectares;
  3. Water yield reduction < 150mm yr-1, land previously has a low biodiversity score, and sequesters 44 Mt CO2-e yr-1 using 3.2 million hectares.

Total

561—660 Mt

 This estimate is 97—114% of Australia’s 2006 greenhouse gas emissions (576 Mt CO2-e).

1Mackey et al. (2008), Green Carbon: The role of natural forests in carbon storage. Part 1. A green carbon account of Australia’s south-eastern eucalypt forests, and policy implications, Australian National University, E Press, Canberra.

2Costa and Wilson (2000), An equivalence factor between CO2 avoided emissions and sequestration—description and applications in forestry, Mitigation and Adaptation Strategies for Global Change, 5, pp. 51—60.

3Garnaut (2008), Garnaut Climate Change Review, Table 22.2, pp. 542-543.

4Polglase et al. (2008), Regional Opportunities for Agroforestry Systems in Australia, Rural Industries Research and Development Corporation, Publication No. 08/176, pp. 77—80.

 

February 16, 2009

Will the carbon price collapse in the Carbon Pollution Reduction Scheme?

Posted by Peter Wood under Carbon Price Signals, Politics, Uncertainty, Probability and Risk | Tags: , , , , , , , |
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In Phase I of the European Union Emissions Trading Scheme (the EU ETS), between 2005 and 2007, the carbon price collapsed. In April-May 2006, the price for a permit to emit one tonne of carbon dioxide collapsed from over 30 euro to less than 10 euro. The carbon price then eventually declined to less than 0.10 euro by September 2007. The primary reason for this was that too many permits were allocated — the size of the cap was higher than the total amount of emissions. Has Australia learned from what happened? Is the carbon price likely to collapse during the initial phases of the Carbon Pollution Reduction Scheme (CPRS)?

This question is pertinent because the Australian House of Representatives economics committee has been instructed conduct an inquiry into the choice of emissions trading as the central policy to reduce Australia’s carbon pollution. A low carbon price is inefficient because there is a lost opportunity to make deeper reductions in greenhouse gas pollution. This means that deeper reductions will need to be made later (which will cost more), or impacts from climate change will be greater (which will cost significantly more). This issue applies, in a much worse way, when there is no carbon pricing at all (as is happening now).

Phase I of the EU ETS has not been the only time that cap and trade schemes have experienced low carbon prices. In the north-eastern states of the United States, an emissions trading scheme called the Regional Greenhouse Gas Initiative (RGGI) has commenced. The RGGI covers emissions from electricity generation, and allows for the purchase of offsets. It aims to stabilise emissions at 2002-2004 levels by 2015, and then reduce emissions by 10% by 2020. Permits are auctioned, and there have been two auctions so far, the emission permit prices were US$3.07 and US$3.38 per tonne of carbon dioxide.

One “design feature” of the CPRS is that Australia’s emissions trajectory is set 5 years in advance (see Chapter 4 of the White Paper). There is also a target range for emissions reductions to be achieved by 2020 to be 5-15% below 2000 levels (Policy position 4.2). The target range is perhaps the worst aspect of the CPRS White Paper, because an unwillingness by Australia to reduce emissions beyond 15% undermines a good comprehensive international agreement to reduce greenhouse gas emissions. The initial trajectory is given in Policy position 4.5 of the CPRS White Paper. I have converted these figures from percentages to megatonnes of greenhouse gases (carbon dioxide equivalent).

The first indicative national emissions trajectory will be:
• in 2010–11, 109 per cent of 2000 levels (602.5 Mt)
• in 2011–12, 108 per cent of 2000 levels (597 Mt)
• in 2012–13, 107 per cent of 2000 levels.(591.5 Mt)

How does this trajectory compare with what Australia’s emissions will be in the absence of of the CPRS? If the trajectory is higher, then the carbon price is likely to be very low (although this is affected by intertemporal flexibility measures, such as banking).

