IPA carbon fallacies

The IPA, predictably, continues its attack on the pricing of carbon with pieces this week in The Australian and the Australian Financial Review. However, much of the analysis is based on falsehoods that need to be pointed out.

Firstly to Tim Wilson’s piece saying that “carbon trading will fail because property rights cannot exist for gases”. Property rights can exist for a range of intangible assets including intellectual property (as Tim points out), spectrum licences, water rights and, yes, the right to emit gases:

Markets are built on credible, tradable property rights. Physical property rights are definable and can be isolated for the purposes of ownership. These dimensions enable them to be traded. Even intangible intellectual property rights meet these criteria through their design, but greenhouse gas emissions cannot meet them.

One person’s emissions cannot be differentiated from another’s. They are the same chemical compounds, whether emitted by another or created naturally. As a consequence, imposing a local price in the absence of a global price, when the externality of greenhouses gases is also global, fails the test of economic logic. It doesn’t compare with previously trialled sulphur dioxide emissions trading, which created a local price mainly to address the localised externality of acid rain. And sulphur dioxide isn’t a by-product of the energy engine of our entire economy.

If greenhouse gas emissions cannot be property rights because “they cannot be differentiated from another’s” and “they are the same chemical compounds”, then on this logic it would be impossible for sulphur dioxide permits to be property rights as well. However, they are. As he mentions, sulphur and nitric oxide emissions trading, commonly known as SOx and NOx, has been occurring in the US since the mid-1990’s. But each emitter’s emissions cannot be differentiated from another’s, and as they are the same chemical compounds, they cannot be differentiated from whether they are created naturally or not. So on the tests of economic logic that he says CO2 rights cannot exist, then SOx and NOx rights cannot exist either. But they do exist.

He then goes on to say that you can’t compare SOx trading with CO2 trading because it created a local price to address a local issue. When Tim says “local” it actually applied to many states of the US. There are also a range of New England US states currently trading CO2 on this basis, and California is commencing their CO2 scheme next year. There is nothing stopping a sub-section of a country within a country (as per US SOx, NOx and CO2 trading) creating property rights, just as there is nothing stopping a country within a region or globe creating property rights to underpin a cap-and-trade scheme. Of the latter, there are many examples: the EU ETS, NZ ETS, Australia’s proposed carbon price, or even the architecture of the Kyoto Protocol which allows for international trading in countries’ right to emit (units called AAUs).

Tim may be correct to say that SOx isn’t a byproduct of the energy engine of our entire economy, but it certainly was and is a byproduct of the energy engine of the US economy. But perhaps his point here talks more to the fact that IPA is not in favour of a carbon pricing mechanism rather than the economic logic of whether a property right can be created or not.

He then goes on to say:

The impossibility of identifying local greenhouse gas emissions in isolation to attach a technical property right provides the basis for the right being attached to the process of emitting.

Buying and trading emissions permits requires an extremely high level of trust that participants are reporting accurately, under standards that don’t require them to do so, because it is basically impossible.

To make this statement conveniently ignores that the National Gas and Energy Reporting Act, brought in by the Howard Government in 2007, has been in operation for some years now and provides a well-established monitoring and reporting framework for greenhouse gas emissions. This reporting will underpin the operation of the carbon price legislation. The NGER Act requires accurate reporting, which penalties for inaccuracies, and certain audit requirements. It is not “impossible”; it’s not only possible, it is in fact being done.

Secondly, John Roskam in today’s piece in the AFR basically runs the line that certainty for investment can be achieved with the repealing of the carbon price legislation. While this may seem an attractive idea, it has already been shown to fail as a policy response. John Howard first ruled out putting a price on carbon in 2003, in response to a recommendation by the Parer Review. However, this did not provide any certainty, because saying that you won’t put a price on carbon doesn’t nullify the science and certainly doesn’t make the problem go away. He ultimately commissioned the Shergold Report, which recommended going to an ETS, and his Government then adopted this policy in 2007. Even if the policy was repealed in, say, 2015, the question of how to efficiently reduce emissions will remain. And businesses will still want to know, just as they did in the policy uncertainty between 2003 and 2007, of what will be the policy response to the issue. The idea of repeal only really works if you think that ultimately the greenhouse gas problem is not a problem at all, as clearly the IPA does.

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Comments

  1. darklydrawlMEMBER

    CeC. Thanks for continuing to post updates on this issue, despite this being the one issue on MB that seems to attract some fierce comments (from both sides).

    This issue does seem to get folks emotional and fired up, which I feel is never a good position to start from when looking logically at the pro and cons of a proposed solution.

