Thursday, May 28, 2009

Preventing Windfalls to the Polluters

Here is a piece that argues that, even the Waxman-Markey bill has allocations to regulated utilities, it is able to preserve the carbon price, and therefore, the bill is appropriate. The key distinction appears to be that the permits are given to the distribution company rather than the generator.

Wednesday, May 20, 2009

Carbon Pricing and Avoided Deforestation

It is rare that there is positive news on the environment, but this economist article points out an actual case where the"financial innovation"may have actually helped save the rainforest. The carbon sequestration capability of the rainforest is pegged at 1Tonne per hectare, and the world wide acreage of the rainforest is quoted as being 1B Hectares. Therefore, the monetary value of the Carbon permits sold amounts to $10B worldwide. Now, the US timber industry alone has $30B in revenue, so, the question is: Is carbon pricing sufficient to ensure that forests are not destroyed? It appears that additional externalities due to forests (benefits such as habitats for animals and plants, and prevented losses, such as soil erosion) may need to be factored into calculations to ensure that the forests are not destroyed.

Monday, May 18, 2009

Krugman Part II: Taxes vs. Cap and Trade

Krugman argues that cap and trade is better than taxes, particularly from a verification perspective. He points out that it is going to be difficult for anyone to check whether a specific firm in China was taxed for its carbon emissions or not, but it will be easier to verify that the total emissions have been reduced by China if they relied on the cap and trade mechanism. It is not clear to me how the verification of whether a given firm has actually paid carbon taxes (which should be in the company's financial statements, presumably) is more difficult to verify than whether the same company did actually do the activity that enabled it to get the carbon credits to trade (This would likely need a full scale carbon audit). While I am in favor of cap and trade over carbon taxes, verification does not appear to be a factor that favors cap and trade over carbon taxes.

Friday, May 15, 2009

Krugman on China and Climate Change

Krugman proposes a "Carbon Tariff" on imports from China, and presumably any other country that does not accept a cap on its emissions. This could be a good bargaining chip to encourage developing nations to join in climate change reduction initiatives, but as Lord Stern noted, it may amount to only 1-2% of the overall cost of any imported good, and may not achieve meaningful reduction in emissions or a difference in the sourcing strategies of companies. If that is the case, then it may marginally reduce consumer demand for goods without any additional impact on GHG emissions.

Thursday, May 14, 2009

The Energy and Climate Change Bill Progresses (slooowly...)

It appears that the Waxman-Markey bill is coming out of committee finally. The lobbying efforts appear to have been quite successful, with the breakup as follows:

(1). Utilities : 35%
(2). Energy Intensive Industries (Steel, Aluminum, and Cement): 15%
(3). Refineries: ??
(4). Auto: 3%

So, in all, more than 50% is of the credits are already spoken for. This is almost exactly along expected lines. The key is the sunset provisions for these credits, whether they expire automatically, or not, a point that Felix Salmon addressed earlier.

Tuesday, May 5, 2009

Good Old Fashioned Rent Seeking

WSJ reports that industries are pushing for free pollution credits. This is a huge giveaway from the government to the industry if it happens, with the consumer paying the difference in costs anyway. Since the motivation is clearly political, one option is to have the give away a small portion, say 20% of the credits for free, and have them phased out on an annual basis in the next 5-10 years. This could result in securing the votes necessary to pass the deal, and have the expectations set for the rent-seekers in the industry that their rent is going away in the near future. Of course, Congress has a checkered record in dealing with sunset provisions, so perhaps it is not viable.

Alternatively, the government could auction 100% of the credits, and give the producers cash (from the proceeds) which would clearly be unpopular in the long run, and politically indefensible (or at least less defensible, considering farm subsidies are not that different, and they have been around for a while).

Either way, the cap and trade legislation is an excellent Economics 101 primer. A somewhat technical analysis of this legislation is provided here.

Monday, May 4, 2009

Lord Stern's Approach

The influential Lord Stern believes that use of carbon tariffs on imported goods is just "covert protectionism". He seems to be more in favor of cap and trade, and part of the reasoning seems to be that it will lower cost of compliance.

However, I think this is not universal. Let us consider a case where offsets are freely tradeable across international boundaries, and where each country has a specific target to meet. If a major carbon producer finds itself short, then the demand for carbon in that market rises, increasing the price of the offsets. This would lead to migration of the offsets from other countries into this country. Since offsets play a significant role in meeting emissions targets in most markets, this would lead to an increase in compliance costs for all the other producers as well.

So, while the overall cost of compliance may come down, all the different entities may not see a reduction in the price. In fact, if USA came online and started demanding CDM credits similar to Europe, the likely scenario is that the cost of compliance will go up for the Europeans. So, this might be a good time to buy the guaranteed CERs or the CER futures.