What on earth is going on with the Australian ETS?

As was noted by several in the NZ blogosphere, Australian Treasurer Wayne Swan recently referred the Australian Emissions Trading Scheme (the Carbon Pollution Reduction Scheme) to a lower house finance committee. Since the committee was tasked with considering whether an ETS was the correct policy response to climate change, and given that the committee was to report after the Government had previously stated the measure would be passed, everyone took this to mean that the CPRS was very much on the back burner.

Almost immediately the Government was stating that this was not the case. By the end of the week the move, a ploy to reduce the power of the Senate and back the opposition into a corner on climate change policy, had been reversed.

Dennis Atkins, who is pretty much the only person worth reading in Brisbane's Courier Mail, has a very good analysis of what on earth was going on here.

Atkins frames this issue in terms of the chaotic state of affairs in Canberra currently, with an enormous stimulus package going through Parliament in the week of the worst natural disaster in Australia for at least a hundred years. This is on top of Rudd's notorious work rate and instincts for micromanagement.

All of this was happening in what is now a permanent state of semi-chaos in Canberra. Ministers and public servants are stretched to breaking point, too much is being asked with too-tight timelines and ridiculously minor decisions are not being made until they are ticked by the office of Prime Minister Kevin Rudd.

Swan's letter to Economics Committee chairman Craig Thomson sailed through this monster mash and it was apparently not given the attention it deserved, allowing a form of words too open to mis-interpretation.

Now the politics of the CPRS is clearly far from settled. Apparently the big mining companies have only recently realised the implications of the scheme for their businesses since the shine went off the global economy. As a result the Government is coming under vastly increased pressure from business interests.

There's plenty of bark left in the emissions trading dog, as an increasing number of companies and their representatives in Canberra have been telling ministers in recent weeks and will continue to do in the weeks and months ahead. While Wong repeats the mantra that carbon reduction cannot be put on the back burner because of the global financial crisis, business is not so sanguine.

Mining companies - especially those representing coal interests - have been laying what are said to be some alarming numbers on ministers' desks, highlighting job losses and potential mine closures.

On the other hand strong ETS advocates are increasingly willing to oppose the proposed scheme as being too weak. Some are even willing to go back to the drawing board and investigate a carbon tax, as in this open letter by 10 very eminent economists.

In his article Atkins also emphasizes that the Government will certainly struggle to get this bill through the Senate. The Greens oppose the scheme as too weak, and the Liberals oppose the current measure as too onerous. The Nationals are likely to oppose regardless.

Once again we are hearing that the Government may be willing to go to a double dissolution election over this issue. So the politics of the Australian ETS still have a lot of life in them yet!

Economic crisis to delay U.S. carbon trading?

In more recent comments Chu is open to considering a carbon tax, rather than cap and trade, a good thing perhaps.

More importantly perhaps he seems to indicate that the current economic crisis will delay either cap and trade or other carbon pricing mechanisms.

He said that while President Obama and Congressional Democratic leaders had endorsed a so-called cap-and-trade system to control global warming pollutants, there were alternatives that could emerge, including a tax on carbon emissions or a modified version of cap-and-trade.

Dr. Chu said reaching agreement on legislation to combat climate change would be difficult in the current recession because any scheme to regulate greenhouse gas emissions would probably cause energy prices to rise and drive manufacturing jobs to countries where energy is cheaper.

“The concern about cap-and-trade in today’s economic climate,” Dr. Chu said, “is that a lot of money might flow to developing countries in a way that might not be completely politically sellable.”

Chu Back to Speaking His Mind

It's great to see Nobel Prize winning physicist and U.S. Energy Secretary Steven Chu back to speaking his mind. Here from an interview in the L.A. Times he discusses the effects of reduced snow-pack on California.

In the pessimistic scenario, the snow pack will decrease by 70 to 90 percent. Well, let me tell you what California does when there's a two-year in a row 20 percent decrease in snow pack: They water-ration.

Q: So you're looking at a scenario of permanent water rationing?

CHU: No, you're looking at a scenario where there's no more agriculture in California.

You may have noticed that during his confirmation hearing he walked back an earlier comment that coal was his "nightmare", describing it only as a bad dream, (NYTimes) but maybe one only needs to be circumspect in front of the Senate committee?

In the L.A. Times interview Chu presents the case for action against climate change despite uncertainties in our knowledge. He has a particularly good analogy to the dangers of old electrical wiring.