    Keep fighting the good fight I say.

    • ‘This issue does seem to get folks emotional and fired up, which I feel is never a good position to start from when looking logically at the pro and cons of a proposed solution.’

      Unfortunately rationality is not one of humanity’s strong points.

  2. Is there a government party out there that recognises climate change exists but understands that any attempt to lower emissions is meaningless in the grand scale of things? In staid, Australia should prepare for climate change by maybe creating more desalination plants etc

    If you love the environment so much then why not stop exporting coal?

    Its just this illogical thinking I can’t get my head around. Australia wont adopt nuclear energy or export uranium to India but is happy to burn dirty coal and then tax industry in the name of climate change??

    • ‘Its just this illogical thinking I can’t get my head around. Australia wont adopt nuclear energy or export uranium to India but is happy to burn dirty coal and then tax industry in the name of climate change??’

      Under the current political and monetary policies of Quarry Australia, cessation of resources exports would be disastrous for our economy.

      However domestic energy generation most certainly will be covered by the new Carbon tax policy. Maybe once we get clean power generation down pat we can start exporting our IP instead?

  3. That is an absurdly stupid argument to run. All your rebuttal points are great but there’s also the fact that the NSW GGAS scheme has been running in Australia for a decade and putting a price on abatement, which is a degree more abstract than emissions, yet which has resulted in a market for permits and lead to altered investments in generation across Australia.

    With his line of thinking you shouldn’t be able to price electricity as it’s a perfectly homogeneous product and the electrons cannot be differentiated once they’ve been produced.

  4. Carbon E. Coyote

    Thanks. As Grant King said yesterday at the CEDA function:

    “Much of the discussion on this issue has not been troubled by the facts, in substantial part because broader political and ideological agenda have overwhelmed a more balanced debate.”

  5. Around property rights for carbon;

    It is still possible for a future government to effectively repeal this new regulation without disowning people of their property rights initially and pay no compensation.

    The government can create numerous new permits which while not allowing us to continue on a trajectory of greenhouse gas reductions will mean the existing permits are worthless and can then be compensated for at a value of nothing. i.e. no material damages will stem from such a move.

    If I could sue for inflation I would do so on my savings along with many other Australians. Unfortunately when it comes to fishing licenses or carbon permits ultimately the market price is dictated by how many the government decides to dole out.

    If they have the numbers in parliament they can create as many as they want.

  6. I read today that both Europe and Japan are looking at scaling back their schemes.

    Just as we implement the worlds biggest carbon tax.

    Seems like we are shooting ourselves in the foot.

        • Zerosignal, your statement that the “race to cut emissions is off” is a horrible misrepresentation.

          In fact, the news is “Commission’s Energy Department Urges EU to Reconsider Energy Transition Absent a Broader Emissions Deal”, further, “the European Union is questioning whether it should press ahead with plans to cut greenhouse-gas emissions if others don’t follow suit ”

          So I guess that means we should re-double our efforts while the Euros are only THINKING about it? You know, in order to not be one of the nay-sayers who dragged the pioneers back because of our own apathy and cowardice.

          Japan is sweating on it because it’s worried about the future of it’s nuclear reactors.

          Point being, we’re only seeing rethinking because of the foot dragging demonstrated by places like Australia.

          • Once again you are mistaken that they even care about Australia.

            In the real world, where I prefer to live the only nations of consequence are the United States and China.

            You can maybe through Europe as a union in to that as well, but that seems to be crumbling at the edges as well.

      • Closest thing I could find was this, Mr Holes:

        “Investment banks scaling back carbon trading activity: The European Emissions Trading Scheme (ETS) has seen the theft of €3m in allowances, a €5bn VAT fraud leading to 100 arrests and the temporary closure of a major exchange this year. Whilst these scandals will undoubtedly have caused concern, lower trading margins as a result of depressed prices and low volatility are a key driver in the scaling back of emissions trading activities. As banks face increasing capital and operating cost constraints, non-core activities such as carbon trading are increasingly vulnerable to cut backs.”

        http://www.timera-energy.com/energy-markets/fuel-for-thought-sep-30th/

        Not scaling back the schemes at the regulatory end, just banks doing obvious risk reduction. Misrepresent news much, Zerosignal?

      • Is there a comparison normalised over the population (I don’t know if that’s relevant), or is just a dollar size comparison? How is a real comparison done, and is it just on the price/tonne? I don’t know I’m just trying to find out how we compare.

    • The Eurozone covers 330m people though. So ours will be the biggest in per capita terms.