Projections for Australia’s emissions in the absence of of the CPRS are supplied have been estimated by the Department of Climate Change here. They project Australia’s emissions during the 2008-2012 Kyoto commitment period to be 599 Mt CO2-e. Note that this is below the CPRS trajectory for 2010-2011, about the same as for 2011-2012, and slightly higher than for 2012-2013. The projections include uncertainties in emissions for each sector, they range from 3% to 10%. They do not include uncertainties in emissions from land use change or from forestry. Aggregating these uncertainties is difficult, because emissions in different sectors are not independent. There can be covariance between different sectors. If we assumed the sectors were independent and ignore uncertainties in land use change and forestry, then the uncertainty in the projected emissions is 12-13 Mt CO2-e (about 2.2% of projected emissions). If the emissions in each sector are highly dependent, and we take into account the uncertainty from land use emissions, then the amount of uncertainty could be several times higher.

The Treasury modeling predicts that a 5% 2020 reduction scenario would be consistent with an initial nominal carbon price of $23 in 2010. Since the modeling was released, the global financial crisis has gotten worse and the global carbon prices have dropped significantly. The boom in Australia’s emissions intensive resource industries has also ended. The government has also unveiled a stimulus package that includes $3.9 billion in ceiling insulation for households and incentives for solar hot water.

There have been some very serious declines in the price of carbon as the global financial crisis has been unfolding. In the EU ETS, the carbon price has declined from around 30 euro in mid-2008 to 8-9 euro in February 2009. Credits for clean development mechanism projects (known as certified emission reductions, or CERs) have also declined in price, and are trading at less that 8 euro (around A$15). The price of CERs functions as a cap on the carbon price in the CPRS, because firms will be able to purchase an unlimited amount of CERs to account for their emissions (Policy position 11.5).

One thing that will provide stability for carbon prices is the banking of permits. The CPRS White Paper proposes that “Unlimited banking of permits will be allowed under the Scheme (except those accessed under the price cap arrangements)” (Policy position 8.2). Firms with extra permits can always hold them until a later year, and exercise them then. This means that even if there is an overallocation of emissions, there still will be some demand for permits if there is the expectation that there won’t be an overallocation of emissions in subsequent years. In Phase I of the EU ETS, there was banking of permits allowed, but not between phases. At the end of Phase I the permit price declined to less than 0.10 euro. When there is overallocation, banking spreads the impact in carbon prices across several years, instead of confining it to one or two years.

Because of unlimited banking of permits, the carbon price in the early years of the CPRS will also be affected by the medium term trajectory. The target range of 5-15% that has been set for Australia is not very steep, and is not consistent with what science and equity arguments suggest would be appropriate for Australia. Business as usual projections for 2020 emissions are available, but are even more uncertain than for 2010. Australia’s unconditional target is likely to be easier to meet than the EU’s unconditional target, because Australia’s high per capita emissions imply more opportunities for abatement.

At this stage it is too early to know for certain whether there will be an overallocation of emissions in the initial years of the CPRS, but is is very likely. In this sense, Australia appears not to have learned the lesson of Phase I of the EU ETS. International developments alone suggest that the carbon price is likely to be significantly lower than the price suggested by Treasury modeling. Banking of permits means that the carbon price probably will not be as low as the end of Phase I of the EU ETS. The US RGGI also has unlimited banking of permits, and that has not prevented the carbon price from being very low. It is therefore very likely that unless significant changes are made to the CPRS, it will start with very low carbon prices.

What changes need to be made to the CPRS to make it more effective and efficient? What changes need to be made to put in place long-term incentives for investment in clean energy and low-emission technology? Clearly the targets need to be tightened, the unconditional target could be significantly stronger. The conditional target only serves to undermine climate negotiations by ruling out Australia playing its part in a global effort to reduce greenhouse gas emissions. It is not appropriate for the government to rule out any level of emissions reductions.

There are also structural changes that should be made to the CPRS. The best way to rule out downward price volatility is by introducing a price floor. This could be implemented by having firms pay an extra fee when they surrender their permits, or could be implemented by having a reserve auction price. By having a price floor (and making it sufficiently high) we get many of the advantages that we get from a carbon tax. The CPRS also should not allow firms to purchase unlimited amounts of CERs, this is also because of credibility and additionality problems with the CDM, as well as the effect on prices. If the CPRS allows banking of permits, then for each permit banked, the regulator could reduce the cap by that amount of permits in the following year.

The overallocation issue suggests that permits should not be treated as property rights. This has lead to problems elsewhere, such as with the overallocation of the water in the Murray River. It is also inappropriate to create and allocate property rights that potentially infringe on the rights of future generations to a clean atmosphere. Emissions permits should instead be treated as limited compliance instruments. This suggests that Policy position 8.1 of the White Paper needs to be changed.