Carbon dioxide is a global problem. The cost of the carbon emissions are things that, number one, won't show up immediately in one year, or even in 10 years. They have begun to appear. The real costs are hard to estimate because we don't know to what extent, how bad it's going to get, in all honesty. There are projections... You can make a best guess on what might happen. I prefer - there are people who say, since we're not sure, we really shouldn't do about it - I think, in my opinion, a more measured way of dealing with this is, it's all about the risk, the potential risk, the downside risk of not doing something, or maybe doing it in a very moderate way.

The analogy I like to use is, suppose you buy a house, and then in the inspection, the structural engineer says, well, this House is a fine house, but understand, you have to rewire the house, because it's an old wiring and there's a chance of an electrical fire. It's going to cost a lot of money, but you should rewire... So you get an estimate of whether you really need to rewire the house, or whether you can go another, safely for another 20 years or 10 years. Suppose, just pretend, that the next person comes and says, essentially, I think the wiring is shot. I can't guarantee if it's going to be this year or five years from now, but you run the risk of an electrical fire. So now you have many options. You can continue to shop for the answer you want: your house is safe. Or you can say, I know the solution.... let's pretend it's $20,000, a lot of money, that's going to come out of your budget, an you can't - you're going to have to forgo a lot of other things. You could say, well, I could just get better fire insurance. You're probably not going to do that. Because there's a chance the house could burn down when you're asleep and your kids are asleep in the house. So eventually, you might be led to say, if there's a 50 percent chance my house might burn down in five years, I better do the rewiring. Then you have to bite the bullet. No one is telling you there's a 100 percent chance this is going to happen.

Finally this

Dr. Chu said he was still adjusting to his surroundings and title after most of a career spent as an academic scientist. Asked whether he preferred to be called “Dr. Chu” or “Mr. Secretary,” he answered, “Steve is fine.”

Given what I have heard about the workrate Chu expects, I wonder if some at the Department of Energy will be in for a period adjustment also.

The Australian Liberal Party and Agricultural Greenhouse Gas Emissions

Yesterday Australian Liberal Party leader Malcolm Turnbull gave an interesting speech on climate change policy to the Young Liberals conference. The associated change in policy direction was leaked to the Saturday newspapers, here for example.

Turnbull has been under pressure from the Nationals who are opposed to an emissions trading scheme. As a result we get this:

The Opposition Leader, Malcolm Turnbull, will announce a three-pronged policy of greenhouse gas reduction that will impose no direct costs on businesses or homes and require no behavioural change, and aims to eradicate divisions in the Coalition over climate change.

It's astonishing that a serious response to climate change can be advertised as requiring "no behvioural change" but there you go.

The speech itself is interesting, with three major policy proposals.

Our plan captures three gigantic opportunities for CO2 abatement that the Rudd Government has ignored:
· A Green Carbon Initiative - a comprehensive biocarbon strategy ofinvesting in the health of our landscape, restoring soil carbon by reversing over-grazing and excessive tillage, embedding CO2 in biochar (charcoal fertiliser), tree planting, and revegetation;
· Dramatically increasing energy efficiency, especially in buildings;
· Constructing at least two industrial scale carbon capture and storage power stations deploying industrial scale solar energy and geothermal energy and harnessing the energy of the oceans through tidal and wave power.

The Green Carbon Initiative aims to address the issues of terrestrial carbon sequestration discussed in my previous post. Turnbull has been talking to serious people about this and the measures he proposes seem worthwhile. Of course the small matter of the structure of the incentives in the Kyoto protocol and its successors needs to be addressed so that Australia gets full credit for any moves in this direction. It's hard to know how to weigh the contributions of serious thought and political opportunism in this proposal.

As to the second point, increased energy efficiency should be the FIRST priority of policy makers and politicians in response to the twin challenges of climate change and the need for economic stimulus. Here I would fault Turnbull only for inappropriate emphasis.

His third point which mainly emphasizes carbon capture and storage at coal fired power stations needs a serious caveat. CARBON CAPTURE AND STORAGE IS AN UNPROVEN TECHNOLOGY. On the other hand the various sources of alternative energy generation are already technologically feasible and even economic in the right circumstances. Again the emphasis is all wrong.

Finally the implication that the Rudd Government is not thinking about any of these approaches seems a little unfair!

Nevertheless the politics of climate change and emissions trading in Australia look to be very interesting in the coming year.

