Tuesday, March 1, 2011


Random header image at Larvatus Prodeo
This post first appeared as a guest post at  Larvatus Prodeo .  It looks at what should be considered when eveluating climate action programs and applie sthese criteria to the eveluation of programs that depend on putting a price on carbon.  The conclusion was that the carbon price should be put to one side and alternative approaches used to get on doing things that we know have to be done.

Evaluating emission abatement programs

The great big lie that makes AGW deniers so influential is not their climate science distortions. It is their exaggeration of the impact of the action required to reduce emissions on individuals and the economy.
Fighting this exaggeration is not been helped by some of the climate action programs that have been foisted on us by both the Coalition and Labor in recent years. Programs where the cost per tonne CO2 abatement have been over $300/tonne. (Compared with less than $40/tonne to achieve the same emission reduction by lifting the MRET target.)
Fighting this exaggeration has not been helped either by proposals for large, complicated programs which are difficult to understand and easy to distort. The complicated nature of the CPRS was the gift that kept on giving for a skilled distorter like Abbott.
Given past mistakes and the government’s determination to commit to a large, complicated carbon price program with compensation before the end of the year, it might make sense to have a conversation about what questions should be asked before committing to climate action programs.
It might also make sense to see how well the proposed carbon price program stacks up against these questions. Unfortunately, the carbon price program just doesn’t stack up when the right questions are asked.
This post was prompted by a recent article from Mark Davis and Lenore Taylor under the provocative title Climate cash goes up in smoke. They said:
More than $5.5 billion has been spent by federal governments during the past decade on climate change programs that are delivering only small reductions in greenhouse gas emissions.
An analysis of government schemes designed to cut emissions by direct spending or regulatory intervention reveals they have cost an average $168 for each tonne of carbon dioxide abated.
The article then goes on to compare various programs based on a table that can be found here.
Unfortunately, their analysis is seriously flawed. The “total cost” quoted in the table does not take account of “costs or savings to households, businesses and other non-government players in the economy.” As a result, the regulation-driven “Greenhouse intensive water heater phase out” program looks like a real bargain because the cost of installing the greener option is a non-government cost. Equally, the “Household insulation” program looks worse than it should because it doesn’t include the benefits of savings in power costs or the economic stimulus that was critical at the time.
Despite these limitations, the article was a strong reminder of the need for proper evaluation of climate action programs.
An interesting article, A carbon price can’t save the planet by itself by Ross Gittens, is more useful. The article focuses on the need for complementary measures to deal with important issues for which a carbon price is particularly ineffective. Much of the discussion is relevant to evaluating the desirability of adopting a carbon price scheme.
Of particular interest is a set of six principles for evaluating climate action programs that come from Richard Denniss and Andrew Macintosh. These can be summarized by the following check list:
    Cost effective? ($ per tonne CO2 abatement?)
    Response to clear case of market failure?
    Complement, not oppose other programs?
    Federal policies fit in with state policies?
(NOTE: Explanations and examples for all these principles can be found near the end of the Gittens article.)
It was concluded that “objectives… need to be spelt out clearly…. and the schemes need to be monitored regularly against those objectives.”
Some other items might be added to this check list:
    Price effective? (Important because it is price increases rather than costs that voters actually see and price increases that spur claims for compensation.)
    Easy to explain/hard to distort?
    Generates appropriate market forces to drive improvements?
    Certainty re rate of take-up?
    International impact?
At this stage it is useful to see how two existing programs would rate:
Firstly – Malcolm Turnbull’s “Incandescent light bulb phase out”: This is a successful program that ticks all the applicable boxes. In particular:
    It gave certainty of take-up – a particular advantage of simple regulation based schemes.
    It addressed a market failure. This arose because the potential savings to an individual user were too low to create much interest.
    It created the market forces that have helped to improve light quality and drive down globe prices since the regulations came into force.
    It is cost effective. A high efficiency globe running one hour a day will save me about $5/year – close to the current price of a high efficiency globe.
Secondly – Various solar PV programs: These were less successful programs that still got results and would get a tick in terms for most of the applicable checks. However, there were some checks where the answer was ambiguous or clearly negative:
    Cost/price increase per tonne CO2 abatement: There is some ambiguity re this figure because solar PV generates most of its electricity at times when the price paid is well above average.
    Uncertainty re rate of take-up: Governments have responded to above expectation take-up by cutting back on schemes. The resulting fluctuations in demand have made it difficult to develop a stable solar PV installation industry.
