Indeed, as some people are worse off than others – I have already stated that my argument was normative and value-ladden, not objective.

“In the past you’ve normally indicated that we need to consider the redistributive impacts of such policies, I don’t see how this is a different”

I guess that depends on how we define fairness. We already have a set of redistributive policies based on income – I don’t see why we have to allow further redistribution based on the loss of value on your endowment (which is effectively what we would need to justify in order to ask for redistribution in this case).

It appears that our entire discussion here is about transfers. The ETS should, insofar as it acts like the appropriate pigovian tax, lead to the right allocation of resources, we agree on this as well – which means that NEITHER of us believe that flat tax funding of the Kyoto Liability is the right method as relative price signals will be distorted.

I am assuming that “fairness” would dictate that we don’t need to compensate the losers, you are saying that “fairness” implies that we should. We are never going to solve this as the argument is based solely on value judgments.

My belief is that since this policy simply reduces the value of some households endowments (the ones that own the carbon emitting resources) and increases the price of purchasing certain products for some houses (energy, fuel), then current redistributive policies based on income are fair enough and so we don’t need to add additional transfers. Any rights based valuation method would find this conclusion abhorrent, but ohh well.

I realise that such an assumption is implicitly value-ladden, but it is not a pareto-inferior equilibrium, so in a normative sense I am allowed to pick it – as long as I’m explicit about what I think is fair, which I think I have been.

I wasn’t thinking in terms of society and industry (seems like a vague distinction to me), it was just pointing out that this policy will impose higher costs on some people/groups than others. It’s pretty clear that introducing the ETS does not lead to a a pareto superior outcome. In the past you’ve normally indicated that we need to consider the redistributive impacts of such policies, I don’t see how this is a different.

Any transfer is a PERMANENT claim on resources, so now we’re just arguing about magnitude. The current popular free trade argument is for a PERMANENT transfer from rich to poor via tax and social spending to make up for the (assumed) benefits to high income earners and costs to low income earners of free trade (in developed nations, that is).

Policy skeptic that I am, I don’t believe there is any consistent set of principles that guides our decisions about when we compensate losers and when we don’t. I think there is plenty of room for debate about the level of compensation required in this case.

My point is that a) and b) are exactly the same thing in the absence of transfers. If you set the price equal to the socially optimal price you make sure that the total burden is captured by the market transaction. Now this does not mean that the emitter themselves pay the entire burden in shifting – part of it is paid by the consumer (depends on the elasticity).

Now if the disagreement is on the transfer front, I don’t believe that there is any rational for a long-run transfer of resources between society and industry (which is the only way a and b could be different in the long run) – you can call that subjective all you want, I’m willing to stick to it

“there are existing precedents for letting society as a whole absorb the social cost of unexpected events”

Agreed – which is why we should have a “transition period” for the scheme, and why we have grandfathered credits that disappear over time, we are trying to ease the “transition”. We do not disagree on this, and in fact the government is doing this.

However, when it is a PERMANENT structural change, it will not be in societies best interest to protect industry forever – as you said its the same argument as the free trade argument.

In my view they are the same thing entirely. Accepting the liability ensures that we now face a social cost from our carbon emissions (as it is by unit). The ETS should change prices to reflect this social cost – which will lead to welfare losses.

“We are describing a rather Kafkaesque scenario here, but we can always default and face the consequences”

Agreed. The only reason I wanted that put to one side is that it is a whole separate argument. Once we have decided what is the cheapest way to pay the liability, then we can say “is it cheaper to default or pay”.

I was only against discussing this based on the fact I wanted us to stay on topic – it was a way of avoiding the “global warming is not even happening” hijack.

a) make transactions based on prices that reflect the full cost to society; or
b) suffer the full loss of welfare associated with introducing a true carbon price

I agree with a) but think there is case against b).

“we’ve got a liability we have to pay for”

We are describing a rather Kafkaesque scenario here, but we can always default and face the consequences. In this scenario i would say that the post-Kyoto optimal policy is so uncertain we would be better off not introducing an ETS yet.

I think we are agreeing that helping to cushion the transition is a good idea, but that, in the long-run, the relative price signals should be appropriate. It is just like the free-trade argument in that regard. I’m sorry but I don’t see where we are differing here 🙂

“Tautologies don’t advance your case that a carbon price is “fairer” than the alternatives.”

Agreed (sort of), I was making a value judgment that about what was fair – I don’t see how else I would analyse the policy. My analysis could only be construed as objective if we could compensate the losers and still end up better off than in the tax case – the NZIER analysis debunks this for some potential scenarios.

Personally, I would prefer us to be in a situation where those who create/consume things that cause emissions pay the cost of it – I inherently gain value from relative prices being efficient. The NZIER analysis was not enough to convince me that any other allocation of burden would be better – if more CGE analysis had reached the same result I would be convinced, but it didn’t.

“I strongly disagree. I doubt there would be any public or political support for meeting our Kyoto obligations if the practical result of our policy was costs to us and higher total emissions globally”

It doesn’t matter whether we support the policy or not, we’ve got a liability we have to pay for – off course there are going to be costs. We have to figure out the socially optimal way of paying off this liability – that is the point.

We both support pricing carbon, but as I said before, that belief doesn’t automatically imply that we shouldn’t compensate those who are affected. It would seem to me that a lot of the transition costs are a shock. A better analogy would be the statement “we should have free trade, but we should have social policies that compensate the losers”. It seems like the same principle to me.

“Also our concept of fairness shouldn’t imply lower aggregate welfare in the first place – as long as we accept that the type of fairness we want to promote is that which people value in the first place.”

Tautologies don’t advance your case that a carbon price is “fairer” than the alternatives. Leaving aside whether the NZIER study was right or wrong, the point still holds that in the real (messy) world a full carbon price might not necessarily be optimal from a social welfare perspective – in which case society might happily prefer an “unfair” ETS.

“global emission are not the point”. I strongly disagree. I doubt there would be any public or political support for meeting our Kyoto obligations if the practical result of our policy was costs to us and higher total emissions globally. (of course that is a far-fetched scenario, but still…)

I think that provides a case for gradually introducing a price for carbon – not for never making the scheme user pays. After all, this isn’t a temporary shock (like a flood), this is a complete change to a new structure for the economy.

“Also, I don’t think we want a concept of “fairness” that leads to unambiguous reductions in welfare, which was effectively the NZIER case”

The NZIER case showed a reduction in total economic output – not economic welfare. It didn’t make any claims on the distribution of resources.

Also our concept of fairness shouldn’t imply lower aggregate welfare in the first place – as long as we accept that the type of fairness we want to promote is that which people value in the first place.

Furthermore, global emission are not the point – we are only interested in making a scheme that sees us meet our Kyoto obligations at the lowest welfare cost – the NZIER study is the only one to actually conclude that GDP could be lower, and I’m not sure it convinced me of that.