Agriculture and Kyoto

Most scientists would argue that the Kyoto agreements have many serious deficiencies but are the only framework we have for international efforts to curb greenhouse gas emissions and minimize the risk of catastrophic, or just very damaging, climate change.

From New Zealand's point of view the most serious questions about Kyoto and its successor agreements relate to the impact of agriculture on greenhouse gas emission.

Readers of this blog, if there are still any, might like to take a look at my discussion about some aspects of this with Charles Finny over at Dear John.

Garnaut's new report

Ross Garnaut has released a supplementary report on emissions trading in Australia. He is recommending a very slow start to the program with a target of a 5% reduction on year 2000 emissions by 2020 unless a deal that includes all nations emerges from Copenhagen.

Paul Kelly notes that this takes the heat off Rudd

There are two main stories in the Garnaut report about the 2020 target. Garnaut is advising Rudd to run on two tracks: what Australia does with a comprehensive global agreement and what it does with an ongoing ad hoc post-Kyoto global compromise.

Taking the second scenario (absent any all-in global deal), Garnaut advises Rudd to settle on a 5 per cent Australian reduction by 2020. He stresses this would be consistent with reaching Rudd's non-negotiable 60 per cent reduction target by 2050.

The reason 5 per cent is the most likely target in practice is because, as Garnaut argues, there is only a chance the world will reach a comprehensive deal any time soon. Given this likely failure, Garnaut wants a modest start for Australia.

Because it is inconceivable that Rudd would choose a more ambitious target than Garnaut's, the best calculation under this scenario is that the Rudd Government will settle somewhere between zero and minus 5per cent from year 2000 levels.

Hostage to Fortune

If Clark pushes Emissions Trading through the House with Peters' votes using the figleaf of a Privileges Committee inquiry she creates two enormous hostages to fortune.

The historical view of her Government will be strongly coloured by the eventual seriousness of the charges against Peters and the outcome of the Privileges Committee and SFO inquiries. She will also need the ETS to be an enormous success. If there are too many unintended consequences she will stand accused of driving through the most thoroughgoing and radical economic reform since the first term of the Bolger government without proper care and due process. The more so if it emerges that Clark's support for Peters keeping his job has the explicit quid pro quo of Peters' support for the ETS.

Like Prime Minister Howard in Australia she could find her standing much diminished by failing to leave politics on her own terms and by seeming at the end more interested in retaining power than in exercising it wisely.

Political Management of Australian ETS II

Wow! Despite leaking to the papers at the weekend Nelson did not have the numbers in Shadow Cabinet yesterday to significantly move Coalition policy on the ETS.

So you can pretty much ignore my previous post.

Paul Kelly writes about the politics of climate change and the ETS in the wake of this development here. It seems like NZ politicians should read it.

The politics of emissions trading is dominated by four events.

First, emissions trading is a de facto new tax that arises from pricing carbon. The notion that you can de-carbonise the economy without pain is ludicrous. New taxes are usually unpopular. But this will be presented as a "saving your planet" tax and many people will buy such a polemic. ...

Second, those who think the economics are on the side of delay are wrong. While action now has a price, action later means the final price gets higher. As Howard learned, any leader branded a delayer will be ruined. ...

Third, climate change requires national action but a global solution. ...

This weakens the case for action. So Rudd must argue that Australia has a responsibility as a global citizen to contribute to the solution. But he is trapped in the prisoners' dilemma: each nation benefits from having the problem solved while minimising its own share of mitigation. ...

The fourth event, revealed in Rudd's green paper, is that Labor lacks the nerve for a pure system of emissions trading. It is drawn to political fixes and carve-outs from the carbon price. It plans to offer 30per cent of pollution permits for free, give assistance to generators and cap the carbon price in the early phase.

The risk was highlighted by Garnaut: a hybrid system inviting endless political negotiations and compromises, weakening economic competitiveness for little gain on emissions. The moral is that implementing an emissions trading scheme is an epic task.

Political Management of Australian ETS

If the weekend papers are to be believed the Liberals are likely this week to alter their policy to oppose any ETS prior to commitments to reduce emissions from the major emitters; the US, China and India. Nelson seems keen to find a way to oppose the Rudd legislation without moving too far from their previous position.

The green paper which has very similar proposals to the model that was being investigated by the previous government was thought by many to be aimed at ultimately getting support from the Coalition. That support seems very unlikely to be forthcoming unless perhaps Turnbull becomes leader in a hurry.

