Floor price idea flawed

There’s a proposal doing the rounds in Canberra for a floor price on the price of CO2 permits, to apply once the emissions trading scheme moves from its fixed price period into a floating price period.     The UK has just implemented such a scheme as a “top up” on the price of permits under the EU ETS. The main rationale being put forward is the underpinning of investment of new entry power generation plant. Here’s four reasons why I don’t think it’s a good idea:

IT WON’T WORK

The long term returns of new entry generation plant is impacted by many factors, of which the carbon price is just one. Exchange rate (which determines up front capital cost), supply/demand balance of electricity (which moves in and out of constraint), the coal price and the gas price all have a powerful impact on returns. There’s a useful chart in the Fin Rev today (p14) that shows the dependency. The carbon price is important to set the direction for decisions about new entry but it can’t single handedly secure a minimum return for new plant.

NO MARKET FAILURE

To implement a floor price before the carbon price is even in existence is to assume that there’s a market failure before there’s a market. A floor price is effectively saying that the market got it wrong, that abatement is too cheap and needs to be priced up. It institutionalises a government intervention in the market. It would be much better to leave the market to be priced on fundamentals.

The floor price idea came up when the EU ETS went through a brief dip during the GFC. Obviously as economic activity declines, so do emissions, so the EUA price dropped to reflect this. The drop was probably made more severe due to the lack of readily available credit, which would have otherwise seen many utility buyers purchasing to store permits for later use. As it turned out, the market found its own floor at €8/t, but has since recovered to trade at a consistent mid-teen level, with some recent support due to the implications of Fukushima.

In much the same way as our floating exchange rate saved us from the worst impacts of the Asian financial crisis in the 1990’s, so to can a floating carbon price lift the brake on the economy when an economic restriction is doing the abatement task.

NOT COMPATIBLE WITH GLOBAL ABATEMENT

The price of an Australian Emission Unit (AEU) reflects the supply/demand of permits, including the ability to import offshore credits/permits. The whole idea of global abatement is to build towards a global price. But a floor price is effectively saying that if the international price for whatever reason is “too low” then we should continue to apply a restriction to our own economy regardless of its effects. It is effectively elevating the importance of domestic abatement over the availability of more cost effective abatement offshore, to the detriment of our local economic performance.

POOR USE OF GOVERNMENT FUNDS (ie our taxes)

A floor price, in practice, is the government re-entering the market to purchase abatement, sort of like a reserve bid at a real estate auction. Ironically, this shares some features of the “direct action” policy which sees taxpayers funds used to purchase abatement according to a market-based merit order. But we need to ask why this is a good use of taxpayer funds, especially when the market is quite happy to purchase abatement from cheaper sources elsewhere. A risk for government will be that a floor price reduces the amount of revenue from auctioning the permits (which it would do in a floating price regime), and this is the revenue it would be using to compensate households. There are many better uses for government revenue than this.

In my view, the challenge of implementing a carbon price is already great enough without adding complications, such as a floor price, along the way.

Comments

  1. I hope this moronic idea of carbon tax with household compensation die quickly.

    What a waste of opportunity ( not for the financial service industry of course).

    Abbot will have a field day, this government will not last much longer.

  2. i get this horrible dark feeling when it comes to our government and energy and make comparisms with what is going on in China.
    I believe that left entirely to the market , we will get the following result with a market carbon price, it will actually encourages existing providers to cut back emmissions, cut back on energy production and the energy cost/prices goes up our productivity as a nation goes down, as it borne by the consumer who is already tapped out due to , too much debt, expensive petrol, food etc.
    In the meantime we China, establishing government owned corparations who recieve loans direct from their central bank, which are written off or distorted, ending up owning our Utilities ( Loy Yang) because they have the cash and in the meantime they are building 300 nuke power plants, a myraid of other forms of power plants not to mention establishing a monoply on rare earths so that renewable energy plants are indirectly controlled by them as well.
    Scary and brainless.

    • Carbon E Coyote

      would it scare you to know that most of the latrobe valley generators are owned by offshore entities and have been so for a while?

      China Light & Power owns Yalloutn. International Power owns Hazelwood and Loy Yang B. Loy Yang A owned by a consortium that includes TEPCO (owner of Fukushima)

  3. Not suprised, just pissed off that we could be so stupid and we dont seem to be getting any brighter, I suppose the next step, once our banks go broke, our dollar trashed, our overlords will demand that the ineffectual FIRB is quashed and that we allow China to buy whatever is left.