      We are the biggest emitters per capita so decarbonisation of the economy is a larger task here too..

  7. I think more reasonable aarguements against an ETS would stem from (apologies if you have seen before).

    1. Europol, Europe’s criminal intelligence agency, said that as much as 90 percent of the entire market volume on emissions exchanges was caused by fraudulent activity

    http://euobserver.com/885/29132

    2. Hartwell & London School of Economics study, reported on here:
    http://www.abc.net.au/pm/content/2011/s3264996.htm

    3.ETS does not help in getting funding for green projects ergo, is “a lot of hot air”… http://www.internationalrivers.org/en/blog/katy-yan/2011-9-20/wikileaks-cable-highlights-high-level-cdm-scam-india

    To me it all means a Carbon Tax is the better of two evils…

  8. I like many want a good pricing solution, but I doubt we’ll get one when all sides are so convinced it’s my way or no way. There is some really good progress on green energy solutions in Australia, but we need to invest in them more and over time the benefits will be there to see.

    No side of politics can claim any high ground IMO. I was at “All-Energy 2011” in Melbourne on 12/13 Oct and it was a great conference, but showed me how much there is to do, and such little incentive for Australian companies given the lack a good policy in all political parties. It was really sad to hear the demise of parts the solar industry from so many at the conference, but very stoic in battling on.

    Thanks for the post Coyote.

    • That is what we have with this government, one of the most deceitful in our time.

      They tell half truthes – ‘Increase Tax Free Threshold to $18k from $6k’ what they don’t tell you it was effectively $16k because of LITO ANYWAY

      To out right lies – No carbon tax under a Government I lead.

        • Really bias? I voted for Brumby in Victoria (despite the spin) as I thought Big Ted would do a worse job – which seems so far to be proven right.

          Accepting ‘all government lie’ is bullshit and if you are not prepared to switch your vote against them then you get what you deserve.

          Treating politics like football is costing this nation big time.

          • Depends what they lied about.

            While I don’t consider Workchoices a lie for example, it was something the people had no chance to vote on and ultimately was the downfall of John Howard.

            Carbon Tax, was something the people voted against and now are getting it – Julia faces the same outcome as John Howard.

          • Why didn’t you switch your vote against Brumby then ?

            Kick the bastards out, because all governments lie.

        • And as I tried, seemingly in vain, to explain, yesterday there are small forgivable ‘lies’ like “I will pay x amount to x people”, then there are the massive lies designed to steal election and thus are not forgivable. Ones like “there will be no carbon tax under a government I lead” 6 days out from an election, or “never ever GST”.

          These lies deserve to be judged at an election. Bias and voting intentions are irrelevant.

          “What I mean is saying this government is a liar does not distinguish it from any other. The policy is what matters”

          Simply dismissing a lie this big as ‘well all governments lie’ is ridiculous. By this logic it doesn’t matter what a party says before an election, once they win all bets are off. I mean it’s ‘the policy that counts’ right?

          Sorry but this argument simply does not cut it.

          Admit it mate, this tax has no mandate and Australia deserve the right to have their say on it.

          • “Admit it mate, this tax has no mandate and Australia deserve the right to have their say on it.”

            2010 Election, FPP votes as a % of ’07:
            Libs: 108%
            ALP: 87%
            Nationals: 67%
            Greens: 150%

            Australia had its say.

  9. I agree with your rebuttal of the no property rights argument, CeC. However, you are on shakier ground with regard to business certainty. The main uncertainty for business at the moment must surely be the international situation. If, as seems likely, no successor to Kyoto is agreed to (Japan and Canada have already said no deal, the US didn’t sign up to Kyoto), then the chances of a fair dinkum international carbon price in the near, or even medium term are rapidly diminishing. Connie Hedegard is saying there is no point in the Europeans continuing if they can’t drag the rest of the world with them. In that environment, does anyone believe that an Australian government, of either persuasion, will persist with a carbon trading scheme? I certainly don’t.

  10. The point is you simply cannot measure the benefit of trading the right to emit CO2, even if you make the assumption that it is even a problem. You stop emitting CO2, great, but then what? Does the temperature magically stop changing?

    The so called ‘property rights’ are pointless because they have no tangible benefit. Intellectual property gives you the right to an idea that could produce wealth in the future, water rights give you the right to water and sulphur dioxide emissions effect local areas and no emitting the gas has a tangible effect on the local area.

    “The idea of repeal only really works if you think that ultimately the greenhouse gas problem is not a problem at all, as clearly the IPA does.”

    And the idea of a tax on carbon dioxide emissions is only logical if you make the assumption that emissions of it are an issue and that the world are going to do it with us.

