TVHE

I was about to post a comment on Eric’s blog – but then the comment got long, and I realised I needed a blog post.  So here it is.

Eric Crampton raises some important points regarding the Reserve Bank’s view on the ETS in New Zealand.  Essentially, they are ignoring it – a policy decision that a lot of analysts have disagreed with.  However, this is one of those cases where I would tend to side with the Reserve Bank, lets work through the discussion to figure out what value judgments I’ve made to get there

Update:  Eric discusses further here.

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Ok, first off, I’m sorry I haven’t done a post-budget thing for a Green’s alternative budget yet – it will come, I’ve just been really really busy.

Second, this talk on the ETS is irritating me.  And it isn’t because of the description of what it will do to prices – this is true, the price of stuff that uses carbon will go up when you put a price on carbon.  The problem is the “frame” its being put into, which ignores trade-offs.  Here is the frame:

What is it?: A market-based approach to reducing greenhouse gas emissions. Emissions units, or carbon credits, are traded between participants.

People see this and then they say “global warming isn’t real” or “we are too small to impact on global warming” and then they say “NO ETS!”.  However, this isn’t the point of the ETS.

The ETS is a scheme to raise the funds to pay for our Kyoto Liability.  Even if you don’t believe in global warming, we have a liability that is based on carbon emissions.  As a nation, either people who produce the carbon pay for it – or everyone pays for it through higher taxes.

So here in lies the question – do we want higher prices for carbon goods or lower incomes because of higher taxes?  Given that the liability is a function of the amount of carbon we produce, it follows that pricing carbon on the basis of this will lead to the “best” solution – no matter what political party you support.  I know that National, Labour, and the Greens all understand this – so if you guys could like, explain it to the ACT party, and then like, explain it to the public, I’ll be very happy

Update:  Fuller points discussing the arguments around this in more detail in this comment.  Amazed at the strength of feeling around the ETS when all the impact studies suggest that the costs aren’t nearly as substantial as many other policies that are out and about …

So I’ve been told by CPW that the Green party has a new policy regarding electricity generation. I will discuss it here, and then explain why I’ve titled the post as such – overall, I do think we need an actual Green party who aren’t just redistributionists in green drag …

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Keith Ng writes today that the real villain in climate change is not businesses, it’s households! He claims that most growth in emissions and energy consumption is due to household consumption, not businesses. Which is the biggest red herring I’ve seen around climate change in a while.

Here’s a picture that will help: it shows how everything in the economy is actually linked together so considering household and business emissions separately makes no sense.

Now that may be a little simplistic but it’s good enough for our purposes here. Household emissions are measured by looking at the emissions generated in the production of goods that the household consumes. So the emissions come from producers, but the final product is consumed by households. Households provide the demand that causes the creation of goods that generate emissions in their production. So households are really responsible for ALL emissions. All emissions??? Yes, ALL of them.

What about businesses emissions? Well, businesses use goods to enable the production of other goods that households end up consuming. If there were no households buying things then there’d be no businesses making things. So this whole distinction between households’ and businesses’ emissions is really rather confusing, and more of a statistical device than a real division: one would not exist without the other.
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The California Energy Commission, in all their wisdom, have decided that the best way to encourage energy conservation is through imposing compulsory energy efficiency standards on TVs – in other words they are banning what they deem to be ‘energy inefficient’ TVs. They are the first state in the US to implement such a measure.

The aim of the intervention is to reduce electricity demand and hence avoid the need to build new power plants to meet this demand. In this sense, the Commission perceive the building of power plants to be a negative externality, presumably as the cost of building is reflected in the per-unit price of electricity for all users.

I take issue with this ‘externality’. For example, if a lot of consumers suddenly started demanding ‘Thierry Henry is God’ t-shirts, such that the price increased, should I feel aggrieved that the action of others is affecting the price I must pay for such a worthy product? No, that is how the market works.

Putting aside my scepticism, let’s assumes that the externality is a genuine one. What might be a superior way of discouraging consumption?

Bans are a blunt tool. From an economic efficiency perspective, you should first try and use prices to incentivise behaviour. High demand for electricity is only ever a problem over relatively short periods. For example, in New Zealand the peaks occur on weekdays in the morning as people wake up and in the evenings as people go home. In hotter climates, the peak typically occurs at the hottest part of the day as air-con works its magic. Hence one might try to charge higher prices at times of high demand to discourage consumption (and hence avoid the need to invest in new power plants). There are electricity meters that are capable of facilitating such differentiated pricing and indeed they are being rolled out in California as we blog.

Under the differentiated pricing scenario, consumers are paying the ‘true’ cost of electricity, so even if they continue to consume at high levels, one should be indifferent to building a new power station as the externality has been internalised.

