A note on the ETS and inflation

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 😉

UpdateEric discusses further here.

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National, Labour, Greens: You all get this, please help clear it up!

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 …

We need a new Green party

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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Who’s the real villain?

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.
Circular flow of income

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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California knows how to ban stuff

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).

Health Legislation: a carbon emitter?

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?