 

January 8, 2009

The Hansen-Romm Debate

Posted by Peter Wood under Politics | Tags: , , , , |
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There has been an interesting online debate involving James Hansen, and Joe Romm (from climateprogress.org and the Center for American Progress). After Hansen released his essay Tell Barack Obama the Truth — The Whole Truth (also reproduced by Barry Brook at BraveNewClimate.com), Romm responded with a blog post An open letter to James Hansen on the real truth about stabilizing at 350 ppm. Hansen’s strategy is to aim for a target of 350 ppm or less with an approach based on a carbon tax where 100% of the dividend is returned to households; a halt to construction of new coal-fired power plants unless they store the CO2 that they produce; and an R&D program in technologies that some will find controversial. Romm’s approach is to aim for a target of around 450 ppm with an approach based on a “WW2-style effort”. Both of their essays are worth reading, as are the comments threads.

Since then, Hansen has given a speech to the American Geophysical Union that summarises his “Target CO2″ paper (and is even scarier than his “Target CO2″ paper). He has also written a letter to Michelle and Barack Obama, which has gotten some media attention in Australia because he stated that “Australia exports coal and sets atmospheric carbon dioxide goals so large as to guarantee destruction of much of the life on the planet”. This isn’t the first time Hansen has commented on Australia’s climate policy, he also said in October that Australia’s approach to climate change “if adopted globally, practically guarantees destruction of most life on the planet.”

 

December 15, 2008

White Paper released, Kevin Rudd announces target.

Posted by Peter Wood under Carbon Price Signals, International Cooperation and Prisoner's Dilemmas, Politics | Tags: , , , , , , , , , , , , , , , |
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The Carbon Pollution Reduction Scheme White Paper has been released. Australia’s Prime Minister Kevin Rudd has announced an emissions reduction target of 5-15% in 2020 compared to 2000 levels.

The target of 5-15% by 2020 sends a signal to the rest of the world that Australia is not willing to play its part in an international agreement that stabilises at 450 ppm or less. It does not even signal that Australia is willing to stabilise at 500 ppm or less. It obstructs a good agreement on climate change. This means that it says that we don’t care about the Great Barrier Reef, we will not make a serious attempt to stop it from being destroyed or seriously degraded. Curiously, Kevin Rudd states that 450 ppm should remain a core part of international negotiations.

Rudd and the White Paper have argued that a 5% reduction would imply greater per-capita reductions than the EU’s 20% reduction by 2020 because of Australia’s greater projected population growth. This argument is irrelevant because Australia’s per-capita emissions are much higher than the EU’s. Any international agreement that does not have high per-capita emitters reducing emissions more than low per-capita emitters would never be accepted by the developing countries in the world. Rudd’s approach makes promising per-capita approaches to climate change, such as contraction and convergence, more difficult to achieve.

In short, there are four problems with the targets that Rudd has chosen:

  1. They are too weak to correspond to the stabilisation targets that we need to avoid dangerous climate change. They effectively rule out Australian cooperation with global stabilisation targets that add up to 500 ppm or less.
  2. They are based on a model where low per-capita emitters and developing countries bear a disproportionate amount of the burden of emissions reductions. They do not take into account Australia’s high per-capita emissions and are therefore inequitable.
  3. This means that developing countries have less incentive to participate in a global agreement, making the mitigation task harder.
  4. There is considerable evidence that Australia can afford much more mitigation — the expected cost of climate change will be greater than the expected cost of mitigation.

Now for some comments on specific aspects of the White Paper.

Assistance measures: Much money is being squandered on assistance to emissions intensive industries. The coverage of assistance to “emissions intensive trade exposed” industries has been expanded to include industries that made the most noise, such as liquefied natural gas. Rentseekers have been rewarded. There will also be $3.9 billion dollars (assuming a $25 carbon price) in free permits handed out to coal-fired electricity generators. This is money that could have been invested in low emission technologies, reducing emissions from deforestation or forest degradation, or assistance to low income households. Instead it does nothing more than line the pockets of shareholders.

The large amounts of assistance to polluting industries have meant that there much less funding available for compensating households. The distribution of assistance to households is strange, households with incomes of less than $20,000 are given less assistance than households with incomes between $20,000 and $120,000. Newstart recipients will recieve $14.20 more per fortnight; people on the minimum wage will recieve $14.95 more per fortnight. No money has yet been allocated to help households increase their energy efficiency.

