NZIER on emissions targets

So NZIER thinks it doesn’t matter whether we reduce local emissions or just pay off third-world countries to reduce them for us. Apparently the only important issue is whether we satisfy our responsibilities that we’ve committed to. The money quote is:

It allows emissions reductions to take place in the country where it is cheapest to do so. The climate doesn’t care where the emissions reductions occur, so nor should we.

Economists just love to assume the world’s a perfect place but, so often, reality bites them on the ass. Yeah, I’d like to THINK that when I bought a credit from Somalia they were implementing a project to reduce their forecast emissions. In reality they probably spent the cash on guns and powerboats, and forged the certificate of additionality. The fact is that a lot of credits available on the international market either have dubious additionality value, or cheaply reduce GHG emissions by destroying the environment in other ways. When you buy on the international market instead of reducing your emissions domestically that’s the sort of thing you’re buying into. If you don’t believe me then ask the gospel 😉

Ultimately, the environment doesn’t care if NZ satisfies its international obligations, it only cares how damaged it gets. When you buy on the international market you just have to accept that you’re not doing it to help the planet, you’re doing it to meet the letter of the law. If that’s the way you want to play international diplomacy then fine, but don’t pretend it’s because you’re a greenie at heart!

  • “Economists just love to assume the world’s a perfect place but, so often, reality bites them on the ass. Yeah, I’d like to THINK that when I bought a credit from Somalia they were implementing a project to reduce their forecast emissions. In reality they probably spent the cash on guns and powerboats, and forged the certificate of additionality.”

    Yes. But the issues associated with the quality of the certificates would probably influence their value on the market methinks. An international organisation isn’t going to accept the credit unless they think the reduction in emissions can be somehow quantified.

    Given that I would say that relative trade-offs is the important issue.

    NZIER sounds a bit like Larry Summers here, I agree with the hypothetical, although there are practical issues with true “voluntary” implementation.

  • @Matt Nolan
    I think The Hand is overstating the problems. There are a lot of people working on ensuring the validity of CDM credits and guaranteeing additionality. It’s a problem, but it’s not going to single-handedly doom the planet to extinction 😛

    However, I have to disagree with you too, Matt. I don’t think that the purchasers of the credits are too worried about where they came from. To most politicians it’s more about being pragmatic and minimising the cost of Kyoto compliance, rather than saving the world. Even if it were about saving the world, the marginal cost to the environment of a few shonky credits is probably pretty small. Consequently, I doubt that the price of the credits will be significantly influenced by how truly they represent carbon reductions.

  • @rauparaha

    Then I would say the problem is with shonky credits being accepted for normal credits – which is an issue with the implementation of the Kyoto protocol – not with trade per see

  • @Matt Nolan
    That is precisely the problem. However, the difficulties of implementation can have a significant effect on the efficiency of the market in achieving its objectives. Whether you think governments should take account of it in their domestic policy is obviously a normative question that we can’t answer.

    I would be interested to see estimates of how large the impact is, though. So far I’ve only seen anecdotal evidence of shonky credits.

  • ben

    The assumption that the credits purchased are actually binding is in the quoted text. “It allows emissions reductions to take place…”

    As Matt points out, this is a system problem not a problem with trade per se.

    I think NZIER is right on the money: trading credits is essential to a climate change response – if gains from trade cannot be exploited on this issue then either the environment or welfare, or both, needlessly suffer.

  • @rauparaha

    @ben

    In practical terms, this issue is important. It is an institutional problem. Personally I would lay the blame at the set up of international credit markets, and ultimately the implementation of the Kyoto protocol itself.

    My feeling is that the NZIER report assumed a “better” institutional arrangement than currently exists to focus on the scope for market allocation. As long as we realise the institutional limits in this case this is still a very reasonable issue to look into – as I’m sure you would agree to Rauparaha 🙂

  • @Matt Nolan
    Huh? Did I ever say I wasn’t in favour of trading? I said that I thought the benefits of trading could be limited by market problems. The problem here is that additionality is very hard to measure and observe. You often have to rely on the testimony of the people that are claiming the credits. It’s just a very difficult thing to administer.

    I think it’s important to note that NZIER’s release isn’t a report, it’s just a two page note explaining the distinction between reductions and responsibilities for non-economists. I’m sure that in a report they would have covered all this stuff, so I don’t think it’s fair to accuse them of ignoring it. It is an interesting issue to discuss, though 🙂

  • @rauparaha

    “Did I ever say I wasn’t in favour of trading?”

    No, which is why I said I thought you would agree. It wasn’t meant to be a snide remark, it was supposed to be a statement. Sadly it was difficult to translate tone through the interwebs 😀

    “I’m sure that in a report they would have covered all this stuff, so I don’t think it’s fair to accuse them of ignoring it”

    I didn’t so much accuse them of ignoring it as saying that it seemed like a fair issue to put to one side for what they were illustrating. I was standing up for the report – not attacking it 😛

  • Bob1

    I absolutely agree with the Hand. These CDM credits are crap, the additionality problems cannot be overcome.

  • @Bob1

    Even if that is the case, the analysis is not useless.

    All it tell us is that there are institutional issues, and understanding the institutional issues apparent in this given market is important for policy analysis.

    Their point was, if these issues had been solved, would a market outcome that makes emissions tradeable be cool – and it would.

    In policy terms the institutional issue is important, but NZIER wasn’t trying to set up policy they were describing a part of the process. Criticising them for this would be ignoring the scope of their discussion.

    “the additionality problems cannot be overcome”

    This is an issue I would like to see discussed in more detail if we are actually going to move onto institutional structure.

  • @Matt Nolan
    “Sadly it was difficult to translate tone through the interwebs ”

    Ah, sorry, I misinterpreted you there.

    “I was standing up for the report – not attacking it”

    I was unclear here. That was just an addendum as a general comment. it wasn’t directed at you. I think you’ve stuck up for NZIER most admirably 🙂

  • Bob1

    @ Matt

    Agreed. Perhaps we could save institutional issues for another day.

  • @rauparaha

    NZ economists are supposed to be gentle with each other – maybe that only holds in applied circles 😉

    @Bob1

    And what a beautiful day that will be 🙂