    No market forces to drive down the cost of subsidies or the size of feed in tariffs: The above expectation take-up suggests that the price premium for solar PV power would have been lower if the programs had been set up to create competition between solar PV generators.
    Not equitable: Only the better off could afford to take advantage of the overly generous feed in tariffs. On the other hand, the poor had to pay the higher prices required to support this generosity.
In addition, the subsidy scheme was run on pork barrel principles. The subsidy per kWh was higher for small installations and the subsidy model assumed that the panels would be owned by the householders. It might have been smarter to provide the same subsidy per kWh no matter how large the installations were and not to have differentiated between householder owned installations and installations owned by companies who leased roof space from householders. Larger scale and the roof top leasing option should result in lower costs and the possibility of extra income for low income householders.
So what about the proposed carbon price program?
Once again the proposed program would get a tick for most of the applicable checks. However, there are some real problem areas:
Certainty of take-up is going to be a real issue, particularly during the initial stages where the carbon price is low. In theory, the starting prices being bandied around at the moment would be sufficient to start a massive boom in CCGT (combined cycle gas turbine) investment that could see almost complete replacement of coal fired power by the end of 2016. In reality, there may be almost no investment in CCGT because of carbon price uncertainty. There will be uncertainty caused by fears that the opposition will win the next election and drop the whole program. In the specific case of CCGT there will be the additional risk that future increases in the price of carbon may be sufficient to drive the replacement of CCGT before an adequate return on investment has been achieved. Greater certainty and smaller price increases could be achieved by using competitive tendering to set up long term contracts for the supply of cleaner electricity.
Market failure: Gitten’s argument for complementary systems was based on the market failure of the carbon price system for some sources of emissions. For example, the carbon price program would not be an effective way of driving down car-related emissions because the price signal is so weak. In 2007, a $30/tone carbon price would have added only 49¢/day to the fuel costs of the average car. (See here for more details.) Hardly enough on its own to make most people change their driving habits, particularly if they are being asked to sacrifice convenience, comfort and status. People may change their driving habits because of a commitment to saving the planet. They will change if required by regulation but they are unlikely to change for 49¢/day.
Opposing other programs: Richard Denniss says:
The Rudd government’s emissions trading scheme was designed in such a way that any reduction in emissions caused by its subsidies for households installing solar panels would simply reduce the effort required by other polluters, not add to the overall reduction.
This is a potential problem with any program that has an overall emission reduction target.
Easy to explain/hard to distort: Would be a problem if the government goes ahead with a comprehensive program, particularly if it includes compensation for polluters.
Cost/price increase per tonne CO2 abatement: Intuitively, it might be expected that, if the carbon price is $40/tonne, then the price increase per tonne CO2 abatement will also be $40/tonne. However, this is only true if there is 100% replacement of dirty with a clean alternative (and the price premium for clean is the same as the carbon price.) For lesser replacements the price increase is higher because the average price has to take account of both the price premium for clean and the carbon price on dirty. For example, by the time the percentage of clean electricity has reached the 2020 MRET target of 20% renewables, the price increase per tonne CO2 abatement would be $200/tonne, not $40/tonne. At the halfway mark (10%) it would be $400/tonne. In addition, the actual price of electricity will have to be the same as the price of dirty after the carbon price is applied no matter how far the cleanup has progressed. (About 4¢/kWh above the current price.)
By contrast, alternatives, such as the MRET, that do not depend on a carbon price to drive change give lower price increases per tonne CO2 abatement because the average price does not have to take account of the carbon price on dirty. For the above case the price per tonne CO2 abatement will stay at $40/tonne no matter how far emission reduction has progressed. In addition, the actual price only ramps up as the proportion of clean electricity increases. For example, the average price will only need to ramp up by 0.08¢/kWh per year to reach 0.8¢/kWh above the current price by 2020.
In theory some of the higher prices associated with the carbon price approach can be returned to tax payers after taking out admin costs and the CPRS style compensation payments that the government is now talking about including in their carbon price scheme. Even if all the difference were returned, the politics of arguing for a 4¢/kWh price increase now instead of a 0.08¢/kWh increase per year is ridiculous. It would also be much harder for a polluter to argue for compensation when the price of electricity is only rising at 0.08¢/kWh per year.
CONCLUSION: It might be a lot smarter to forget about carbon price for the time being and get on with the things we know have to be done to meet 2020 targets using approaches that don’t depend on putting a price on carbon.