Low price cap on permits: There will be a price cap on permits, so the emissions cap can be exceeded by firms buying more permits at a price of the level of the cap. According to the White Paper:

  • The scheme will have a transitional price cap for the period 2010–11 to 2014–15.
  • The level of the price cap will be set at $40 commencing in 2010-11.
  • The level of the price cap will rise in real terms by 5% per year.

This price cap is less than recent estimates of the social cost of carbon from economists such as Richard Tol [Richard Tol disagrees, see comments]. It is much less than what Nicholas Stern has suggested is likely to be the social cost of carbon. Having a price cap does not make sense if it is less than the social cost of carbon.

No price floor: I have discussed why an emissions trading scheme needs a price floor here. Dr Richard Denniss, from the Australia Institute has recently pointed out a problem with purely cap-and-trade schemes, that in my opinion could be addressed by a price floor, if it was high enough. With cap-and-trade schemes, if a household decided that due to concerns about global warming, it wanted to reduce its electricity consumption, that will not necessarily reduce global warming. What it will mean is that the electricity generator would not sell as much electricity, would not need to buy as many permits, and another firm could buy the permits more cheaply. The total amount of permits will be the same. This is more of a problem when the cap is too weak.

A price floor, it it was high enough, would mean that the scheme would function more like a carbon tax, but still with an absolute cap on emissions. A price floor could be introduced by there being a reserve price when permits are auctioned, or by firms paying an extra fee when they exercise their permits.

Forestry: The White Paper proposes to cover reforestation, on a voluntary basis, and not cover deforestation. Forest entities will not be required to surrender more permits than have been issued for an individual forest stand. Only activities that are covered by the Kyoto Protocol will be included. Judith Ajani and I have shown that at carbon prices of significantly less than $20 per tonne, there will be more revenue from using plantation forests as carbon sinks that as sources of wood. Because native forest logging does not attract a carbon price, and is not properly regulated, there will be an increase in native forest logging. This is likely to lead to carbon leakage from the plantation forest sector to the native forests logging sector, and a net increase in emissions. We made some submissions to the Carbon Pollution Reduction Scheme green paper here and here.

Update: The Australian Governments’ climate change advisor, Ross Garnaut, has written an article criticising the White Paper for its conditional targets not being higher enough, the inclusion of a price cap, and the transfer of wealth to emissions intensive rent-seeking industries. This article was published in the Fairfax press, and at East Asia Forum (under the title oiling the squeaks)..

 

December 14, 2008

Australia due to announce 2020 target — Kevin Rudd portrays himself as “sensible centrist”

Posted by Peter Wood under International Cooperation and Prisoner's Dilemmas, Politics, Uncategorized | Tags: , , , , , , |
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The Australian Government will release its Carbon Pollution Reduction Scheme White Paper on December 15. This will include a target range for greenhouse gas emissions in 2020. Australia has drawn considerable criticism from the international community because it has reneged on its commitment to announce it targets at the climate negotiations in Poznan. In an interview with Kerry O’Brien on the 7.30 Report, Australia’s Prime Minister Kevin Rudd stated:

KEVIN RUDD: … And I’m sure when this is delivered, early next week, we’ll get attacked from the left, from the right, we’ll get attacked by various radical green groups saying that we haven’t gone far enough because we haven’t closed down the coal industry by next Thursday.

KERRY O’BRIEN: I think that’s a little unkind, but …

KEVIN RUDD: Well, I think it’s – no, Kerry, this is absolutely true. We’ll be attacked from the far right and by various business groups, I suppose, and certainly the Liberal Party, for doing anything at all. And we’ll be attacked by extreme green groups for not taking the most radical course of action.

KERRY O’BRIEN: Okay.

KEVIN RUDD: We intend to steer a balanced course.

As well as using straw-man style arguments to attack critics, the Prime Minister is arguing that his target will be appropriate because he will be criticised from both sides. This does not make sense — whether Australia’s targets are appropriate depends on the science, on whether they are equitable, on whether they are achievable, and whether they will increase the likelihood of a comprehensive international agreement that will mitigate climate change. What is not relevant is whether they are criticised by participants in two different sides of a political debate. Instead of underestimating the intelligence of the Australian public, the Prime Minister should address the important issues.

