Comments on: Cost of carbon

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Comments on: Cost of carbon http://www.tvhe.co.nz/2007/09/05/cost-of-carbon/ The Visible Hand in Economics Wed, 05 Sep 2007 20:54:59 +0000 hourly 1 https://wordpress.org/?v=6.9.4 By: Matt Nolan http://www.tvhe.co.nz/2007/09/05/cost-of-carbon/#comment-278 Wed, 05 Sep 2007 20:54:59 +0000 http://tvhe.wordpress.com/2007/09/05/cost-of-carbon/#comment-278 Thats an interesting point Chris.

I always felt that when there is uncertainty, risk averse individuals require a greater return to make up for this uncertainty. As the return on carbon credits would be the capital gain in their value, I thought that the current price would be lower. Also the time value of money, when will carbon credits actually be required, if it is a fair way away then the current price would also be below the future liability.

I’m just not sure if taking a mid-point is the appropriate way to value a future liability. Then again, the scenario you have put forward is very convincing.

]]> By: CPW http://www.tvhe.co.nz/2007/09/05/cost-of-carbon/#comment-277 Wed, 05 Sep 2007 05:00:33 +0000 http://tvhe.wordpress.com/2007/09/05/cost-of-carbon/#comment-277 The US sulphur dioxide market springs to mind as an anecdotal example where reducing emissions was ultimately far less costly than early forecasts and market pricing suggested. I’m loath to argue that the futures prices are likely wrong in one way or another, obviously there’s a pretty big profit to be made if you really believe that.

However if I had to take a punt I would cast this as a “peso problem” type situation. There is a non-negligible chance that carbon-trading regimes will collapse making your carbon credits worthless (I think the price already dived once when the EU gave out to many credits). Hence the market price may tend to track below the observed ex-post price if carbon trading regimes hold together.

]]> By: Idiot/Savant http://www.tvhe.co.nz/2007/09/05/cost-of-carbon/#comment-276 Wed, 05 Sep 2007 01:48:17 +0000 http://tvhe.wordpress.com/2007/09/05/cost-of-carbon/#comment-276 The Treasury price is per ton of CO2. This is easily determinable as the quantum – 41.2 MT – is the amount of CO2-equivalent we are expected to exceed our Kyoto agreed allocation by.

EU prices are also per ton of CO2. Everyone uses it because its the agreed measure under the UNFCCC and Kyoto.

(And at this stage, I should also point out that I buggered up my maths, and that while householders seem willing to pay upwards of $80 / ton for offsets, bidding on the business package is only $10 / ton. Clearly, not enough NZ businesses feel they need to offset yet. I’m also suspicious that Meridian is double-dipping on its reductions; they were awarded Kyoto credits equal to their entire CP1 reductions by the government, and have sold them; these credits aren’t proper Kyoto credits, so are they for Cp1, pre-CP1, or what?)

]]> By: DT http://www.tvhe.co.nz/2007/09/05/cost-of-carbon/#comment-275 Wed, 05 Sep 2007 01:32:27 +0000 http://tvhe.wordpress.com/2007/09/05/cost-of-carbon/#comment-275 Matt,

Agreed that it would probably go up. This of course is dependent on a number of factors – for instance we don’t even have a post CP1 (2013-) agreement, so there may be no cost of carbon from then on. This is the problem – we don’t even know what the system is going to look like beyond Kyoto, which is currently for 2008-2012.

If you are interested, the Stanford Energy Modelling Forum (probably the best modellers in this area) did examine this out to 2050 under some assumptions. The results were examined in a special issue of The Energy Journal which I can give to you to borrow. The figures vary wildly between the 19 models looked at, but the averages are rising well above the 2007 figure, but do so over time.

Ultimately the determinant of price will be affected by what national governments and international organisations deem that people will bear as a ceiling price. If it is $000’s then all of a sudden I think you will see targets revised.