  4. You Fell it like Forrest…CeC
    Left me time to write a Bedtime,Poem…

    Women hunt not a need ,when a,
    Man seeds the breed ,Maturity is it’s lead Humanities been able succeed ,
    by Solar Rules..Forever…
    How much longer must we Bleed,to a Greed seed..

    JR

  5. IMO, Turnbull has more integrity than the rest of the Coalition front bench combined. His highly principled support for a carbon price cost him his leadership, and cost Australia our only chance for a sensible debate on climate policy.

    Of the potential leaders on offer in the Australian Parliament (Gillard, Rudd, Abbott and Turnbull) Turnbull stands head and shoulders above the rest.

    I find it completely outrageous that you accuse Turnbull of some secret mission for the Vampire Squid when Abbott can’t bring himself to support plain packaging on cigarettes. If you want to see conflict-of-interest, perhaps you should look into Big Tobacco’s donations to the Liberal Party.

    Again, can I suggest to you that climate science denialism is a creation of the global fossil fuels industry — it is the biggest vested interest on the planet — and you are their foot soldier.

    YOU ARE BEING USED.

    • Lorax,

      At risk of being censored/banned, I would sincerely and politely like to propose a consideration to you.

      Could not international banksters – such as Goldman Sachs – quite plausibly profit *equally* from the provision of funding / investment into what you see as opposing paradigms?

      Think about it.

      There is plenty of evidence to support the assertion that they *do*. But it would seem I might get banned – at minimum censored – if I were to provide links of same.

      Seriously, consider it.

      Big Bankstering always wins because they are always supplying finance to all sides.

      While we, the easily-led great unwashed citizenry, bicker impotently amongst ourselves over 1 side of the “argument” vs the other.

      FWIW, I deplore Abbott’s position on Big Tobacco … and *many* other issues.

      Each topic on its merits.

      • Mate, I hardly think a global emissions trading scheme is at the top of Goldman Sachs’ money making schemes ATM. Its very unlikely to happen anyway, and besides, they’re too busy profiting from bubbles in the commodities and equities markets.

        Turnbull isn’t exactly short of a quid. Why on Earth you think he’d sacrifice his political career for the extraordinarily unlikely prospect of making money out of emissions trading is beyond me.

        If there’s one business that will profit enormously from the outcome of climate change policy decisions it is Big Carbon, particularly Big Coal. While an ETS would not be my preferred way of pricing carbon, this idea that the push for emissions trading is coming from shadowy banksters is so implausible it makes me question the sanity of anyone who takes it seriously. Are you also a 9/11 “truther”? Perhaps you’re an Obama “birther”? Is Bin Laden really dead?

        Can I suggest again that you and your fellow denialists are merely foot soldiers in Big Carbon’s war against pricing carbon emissions. The big tobacco companies must be wondering why nutters like yourself didn’t come out of the woodwork to defend their products a decade ago.

      • Just on Big Coal – I think Greg Combet has been doing cartwheels assuring Big Coal that it has a good future in Oz and that it will not be adversely impacted by carbon tax.

        “He said Labor would demand an “economically sensitive” compensation package when negotiating the detail of the carbon pricing package.” It’s about politics and money, not the environment.

        http://www.dailymercury.com.au/story/2011/03/07/climate-change-minister-greg-combet-carbon-tax/

        Questioning the validity of the carbon tax does not automatically qualify one as a “nutter” or “denialist”…perhaps a “realist”?

      • David (aka BarnabyIsRight.com) has been strongly suggesting that Julian Turecek and Malcolm Turnbull are motivated by making money out of climate change policy.

        I think he crossed the line there into “nutter” territory.

      • “..strongly suggesting that Julian Turecek and Malcolm Turnbull are motivated by making money out of climate change policy.”

        Can we take it then, that your affirmed position is that neither Julian, nor Malcolm, will financially benefit in any way from the outcome of climate change policy?

      • “Why on Earth you think he’d sacrifice his political career for the extraordinarily unlikely prospect of making money out of emissions trading is beyond me.”

        Because it’s a revolving door!

        His introduction of the Water Act 2007 and the resulting shenanigans with banks acquiring water rights from farmers who have been crushed by debt loads – is a disaster.

        His actions wrt Fai and HIH was deceptive.