The following cartoon illustrates the Prime Minister’s argument quite well (hat tip to JulieG).

Update: There is an open comments thread and links post on the White Paper at Larvatus Prodeo. The White Paper is here, the target range is 5%-15% reductions compared to 2000 by 2020.

 

December 14, 2008

How do different stabilisation targets correspond to levels of emissions reductions?

Posted by Peter Wood under Climate Science, International Cooperation and Prisoner's Dilemmas | Tags: , , , , |
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Given a particular stabilisation target for global carbon dioxide levels or greenhouse gas levels, how much would the world need to reduce its emissions by a certain year (e.g. 2020, 2050)? How much should Australia reduce its emissions by a certain year? I have found the following papers to be useful for this:

The first paper suggests that a target of 350ppm CO2 would require global emissions reductions of 5.17% per year. The second paper suggests that if we were to stop emissions overnight, then CO2 levels would eventually stabilise at approximately 300 ppm.

One approach to allocating emissions reductions between countries is ‘Contraction and Convergence’ where countries eventually converge to equal per-capita emissions. How much a particular country emits in a particular year is then based on the convergence date and the stabilisation target (which determines the contraction rate, but this also depends on carbon cycle feedbacks). Garnaut’s targets are based on a convergence date of 2050, which many would argue is unfair to developing counties and low per-capita emitters. The Global Commons Institute has a tool that can be downloaded, which estimates allocations for different countries given different convergence dates. Estimates obtained using this tool for Australia to contribute to 350ppm are 57-60% reductions for a convergence date of 2030; 45-49% reductions for a convergence date of 2040; 37-42% reductions for a convergence date of 2050 (relative to 2000 emissions). These figures are assuming that convergence starts at 2000, so if they were updated to take emissions since then into account, the reductions will become greater.

Because developed countries are also responsible for more historical emissions, Contraction and Convergence will also require some additional forms of payments, technology transfer, adaptation assistance, or aid for developing countres, before it can be considered to be truly equitable.

 

December 13, 2008

An alternative to offsetting your emissions

Posted by Peter Wood under Politics | Tags: , , , , |
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The Guardian reports:

The £12m defences of the most heavily guarded power station in Britain have been breached by a single person who, under the eyes of CCTV cameras, climbed two three-metre (10ft) razor-wired, electrified security fences, walked into the station and crashed a giant 500MW turbine before leaving a calling card reading “no new coal”. He walked out the same way and hopped back over the fence.

All power from the coal and oil-powered Kingsnorth station in Kent was halted for four hours, in which time it is thought the mystery saboteur’s actions reduced UK climate change emissions by 2%. Enough electricity to power a city the size of Bristol was lost.

Yesterday the hunt was on for the man dubbed “climate man” or the “green Banksy”. Climate activists responsible for hijacking coal trains and breaking on to runways said they knew nothing about the incident.

 

December 7, 2008

South Africa slams Australia’s lack of commitment to action on climate change

Posted by Peter Wood under International Cooperation and Prisoner's Dilemmas, Politics | Tags: , , , , , |
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It has been reported in The Age that the South African Environmental Affairs Minister Marthinus Van Schalkwyk has singled out Australia as one of four industrialised countries that needs to put its emissions reductions on the table. He has stated that:

Kyoto-ratifying developed countries should adopt an emission reduction range of at least 25 percent 40 percent below 1990 levels by 2020. This will give credibility and enable us to finalise ambitious mid-term targets for all developed countries within this range by the end of 2009, in time to avoid a gap between the first and second commitment periods of the Kyoto Protocol and thus secure the carbon market. Without such an unambiguous commitment it will be very difficult to engage developing countries in a credible way to make their deviation below baseline “substantial”.
* Japan, Russia, Australia and Canada have avoided putting their numbers on the table for too long. They now need to come forward with credible and ambitious mid-term targets within the 25 percent to 40 percent range for 2020
* From the United States (US) we expect comparability of commitments and compliance. We appreciate President-elect Obama’s commitment to restore America’s leadership in international global warming negotiations. In 2009, we will be looking to the US to come forward with ambitious commitments that will keep the world in the IPCC’s most ambitious stabilisation scenario for 2020.

Tim Hollo has also commented on this at Rooted.

 

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