]]> By: William Taylor http://www.tvhe.co.nz/2007/09/05/cost-of-carbon/#comment-274 Wed, 05 Sep 2007 01:20:03 +0000 http://tvhe.wordpress.com/2007/09/05/cost-of-carbon/#comment-274 I wasn’t in anyway trying to say that in general we should bias ALL cost estimates upwards, I just think in this case taking the simple average would bias the estimated carbon price for new zealand down.

If we bias all costs down then socially undesirable projects would be undertaken…..

]]> By: Matt Nolan http://www.tvhe.co.nz/2007/09/05/cost-of-carbon/#comment-273 Wed, 05 Sep 2007 01:03:37 +0000 http://tvhe.wordpress.com/2007/09/05/cost-of-carbon/#comment-273 Yes, relative to the socially optimal price. However, we are still more willing to undertake emission reduction projects than we would if there was no price for carbon.

I wish we just had a carbon tax 😉

]]> By: CPW http://www.tvhe.co.nz/2007/09/05/cost-of-carbon/#comment-272 Wed, 05 Sep 2007 00:57:55 +0000 http://tvhe.wordpress.com/2007/09/05/cost-of-carbon/#comment-272 As an aside, if you think the NZ government (or world markets) are chronically underestimating the cost of reducing carbon emissions, this implies, all else equal, that we should be less willing to undertake emission reduction projects.

]]> By: Matt Nolan http://www.tvhe.co.nz/2007/09/05/cost-of-carbon/#comment-271 Wed, 05 Sep 2007 00:54:55 +0000 http://tvhe.wordpress.com/2007/09/05/cost-of-carbon/#comment-271 Ahh, my comment was stupid. I meant to say that it would be better to have an over-estimate than an under-estimate, not that we should blatantly over-estimate the value of carbon, sorry.

However, I’m still not sure that $13.21 will turn out to be the market price for carbon. Regulatory risk from countries allowing important industries to over-run carbon quotas will surely increase the demand for carbon once the government gets into trading. Why does Treasury use a point estimate instead of trying to work out underlying demand under different potential world regulatory environments.

I agree that the Trademe price is more symbolic than real, after all with a week to go they are at $100 a credit (for the 20 credit package). But there is some leeway between the two prices, and I’m not convinced that this mid-point valuation accurately represents what carbon prices will be.

I guess my primary note of difference is that I have a subjective belief that the carbon price will be higher than $13.21 when carbon trading is in full swing. I would welcome any information regarding the validity of this belief 😉

]]> By: DT http://www.tvhe.co.nz/2007/09/05/cost-of-carbon/#comment-270 Wed, 05 Sep 2007 00:27:55 +0000 http://tvhe.wordpress.com/2007/09/05/cost-of-carbon/#comment-270 I am a little busy to check, but most of these things are for CO2 equivelant. This means covering all greenhouse gases, the harm of which is expressed in terms of tonnes of CO2 emitted. Without getting too technical, methane (CH4) is about 21 times worse (for instance) per volume than CO2, so one tonne of methane is expressed as 21 tonnes CO2 equivelant. I would be surprised if a different methodology is used since Kyoto covers multi-gases.

In terms of trademe, that price means nothing. That is currently not trading on market fundamentals – like the Tana handbag, people are buying for symbolic reasons.

]]> By: CPW http://www.tvhe.co.nz/2007/09/05/cost-of-carbon/#comment-269 Wed, 05 Sep 2007 00:26:50 +0000 http://tvhe.wordpress.com/2007/09/05/cost-of-carbon/#comment-269 Why should we bias all our cost forecasts upwards? I don’t see this as an efficient practice in general, as it would mean that many socially desirable projects wouldn’t pass a cost benefit test.

If you want to make the case for the government running a surplus as a precautionary measure then fine, but this should be done by planning for a surplus with unbiased forecasts, not by high-balling all your cost estimates just in case.

Can we have biased forecasts for other policies we like? I predict tax cuts increase revenue! Whoopee.

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