        You may revere the man, but personally I don’t trust his motives.

      • Hi again Lorax,

        “I hardly think a global emissions trading scheme is at the top of Goldman Sachs’ money making schemes ATM”

        Let’s set aside the red herring of “at the top of..”, and just focus on whether GS is, or is not, intimately ivolved in the push for emissions trading.

        I implore you to open your mind just for a moment, and do a little research.

        Start with Generation Investment Management (I’d attempt to provide links, but may get banned!). you’ll have to Google it.

        Former CEO of GS Europe, and GS Global Assets Management. In partnership with none other than Nobel-prize winning alarmist, Al Gore.

        Blood and Gore.

        GS 19% shareholder in Chicago Carbon Exchange, which was started by … GenIM.

        This just tip of the iceberg. One example only.

        “..this idea that the push for emissions trading is coming from shadowy banksters is so implausible it makes me question the sanity of anyone who takes it seriously. Are you also a 9/11 “truther”? Perhaps you’re an Obama “birther”? Is Bin Laden really dead?”

        H&H, I find it rather telling that you permit blatant ad-hom, off-topic “attack” here from a mate, but censor my *sourced*, *factual* posts with politely worded questions, falsely accuse me of making “personal attacks”, and threaten banning.

        Lorax, the above is beneath responding to, but I will anyway, and simply ignore the ad-hominem.

        It is not “implausible” (viz. big bankstering and emissions trading).

        The facts are there for all to see/find.

        It merely requires a willingness to open one’s eyes.

      • I can’t believe you continue to single out CO2 as if its the only commodity thats ever been traded!

        If you don’t like the free market, fine, but that is where you should direct your criticisms!

        You would do better to critisize the amount of leverage allowed on trading ALL commodities, because that is truly the best way to reward speculating and debt to investment and saving.

  6. Over at Climate Spectator, the argument is for a floor!

    http://www.climatespectator.com.au/commentary/case-carbon-price-floor

    There appears no agreement on this tax, regardless of individual views on climate change. Labor assured there would be no carbon tax – but the desire to retain power makes for some unwanted bedfellows.

    The issue of imposing the carbon tax is fraught with complexities, exemptions, exceptions, reimbursements and significant disagreement. It creates another level of bureaucracy, further complicates one of the worlds most complex taxation systems, forces additional operational costs on business and (according to yesterday’s Oz) will keep AFP carbon cops busy!

    The benefits would appear to accrue to those employed in sectors promoting the tax and, when ETS is fully implemented, permits, rights, etc fully tradeable on the international market – well, that’s the booty Deutsche, JPM, Goldmans and others are waiting for.

    There may be some negligible reduction in carbon emissions. May. This is not the same as a ‘pollutants’ control scheme – something more directly identifiable and measurable (and preferable?). And this is not global.

    One other thing – the international economy is faced with a level of uncertainty not experienced in recent times. Caution would dictate now is not the time to impose a tax on a country that pretty much has all its economic eggs in one basket. And that basket is carbon intensive.

    The tax is Flawed – Floor, or no floor.

  7. David,

    I’ve have deleted your posts and am issuing you a warning that if you persist in personal attacks on the bloggers and/or commenters that you will banned.

    Either discuss the issues or do not comment.

    H&H

    • H&H,

      You’re the boss.

      May I just say that there was absolutely no personal attack whatsoever in my posts.

      Pointing to facts (CeC’s employer), news articles, and asking questions concerning them, is in no way a “personal attack” by any possible honest definition.

      Your own position on this issue has been made clear previously. And whilst of course I respect your right to censor as you see fit, I respectfully suggest that you do your readers and the public interest at large a disservice to censor discussion of matters of publicly available information that are clearly pertinent to the “public debate” over carbon dioxide trading.

      With respect.

  8. Your attack on Julian Turecek and Malcolm Turnbull today (which I noticed has been deleted) was beneath contempt and borderline libelous.

    Do you honestly believe in today’s political and economic environment it is politically advantageous for Turnbull to openly declare his support for a price on carbon? As you well know, the carbon tax is political poison at the moment, and Turnbull will doubtless be ostracised by his Coalition colleagues. He has probably blown what little chance he had of regaining the leadershuip.

    All I can say is, the Goldman Sachs must be paying him an awful lot to commit political suicide.

    • Lorax,

      “All I can say is, the Goldman Sachs must be paying him an awful lot..”

