Beyond Kyoto?

With our usual flair for lobbing grenades back and forth between well dug trenches, lots of energy in the greenhouse debate goes into grenade lobbing between supporters of Kyoto and greenhouse denialism of various kinds.

I’m pretty cynical about Kyoto, and particularly cynical about the presentation of the US and Australia as the baddies with the Europeans and the developing countries the goodies. They’re all pretty suss if you ask me and I’ve tried to say why before. I support Kyoto reluctantly because we should be doing something and this is the dog’s breakfast that has been served up by the UN to start the ball rolling.

It will need to change very dramatically to be successful with the minimum change involving bringing in the major developing countries most obviously China and India. Though I despair of the denialists, I doubt that the Kyoto targets will stick. So without wishing to associate myself with those gloating over the stresses coming on Kyoto, it seems appropriate for us to be thinking about what Australia should be doing now given its absence from Kyoto and more generally what might be done by those who think that Kyoto will fall over, or after it has.

The Asia-Pacific Partnership on Clean Development and Climate can’t do any harm but for the same reason it can’t do much good. It’s devoted to the proposition that one deals with a large and pervasive externality with ‘international co-operation’ (without any specification of what exactly is preventing cooperation right now). Oh and asking nicely for technologies to be developed and carbon to be abated rather than by internalising the costs of carbon emission.

To me the problems to be considered seem two fold.

1. What’s the desirable form of a future global regime and
2. What kind of actions make best sense both in terms of meeting individual countries’ interests in the context of the first question and in terms of assisting the world move towards a worthwhile global solution.

Regarding the first point, as aficionados of the debate know, Australia’s Warwick McKibbin and his University of Texas colleague Peter Wilcoxen have proposed a very clever system (pdf warning) that seeks to price marginal emissions of carbon without imposing targets. Instead of targets countries agree to impose domestic marginal carbon taxes that is taxes on emissions of carbon over some figure which ensures that the last ton of carbon emission must meet the marginal tax imposed.

If all countries did this the incentive to abate carbon is equalised around the world. This is a condition of allocative efficiency in the abatement of carbon.

McKibbin and Wilcoxen are eloquent about why it makes a lot more sense to try to price carbon rather than to set targets to hit. We’re mired in uncertainty in any event, but at least deliberately pricing carbon emissions does substantially reduce the uncertainty involved in knowing the cost of policy action.

I expect that if we get anywhere, we’ll end up with something like a carbon pricing model rather than volumetric targeting as Kyoto involves. And one can see how the former could evolve from the latter. When the US agrees to come in, it won’t be practicable to punish them for coming in late, so carbon pricing looks like a good way out of a political dilemma as well as well as being good policy.

I think there are some quite important problems with McKibbin’s and Wilcoxen’s model which I’ve argued here (pdf).

A. Perhaps least importantly McKibbin and Wilcoxen overstate the hazards of targets for instance the extent to which carbon trading might destabilise capital flows.

B. The proposal for ‘marginal carbon taxation’ is inefficient. If we want to raise the cost of carbon emissions, government taxation of all carbon emissions has no substantial efficiency cost and so we should tax all emissions and recycle the revenue as lower taxation where tax has a higher efficiency cost.

C. More importantly the model is gratuitously restrictive. It involves reducing the number of gases targeted. As I argued in the paper I’ve just linked to, this is unnecessary and indeed goes in precisely the opposite direction to the direction that economists should be taking the design of instruments.

D. A third problem, though it’s not really a criticism of McKibbin and Wilcoxen is that it is a ‘grand plan’. Like Kyoto it envisages a global agreement. It may be that the best chance we have is to think of what national actions might coalesce towards a sensible global outcome after a period of time rather than go for the next ‘grand plan’.

So if we’re standing outside of Kyoto, what kinds of actions could Australia take that would be worthwhile in their own right, at the same time as being influential in the evolution of the global carbon abatement system?

How about doing this?

A carbon tax

We could announce that Australia believes that there should be some policy action to internalise carbon emissions. It would then unilaterally impose a (modest) carbon tax on itself which, in the spirit of McKibbin and Wilcoxen is a piece of internal financing it does not directly involve carbon trading offshore. It might then announce its preparedness to match other countries’ higher carbon taxes with its own carbon taxes.