    Which brings us right back to square one.

  11. Carbon E. Coyote

    Ok MattR, yes let’s make the assumption that it is a problem. To answer your questions:

    The science says that if we continue to emit as per usual and continue to increase the concentration of CO2 in the atmosphere (currently ~400ppm, previous high over hundreds of thousands of years = ~280ppm) then temperature accelerates to ~6 degrees above pre-industrial temps. Reducing emissions (on a global scale) gives the world the opportunity to limit temperatures to +3 degrees (if we can peak CO2 concentration at 550ppm) or +2 degrees(if we can peak CO2 at 450ppm). So it is silly to suggest that “the temperature magically stops changing”, of course it won’t.

    On your second point, yes, there is no point acting alone, we need the rest of the world to act with us in reducing emissions. The Copenhangen accord has 90 countries, covering 5/6 of global emissions and 90% of global GDP, committing to reductions. They can individually choose which suite of policy measures they implement to achieve these commitments. Some will choose emissions trading (AU, NZ, UK, EU, California) etc because it is least cost, others will choose other mechanisms possibly because ETS is politically difficult (eg US). The PC report showed that the countries not choosing a carbon price achieve emission reductions but at much higher cost. So we can have global agreement to reduce, even if we don’t have global commitment to a carbon price.

    • We can have global agreement, but we don’t. And it’s not looking too likely in the future, either. The Copenhagen accord is no more than platitudes. The chances of any meaningful reductions on a global scale are approximately zero. It is clear that there will be no “son of Kyoto”. As I noted above, Japan and Canada have indicated they will not sign up to a Kyoto extension. So has Russia. The US didn’t sign up to the original. China and India weren’t required to sign up to any reductions, and certainly aren’t going to now.

      • Carbon E. Coyote

        You’re confusing the Kyoto Protocol with the UN Framework Convention on Climate Change (UNFCCC), which all UN member states are signed up to (including US, China etc) and have been signed up to since 1990.

        Yes, post-2012 looks problematic in terms of what happens after Kyoto.

        But Copenhagen is an arrangement under the UNFCCC, not under Kyoto, which includes reductions from the US as well as Canada, Japan and also China and India. It was made on the basis that Kyoto was flawed because it fails to constrain those emissions from developing countries (who aren’t constrained under Kyoto) even though China is now the largest emitter and the fastest growing.

        Agreed, China and India weren’t required to sign up to any reductions under Kyoto. But they HAVE signed up to reductions (from business as usual) under the Copenhagen Accord, which was formally adopted at Cancun.

        • But the “commitments” made under the Copenhagen Accord are both meaningless (what is “business as usual”?) and lacking any mechanism for enforcement, hence toothless. By 2050 about 3/4 of all anthropogenic greenhouse gas emissions will be from current developing countries. I doubt I will be around to see it, but on the off chance that you will, remember this message “I told you so”.

          You were saying we have global agreement to reduce, when clearly we don’t. That was my point. Kyoto had some, admittedly limited, teeth, for those countries to which it applied. Copenhagen has none. Cancun had none. Durban will have none.

  12. “But they HAVE signed up to reductions (from business as usual)”

    Has the previous phrasing of “reducing emissions intensity” gone stale? Heres a suggestion for the Macrobusiness dictinary.

    feecreasing = An increase made to sound like a reduction, done for political gain.

    As in:

    “Japan has pledged to feecrease their Tuna catch”
    “Malasia have agreed to feecrease their export of hardwood”

  13. Carbon E. Coyote

    He was referring to the French carbon tax proposal, which was proposed and then ditched by Sarkozy in 2010. This was over and above the EU-wide ETS which France is a participant in. I would not advocate having a carbon tax on top of a an economy-wide ETS, it doesn’t make sense.

    So it bears no resemblence to the Australian situation, where firstly this isn’t a carbon tax, but rather an ETS with an initial fixed price period. Others have called this semantics, but that is to ignore the fundamental differences.

    Secondly, on Prud’homme’s point of equity, even if we are to assume that his comments are directed to the EU ETS (which they’re not), Australia’s scheme is far better than the EU scheme where they allocated all the permits to generators upfront and had no household compensation. In the Australian scheme, that “windfall profit” equity goes instead as low-middle income household compensation to address the regressive impact of higher electricity price.

    On his other points, I agree that if you have an economy wide ETS then you don’t need other measures (eg feed-in, RET etc). But that doesn’t mean that an ETS is ineffective if there are other measures; it just means that greenhouse reductions are not achieved at lowest cost.