The obvious perverse incentive that arises from the ban is that consumers will simply purchase their televisions out of state, knowing that they can get a better range of TVs to better suit their individual needs at more cost-effective prices.

It is far more preferable to keep consumer choice open and simply make consumers fully pay for their choice through efficient pricing (assuming that an externality exists in the first instance).

As speculated by some over the weekend, and confirmed today by the Economist, Copenhagen currently appears to be nothing more than a venue for which policy makers will agree to consider a future agreement on Carbon Emissions.

Undoubtedly there exist links between the U.S.’ relaxed approach to the summit and the Obama administrations efforts to pass universal healthcare; for the latter to pass the support of those contributing to the former is required. This is nothing new. What is interesting to note, however, is that such an attitude to favor health over emissions has been indirectly present within the U.S. for some time.

Earlier this year Boston became the second city (following San Francisco) to pass legislation banning the sale of cigarettes in ‘drug’ stores.  Within this legislation there exists a further directive restricting the sale of cigarettes on college campuses. This is where things become interesting. Consider a representative smoker. The impact upon this agent from said legislation results in further effort (i.e.; distance traveled) to obtain cigarettes. As such, the ‘carbon footprint’ of each cigarette has increased within the city of Boston; not too mention the shadow price of the cigarettes themselves.

The question is now posed; are carbon emissions an indirect consequence of health legislation?

When it comes to climate change the biggest argument against unilateral action is the lack of any tangible benefit. What can a single country really do to mitigate climate change? However, an article by Akira Yakita suggests that there are welfare benefits to action outside of the benefits to the climate.

His central argument is that preferences are not stationary and can be influenced by publicly expressed attitudes. So, if the government subsidises green technologies as part of its climate change policy, then people’s preferences shift towards green products. Because the subsidy increases the production of green products, which are now preferred, total welfare might increase. Obviously the final welfare outcome depends on the coefficients on each effect, but Yakita shows that an increase in welfare is possible.

While that’s all well and good in theory it’d be nice to have some evidence of the effect. After all, it could get awfully close to saying that anything the government does is good because people will grow to love it. Yakita’s evidence for the effect comes from two industries. First, he points to the explosion of interest in hybrid cars, where sales growth has been huge despite the 50% price premium they command. Sales of hybrids in Japan have grown by 19%pa from ‘98 to ‘06, while the overall growth in car sales is ~1%pa.

Secondly he points to sales of organic food. While there may be dispute over whether organic foods are actually environmentally friendly, there is no doubt about how they are generally perceived. He reports that the organic food market has grown 15%pa over the last decade as the environmental movement has taken hold.

Those two pieces of evidence together do suggest that preference shifts have taken place. However, it’s a bit of a jump from there to suggesting that government action can instigate a preference shift. I’m willing to believe that preference shifts could make it worthwhile for the government to promote green activities to boost welfare, but I’d suggest the causation has to run from preference shift to government action rather than the other way around. Nonetheless it’s a novel way to look at the benefits of unilateral action on climate change.

A friend of mine who is passionately vegetarian pointed me to this report as a good economic reason to eschew meat:

…two World Bank environmental advisers claim that instead of 18 per cent of global emissions being caused by meat, the true figure is 51 per cent.

So am I thinking about becoming vegetarian since meat is known to be more costly than I previously thought? Of course not. As tempting as it is to see these things in black and white, it’s very unlikely that the cost of meat will ever get high enough that we cease to eat it. Rather people will substitute away from eating as much meat as the price rises.
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Kiwiblog and others are bothered by Nicholas Stern’s pronouncement that:

Meat is a wasteful use of water and creates a lot of greenhouse gases. It puts enormous pressure on the world’s resources. A vegetarian diet is better.

[Stern] predicted that people’s attitudes would evolve until meat eating became unacceptable.

Matt talked recently about why subsidising agriculture is a bad idea, so I don’t want to rehash those arguments. What really baffles me is why Stern feels that changes in peoples’ attitudes are important. If we price greenhouse gasses, and other natural resources, appropriately then there is no need to worry about peoples’ attitudes. As Stern says, meat is far more environmentally costly to produce, so its price will rise. Meat will become a luxury that most can’t afford to eat on a daily basis. That’s something that will happen whether people consciously make a choice to become vegetarian or not.

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Could it be.  Could technology save us from global warming through “space mirrors” and ” carbon absorbing rocks” (source).

Maybe.

In that case, should we not worry about pricing carbon.

No.

Why?  Well, if it turns out that countries can cheaply get below the appropriate carbon producing targets with these technologies, then the price of carbon permits will collapse.  The price will adjust to capture this technological change.

As a result, we should keep running with a scheme to limit the quantity of carbon emissions (in order to avoid or limit the damage of a global warming event) and we should realise that technological progress will get captured in any price adjustment – in fact the very existence of such prices will increase the incentive for people to develop these technologies.