This would flag Australia’s and Australian citizens preparedness to (marginally) reduce their own standard of living in order to no longer free ride on other countries’ abatement efforts.

But we still live in a world of intransigent third world countries who won’t agree to increase the marginal cost of carbon abatement. It is ridiculous to constrain carbon emissions where:

a) Those facilities lower global emissions which is very likely the case for North West Shelf gas which can be expected to displace coal fired power in the region and/or

b) Those facilities will just migrate to less carbon constrained third world countries.

Apart from being fair and sensible from our own perspective, this lowers the rewards to third world countries from avoiding abatement commitments (which for the purposes of this discussion includes imposing carbon taxation even without volumetric emission reduction targets.

Being bold about comprehensiveness

Further the way Australia set up its carbon tax would deliberately seek to be as comprehensive as possible. On the gases within the system, rather than, as McKibbin and Wilcoxen suggest, constrain the Kyoto three gas regime to one, we should go the other way and extend our own carbon tax to any gas that can be included without compromising the integrity of the system.

The same goes for abatement activities. We would encourage the growth and regrowth of forests and woodlands whether or not they fitted with the Kyoto definition of forests. And our carbon tax (with a matching subsidy or credit regime for abatement) would be used to encourage all sorts of innovative agricultural abatement strategies.

As I put it in the paper I cited above.

1t is not clear that there needs to be all that much certainty in measurement of outcomes. What is necessary is that if an estimation procedure is used it does not produce a biased estimation and that the procedure has integrity that is it does not increase the scope to cheat. Thus for instance, if we could only be certain within a tolerance of 20% of how much carbon (measured in GWPs) a particular project would abate, it would increase the comprehensiveness of the abatement effort to include it in the trading system secure in the knowledge that:

1. It was making a beneficial contribution to abatement;

2. Given the unbiased nature of any estimation, any error could just as easily produce better rather than worse environmental outcomes and that;

3. Over time and over a large number of projects such errors would tend to cancel each other out.

If such reasoning were not accepted it would be far better to discount the project by the extent of any uncertainty rather than see its abatement potential go unfunded because it fell out of the carbon abatement market.

However widely or narrowly we draw the trading net at the outset, an in principle commitment to extend it at the earliest practicable opportunity and institutions capable of so doing should be an important design element of the system.

There is a sound case for such an in principle commitment to ‘pragmatic comprehensiveness’ in any circumstances. But the issue takes on much greater relevance when one considers the importance of technological change in meeting our objectives.

It seems to me that such an approach meets all the rhetorical (and legitimate) concerns of the current government. )I’d like to offer it as a really good model in other areas as well. We have very little sway in the current circumstances, being essentially in the shadow of the US.

Anyway, I’d be interested in others’ views though go easy on the ‘it can’t happen’ comments. I’m just trying to get some thinking going. Let’s talk about political possibilities a little further down the track.

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Cameron Riley
18 years ago

Stationary energy is a bigger polluter in Australia than transportation. If what has been happening in Iraq, Georgia and other nations, ie the disruption of the delivery of energy/electricity, starts to happen in Australia, then we may need to change to decentralised energy. In nearly every case, decentralised energy (solar, wind, etc) has a lower carbon footprint than the coal stations.

derrida derider
derrida derider
18 years ago

From Australia’s narrow self-interest POV universal carbon taxes are a bad idea. If our coal customers follow us then we bear most of the costs of their abatement, we share the benefits in reduced global warming but *they* get the benefit of the revenue. In theory, the winners – our customers – will have benefited enough to compensate the losers – ie us – but don’t hold your breath for that to occur.

Which just goes to show what a curse nationalism is.

Robert Merkel
18 years ago

Cameron, Australia’s stationary energy is virtually all generated from domestically-mined sources, either gas or coal, both of which we export in large quantities.

We have lots of other things we can worry about, but a Russia turning off the gas taps is not one of them.

Craig Malam
Craig Malam
18 years ago

“But we still live in a world of intransigent third world countries who won’t agree to increase the marginal cost of carbon abatement.”