      May I politely suggest to you, that the plainly obvious fact arising from the (now deleted) series of mainstream news articles, is that GS *already* paid out a “confidential” settlement on MT’s behalf, to keep him out of court. As he was Opposition Leader negotiating for the CPRS at the time, that is highly pertinent to public consideration.

      This plain and simple fact is a matter of public record.

      Not conjecture, or “personal attack”.

  9. Cold Fusion – More Than Junk Science.

    If this invention lives up to its claim, we won’t need to worry about so called ‘fossil fuels’ and nuclear power and their ensuing debates and claims. If this is true, and I suspect it very well may be, then the jackboot of the oil industry will have its heel from the throat of humanity removed.

    Italian inventor Andrea Rossi’s has created, patented (Italian only) his Cold Fusion Energy Catalyzer.

    http://www.nyteknik.se/nyheter/energi_miljo/energi/article3173090.ece

    Here’s some general info on the Cold Fusion debate.

    http://www.youtube.com/watch?v=JyNn_Z6wCIk

    This amazing technology is now commercially ready.

    A one megawatt plant has been scheduled to open during the second half of October 2011 in Xanthi , Greece . This plant will utilise one hundred and twenty five 10 kW modules linked together to produce over one megawatt of output. The plant is also sheduled to create 300,000 units a year that will be sold in the Greek and Baltic markets.
    This device is very fuel efficient, extremely safe and non radioactive. One hundred grams of nickel and very little light hydrogen can power a 10 kW reactor for six months. After six months, the remaining fuel can be extracted and 90% of the nickel can be recycled, reprocessed, and used again as fuel. One gram of nickel can produce as much energy as 500 barrels of oil!

    http://www.technewsworld.com/story/Cold-Fusion-It-May-Not-Be-Madness-71916.html

    http://www.youtube.com/watch?v=NzL3RIlcwbY

    The estimated cost of this device is $2000 per KW. The running cost is less than 1 cent per kw hour. I believe a 10KW unit is the size of a filing cabinet. A 10KW unit produces 10KW per hour where a normal house uses 10-15KW per day.

    Other inventors are also starting to come forward with their over unity magnetic motors.

    Watch this space…

    • I have read about this. I am not a believer of Global Warming to me its all BS. The earth goes through cycles. Now I do believe in finding cleaner and better ways to produce energy. I believe there are things out there already we could use. Hopefully the world govts will support them and not let these big companies buy them out and shelve them.

      • Absolutely LBS.

        From what I’ve been reading, we very well may see more over-unity devices coming to the forefront in the later half of this year.

        The environment that will be created by the economic depression heading our way is going to help this cause.

  10. I am not a denialist of global warming, personally I think it is an acknowledgement not so much of global warming but the scarcity of resources such as oil etc. I just get this feeling that I am being fed a shit sandwhich and being told that it is vegemite and that it is good for me.

    • At a political level yes, that is probably why they are going after global warming, as it lets them tackle both problems sithout ever having to claim ‘scarcity’.

      But in a world that has been exponentially increasing its consumption of resources over the last 200 years, we shouldn’t be surprised that a lot of growth limiting problems start to pop up at the same time (energy, climate, water, food etc).

      Also you can imagine if we start running out of high quality oil, coal and gas we are then going to go after the lower quality oil, coal and gas. The lower quality stuff will have a lower energy returned on energy invested, so that means more CO2 for the same amount of energy.

  11. “Why on Earth you think he’d sacrifice his political career for the extraordinarily unlikely prospect of making money out of emissions trading is beyond me.”

    Because it’s a revolving door!

    His introduction of the Water Act 2007 and the resulting shenanigans with banks acquiring water rights from farmers who have been crushed by debt loads – is a disaster.

    His actions wrt Fai and HIH were deceptive.

    You may revere the man, but personally I don’t trust his motives.

  12. CEC, why is my comment from 12:30pm still in “moderation”?

    Are these expressed alternative views to energy in violation of this thread?

    Or is there a real concern that it could make the carbon debate null and void?

    Please advise.

  13. Cherry picking evidence won’t help disprove global warming.

    It won’t decrease the level of CO2, methane or CFC’s in the atmosphere.

    Nor will it decrease average surface and sea temperatures.

    It is interesting that you took notice of the record precipation in the US and Russia, but ignored the wild fires that ravaged Russia (and it wheat crop) last summer.