That would mean the ETS would need support of the Greens AND a selection of populist independents to get through the Senate. It may not be possible to satisfy all the factions of the Labor party, the Greens and the assorted loose cannons.

There is a kind of nuclear option known as double dissolution. The government could try to push their desired model through parliament, fail, call an election in which the House and the entire Senate stand for re-election and hope that the Senate that is returned is more friendly to an ETS. This may emerge as a real possibility.

See also John Quiggin.

The Australian ETS Green Paper

Even the summary is 80 pages, so that's weekend reading.

It seems though that the near consensus on the left at least is that too much has been conceded too early to special interests.

The Government are now calling the scheme the 'Carbon Pollution Reduction Scheme' which sounds like a good spin to me. That is until you hear Kevin Rudd on the ABC this morning unable to reassure his interviewer that it will in fact reduce carbon pollution! (At least in the medium term).

Comparing Emissions Trading and Carbon Taxes

John Quiggin has some understandable (to me) reasons to prefer an ETS. One and three seem particularly important to me, changing the carbon tax rate regularly to achieve the desired level of consumption may address 2.

Economics of Cap and Trade

Peter Orzag, the head of the US Congressional Budget Office, has written a major opinion piece in the Washington Post.

He argues strongly for the importance of "banking and borrowing provisions" that allow emitters to shift their allocations slightly from year to year. He is also concerned about offsetting the costs to people on low incomes. These sorts of options will make cap and trade more palatable to a domestic audience which will in turn lead to more effective reductions in emissions and thus better outcomes in international negotiations.

Given that climate change is a global problem, effective solutions will require care toward not only these domestic design issues but in coordinating efforts with other major emitters. Whereas timing flexibility and the use of revenue from allowance sales can be legislated, such coordination is difficult to legislate -- but may be easier to negotiate the more credible the U.S. effort, which in turn depends on avoiding excessive domestic costs. Giving firms flexibility about when they reduce emissions and devoting the revenue from selling allowances to reducing either the macroeconomic costs or the distributional consequences would not make it free to reduce the risks associated with global climate change, but such strategies could reduce the domestic economic costs substantially.

Draft of Garnaut Report on Climate Change Out

You can find a copy on the Australian's web page. Look out for coverage over the next couple of days. (But don't expect much discussion of the New Zealand proposals, we just don't rate the kind of attention over there that many seem to hope for.)

In recent weeks Rudd, Swann, Wong and others have been walking back the suggestion (based on election campaigning) that they will follow whatever advice is contained in it. Rudd is now saying the report is "just one input" into eventual policy. A government green paper will be released by Wong July 16.

Rudd commits to ETS?

There are now several pieces in the Australian press suggesting that Rudd is now doubly committed to the ETS and willing to abandon petrol populism and tell the electorate some home truths. For example this from Dennis Atkins.

European ETS Reconsidered

A recent MIT study suggests my generally negative image of the European scheme may be out of date.

Read the whole article but they cite several lessons from the European experience.

First, the European experience shows that the economic effects—in a macro economic sense—have not been large. ... A second lesson is that permitting "banking and borrowing" will make a cap-and-trade system work more efficiently. ... A third lesson is the importance of having accurate data and good communications both to ensure a smooth-running market and to achieve the desired reduction in emissions. ... A fourth lesson is that the process of allocating emissions allowances is going to be contentious—and yet cap-and-trade is still the most politically feasible approach to controlling carbon emissions. ...

Perhaps the main message for policy makers is that everything does not have to be perfectly in place to start up. When the EU ETS began, the overall EU cap had not been finally determined, registries for trading emissions were not established everywhere, and many available allowances—especially from Eastern Europe—could not come onto the market. The volatility of prices during the first period reflects those imperfections. "Obviously you're better off having things all settled and worked out before it gets started," said Ellerman. "But that certainly wasn't the case in Europe, and yet a transparent and widely accepted price for CO2 emission allowances emerged rapidly, as did a functioning market and the infrastructure to support it."

Emissions Trading and Low and Middle Income Earners

One concern with the ETS I don't hear talked about enough is the effect on the people Kevin Rudd calls "working families". (The political reasons for this are pretty clear.)

The US Congressional Budget Office (!) has just released some advice on how to mitigate such concerns.


Hat-tip Ryan Avent

Emissions Trading in Australia

The Opposition has now come out against including petrol and transport costs in the Australian Emissions Trading Scheme and started peppering the Government with questions about the economic impact of the scheme.