I am a little confused by this statment (please forgive if it becomes obvious that I needto learn more about this debate) – doesn’t the McKibbon-Wilcoxen model suppose that a fixed world price of additional permits would cause money to flow into countries for whom the marginal benefits from abatement exceed marginal costs (in terms of forgone emmissions)? Why wouldn’t developing countries, most likely to therefore be net sellers of permits (lower opportunity costs of emmissions), agree to an increase in the world price of permits? Their marginal costs of abatement would by definition be more likely to be met by such an increase.

Craig Malam
Craig Malam
18 years ago

OK, sorry you’re right. It wasn’t clear to me that MacKibbon Wilcoxen specifically ruled out international trade in permits. But any tax in one country but not in others just invites migration of emissions – how does the model you propose treat this?

John Quiggin
John Quiggin
18 years ago

“McKibbin and Wilcoxen are eloquent about why it makes a lot more sense to try to price carbon rather than to set targets to hit. We’re mired in uncertainty in any event, but at least deliberately pricing carbon emissions does substantially reduce the uncertainty involved in knowing the cost of policy action.”

Well, it reduces uncertainty about cost but increases uncertainty about benefit. So the question is one about the preferences of policymakers.When they first put the idea up, McKibbin and Wilcoxen argued that their proposal would appeal to the US and Australian governments, which were hostile to Kyoto. But it’s apparent from the climate pact, that these governments are hostile to doing anything much. And the governments that have ratified Kyoto don’t seem to be interested in McKibbin and Wilcoxen/

If I thought McKibbin-Wilcoxen was more likely to be implemented than Kyoto, I’d support it. But in practice it seems to be nothing more than another distraction.

Cameron Riley
18 years ago

Robert, Cameron, Australia’s stationary energy is virtually all generated from domestically-mined sources, either gas or coal, both of which we export in large quantities.

A couple of tripping systems took down the whole power grid for the NE United States. That was through coincidence/negligance. That sort of disruption can be done manually by a motivated force – it is being done that way in Iraq.

The way warfare is being practiced in Iraq, centralised systems (including government) are weaknesses.

Jacques Chester
18 years ago

Though it offends my libertarian instinct, would another, decentralised approach be to compel insurance companies to include “global warming” cover? Not being closely familiar with insurance, it might not be a goer. But it’s always struck me as possible that global reinsurers have the most to lose from global warming through bad weather damage, increased deaths due to raised summer temperatures etc etc.

Related is the need for firm property rights in space (making the fresnel lens solution more likely) or at sea (making the iron algal bloom solution more likely).

Jacques Chester
18 years ago

In a half arsed attempt to rescue my poorly stated premises, I offer the following:

The rule is to be that future policies must be assessed to account for global warming.
The idea is that reinsurers will thereby be exposed to enough risk to make individual action attractive. A really big re firm has massive exposure to all sorts of things.

Think of it this way: lighthouses have free rider problems, yet in the past they were often paid for by private firms who pooled risk. Technological solutions to existing carbon are similar scenarios – positive externalities arise, but self interest is still served. To reverse the phrasing of Smith, “It is not from the malice of the neighbour that he switches off his lights in order to prevent us enjoying any of it”.

18 years ago

It would seem that you are all convinced that global warming is taking place, that it has an anthropogenic cause, that it is going to have a very bad effect, that the effects are going to be felt in the near future and that we need to be ready to asign liability, blame and responsibilty for remediation.

The relatively recent archeological record clearly indicates that the earth moved in and out of fairly significant rises and falls in sea level, mini ice ages and periods of obvious warming (what were the glaciers in Greenland doing when the Vikings were able to raise cattle and grow barley there? There were no brown coal power generators in the 11th century, so I have heard.

The whole greenhouse nonsense is another millenarian cult, eagerly supported by a horde of research hungry pseudo-scientists, greenie bureuacrats and the usual crowd of anti-modern rent seekers.

Craig Malam
Craig Malam
18 years ago

Reading through Tim Flannery’s book I also get a little nervous about millenarianism. Such as when he is describing as “abrupt” the previous temperature changes in earth’s history that took 5,000 years. Of course, I am reacting to what could easily be only perhaps ill-chosen words (amidst an argument about imminent danger) and so I am still reserving judgement. There would be some amount of self interest driving these arguments, but it seems to me that dismissing them on this basis alone is not particularly convincing, even when the stakes are high.