Thursday, 15 March 2007

It ain’t easy, being green

Two interesting articles show just how hard it is to be environmentally friendly, especially if you are trying to ameliorate your carbon footprint by offsetting the carbon you produce.

Carbon offsets are a popular form of conscience-salving, practiced by Oscar-winning environmentalists and vote-seeking political parties alike. Yet the economics of carbon offsetting leaves a lot to be desired.

An article on the Economist blog explains that carbon offsets may have exactly the opposite effect from that desired. On the one hand, by alleviating us of our sense of guilt, we may continue to consume and even expand our consumption of (now offset) carbon-intensive fuels. Even if we do consume less, carbon-intensive power stations tend to have low marginal- and high fixed-costs, so if the reduced demand leads to falling revenues, the power supplier need merely lower prices to stimulate more consumption, thus maintaining profits but at the cost of higher output. Meanwhile, the offsets act as subsidies to low-carbon power producers, enabling them to lower their prices, thus sending out a signal to the consumers that energy is cheap, and thus stimulating more consumption. The result, therefore, is that carbon offsets may actually increase energy use.

Furthermore, wind farms (the most common and so far most successful form of renewable energy) and solar power tend to compete not with coal-fired power stations, those dirty smokestacks that provide us with the base-load that we need to ensure all-round supply, but with cleaner power stations (such as gas-fired) that are more easily switched on and off.

In a separate article, Arnold Kling argues – in what is that rare piece, an article on the environment by an American from the liberal right that does not cast doubt upon the actual fact of climate change – that subsidies to green energy are nothing more than “pork”, rewarding good lobbying or financing investment where politicians think it should go.

Kling also condemns “cap and trade” systems as subsidies to energy firms. In this, he is right in practice though not in theory. The European market is carbon has been undermined by the decision to hand out permits to energy producers rather than selling them on the market. By giving away what is a tradable commodity, European governments effectively handed out a licence to print money.

However, all is not lost. What we have here is not proof that nothing can be done – let alone that nothing should be done – about global warming. Rather, we have a good case study in how governments tend to play into the hands of special interests, and another for how empty gestures are no substitute for real solutions.

Cap and trade systems fail because they are missing one simple element; the correct system is cap, auction and trade. Rather than giving away carbon quotas, governments should sell them in an open market – much as they sell bandwidth to telephone and broadcasting companies. Even non-energy producers may buy them, gambling (but not knowing) that they will be able to sell them on at a profit. Thus government both controls emissions and get a return for the nation’s precious asset (its atmosphere) while the power companies get a working market to provide incentives to environmentalism, while not enjoying vast and unwarranted windfalls.

Even better, governments could abandon the whole quota system and impose a uniform carbon tax. This would require those who emit carbon dioxide (and other greenhouse gasses) to pay a pollution charge, which could then be passed on to consumers, thus encouraging energy efficiency. This would provide no subsidies to special interests – even wind-powered ones. They would not be necessary. As the taxes pushed up the price of “dirty” energy, “clean” energy would become economically viable, but the rewards would go not to those energy producers whose lobbyists were most effective, but to whomever was able to produce the cheapest energy after carbon-output was factored into their costs.

So maybe its easy being green after all, as long as we don’t buy piece of mind with a donation to Al Gore.

8 comments:

Joe Taylor said...

Cap and trade systems fail because they are missing one simple element; the correct system is cap, auction and trade.

Absolutely.

What gets my goat though is when eco-socialists use shortcomings in our existing cap-and-trade systems (EUETS for example) to claim that the whole concept of offsetting is flawed and/or immoral.

What we need is a single global price for carbon. Whether that comes from a "no freebies" cap and trade system or a flat carbon tax is less important, but I'm certain they're the only two systems that will work.

I'm in favour of a trading system myself, partly because I don't like the idea of a political process setting a price that would be better set by the market, and partly because a trading system would make it easier to create new credits by investing in carbon-sink technology. And I think it's the only one the Americans will go for.

But really whichever one we can get the widest multinational agreement for is fine.

Joe Otten said...

I suspect offsetting is typically flawed in practise, but I agree there is nothing wrong with it in principle.

There's a good summary of tax v trade here.

Kit said...

Cap and trade will never work because it requires governments to ignore national interests.

The alternative Pigou taxations is pants too. Read David Friedman:
http://daviddfriedman.blogspot.com/2007/03/global-warming-carbon-taxes-and-public.html

Dan said...

The goal of both a carbon tax and a cap-and-trade system is to set a price on carbon emissions. The political process essentially sets the price whether a carbon tax or a cap-and-trade system is used. For a more recent comparison of carbon taxes vs. cap-and-trade see the "issues" page on our Carbon Tax Center web site at www.carbontax.org.

Joe Otten said...

Tom, (is Tom OK, or is it strictly Thomas?)

Responded in some more detail here:

http://joeotten.blogspot.com/2007/03/carbon-offsets-sin-or-salvation.html

The Governor of Northern Rhodesia said...

Tom,

Kling IS sceptical about the extent of man's contribution to climate change. But if we go for what he calls the safe option, ie changing our behaviour now to try and deal with the problem, he strongly favours a carbon tax over the cap and trade system.

Kling has previously argued that we should look to the markets to tell us what we really need to know about the causes of global warming. He points out that there are a lot of assets out there whose continued viability for investors depends on the anthropogenic argument being true (those receiving govt subsidies for developing new technologies, those looking for tax breaks by decommissioning carbon hungry facilities, etc). As our understanding of climate change develops, these assets will be repriced, either up or down, to reflect the new knowledge. Kling argues that the largest investors will be able to pay for access to the best and least biased technical expertise - their success depends on it. He reckons they will always get access to the crucial information before the rest of us, so his solution is to watch how these assets fare in the market over time, and deduce what we can from what the investors are doing.

Even allowing for the fact that market data can be hard to analyse due to "noise" caused by all sorts of factors, its hard to argue with his logic. But his argument has no practical application for policy makers.

ecofx said...

A couple of points:
Offsetting can be wrong in principle if the polluting source wasn't in operation at a fixed point (I'm not suggesting 1990, though!). This is because the equation has an open end on the polluting side - I can pay someone to cut their CO2, but these might not actually be real cuts compared to some point in the past, especially in an expanding economy. As the offsetters continue their pollution, the chances of actually reducing CO2 by whatever percentage is limited by whatever REAL steps the paid minimisers actually achieve.

The word "subsidy" is wrong to describe remuneration for wind power in countries implementing the German system, as no money is budgeted and paid by the government. The government actually sets a minimum price which must be paid by consumers to wind farm operators, competing in a market where the other forms of electricity generation ARE subsidised.

The current CO2 certificate allocation and trading system is heavily flawed, but I believe it would be possible to fix and expand it.

The inefficiency of cars continues to be unbelievably wasteful. Sticking the engines of millions of vehicles in places where heat is required and producing electricity alongside to power the replacement electric vehicles on the roads would completely transform our electricity, heating and transport sectors (we wouldn't do this literally I suspect). In-vehicle efficiency of 270 mpg equivalent is no problem at all for a 2-seater electric vehicle.

And because there are so many possible solutions and lifestyles out there we do need a carbon budget for all individuals and companies. It really is tinkering to wonder whether to tax the plane or its passengers without some more encompassing system in place, for example. In a system where CO2 allocation is a form of currency, an airline would have to consider for itself how much to allocate to the ticket of each passenger whilst having to take responsibility for whatever totals it finally accrued.

Tom Papworth said...

Joe,

For heavens sake, man! We spent a night in the pub. I think you can call me Tom if you want :oD

Anyway, that's what it says at the top of the page.

T