Ross Garnaut will give a speech on July 4 to the National Press Club and release his draft report on the ETS.

Progress of the Australian ETS

During the week Climate Change Minister Penny Wong told the Committee for Economic Development of Australia 'State of the Nation' Conference "the more emissions intensive industries who aren't making a contribution to emissions reductions through the ETS, the more work needs to be done by those industries [that] are making a contribution".

Eminently sensible.

Assistant Treasurer Chris Bowen on the other hand suggested during the week that the transport sector could be left out of the ETS. Asked whether this was consistent with the statements of other ministers he told the Australian "I have been consistent with what other ministers have been saying and that is that it is an open question, we are having a genuine process and there are genuine policy questions about how responsive petrol is to price increases and, given the big increases in petrol prices we have already had, whether another increase is going to do any good."

Hmmm.

Bowen seems to be at the bottom of several outbreaks of what I will call petrol populism from the Australian Government in the last fortnight. A leak of cabinet papers has already shown him to be engaged in robust exchanges with other Ministers about exactly this populist approach. At the moment he seems to have very strong support from Rudd on this.

Read the Australian's profile on Bowen.

More on US Climate Change Policy

The cap and trade bill in the US Senate died on Friday, so it is back to the drawing board for US carbon pricing measures.

One heartening feature of the US climate change policy debate though is that outright denial of global climate warming is losing its grip on conservatives (when 8 of the 10 warmest years on the instrumental record have been in the last decade it's hard to see how one maintains this position but there you go.) A recent Kiwiblog poll suggests this has yet to occur in New Zealand.

As a result, some conservative debate is moving on to responses. Reihan Salam (here and here) nevertheless argues that the best thing to do is provide money for research and hope for a technical fix. I am not optimistic about this strategy. Ryan Avent responds here and here, putting the case for carbon pricing.

Monica Prasad wrote an excellent NYT editorial arguing for carbon taxing without spending. She makes the point that Denmark had great success reducing carbon emissions with a carefully designed carbon tax.

On the other hand this qualified defense of defense of cap and trade is worth considering.


The most enjoyable weekend read on this issue though was Charles Krauthammer's op-ed on oil prices. He's a keen cheerleader for the neo-cons, a dead ender supporter of the war in Iraq, an unabashed supporter of torture, and he doesn't believe in climate change. Nevertheless he thinks the US should be taxing the hell out of petrol! The geopolitical argument he makes for a US carbon tax is very strong. He is also correct that high petrol prices are finally changing the habits of US consumers.

When did we stop thinking about carbon taxes?

I am very much a late-comer to the big questions of climate change policy. But there seems to have been a very broad consensus for some time now in Australia and New Zealand to back Emissions Trading Schemes of some kind, with both main parties in both countries being in favour.

Now in the Kyoto environment with definite emissions targets this seems like a good way to guarantee specific emissions levels. There are also good examples of working markets like the SO2 market in the US. In fact, I believe that as residents of Los Angeles for nearly four years my lungs are beneficiaries of some of the earliest emissions trading markets, aiming to reduce the notorious smog there. On the other hand the possibilities for rorting and gaming such systems seem to have had a very negative effect on the European CO2 market, and the politics in Australia and New Zealand begin to make it look like getting a scheme with teeth is too hard even with in principle support from essentially everyone.

It's interesting that in the US there is still a lively debate on the question of whether "cap-and-trade" (Yankee for ETS) or carbon taxes are the way to go. (There is a cap-and-trade bill in the Senate at the moment though.) I found this article to be a very interesting background to this debate. (Hat-tip Andrew Sullivan).

One person quoted there is William Nordhaus, one of the main exponents of a carbon tax, who has just written a fascinating sounding book that is reviewed here by the theoretical physicist Freeman Dyson. (Hat-tip Michael Nielsen)

Why is it not much simpler to just tax greenhouse gas emissions in terms of equivalent tonnes of CO2? (Or preferably commodities like petrol whose use will result in greenhouse gas emissions). One then adjusts the tax level, either to achieve the desired reduction in emissions or as we learn more about the response of the climate to our dangerous experiment of doubling atmospheric CO2 levels. In New Zealand this would absolutely have to include a tax on cattle, which I seem to recall has been pretty unpopular, but that should keep the Greens happy! If things are structured so as not to enormously increase Government revenue Tories might not be so put out either.

I'm now going to try to find out why this has not been the preferred option in the Antipodes.