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Apr 14, 2011

Carbon price compo for business v households: not the same thing

Labor would like us to think businesses will act just like households when it comes to carbon price compensation. Experience suggests otherwise.


Another speech, another step closer to the policy that will not die: Greg Combet yesterday gave a couple of further clues as to why Labor’s preferred carbon price scheme will be the CPRS under another name.

Remember, Labor did its best to kill the CPRS. First they never sold it properly. Then they dumped it … sorry, delayed it. Then, just to make sure, they dumped the prime minister who oversaw it. Then, as if that wasn’t enough, they swore black and blue there wouldn’t be a tax on carbon after the election.

But that was 2010. This is now. In a Press Club speech primarily designed to provide a justification for injecting the unlikely phrase “millions will be better off under a carbon price” into public debate, Combet dropped more hints that the carbon price is just Mark V of the CPRS.

First, Combet said compensation will be more than 50% of revenue, and it will be permanent. That it will apply “for the first year and over a period of years”.

The 50% threshold is, I suspect, considered psychologically important in selling the carbon price scheme, in a way it wasn’t in 2009 when no one ever mentioned household compensation. It enables the government to say most of the revenue raised will go to households.

And strangely enough, Combet’s statements match the second-last iteration of the CPRS from the 2009-10 MYEFO documents in which, once the scheme was up and running, just over half the revenue went on compensating low and middle-income households. However, revenue grew faster than compensation over the out-years, so household compensation dropped to 45% of revenue by 2020.

Combet also used as his example for the steel and aluminium industries the 94.5% free permit compensation levels from the CPRS. It will look very odd, then, if the government’s carbon price model doesn’t include exactly that compensation level.

Combet did so as part of an argument that compensation to polluters doesn’t reduce their incentive to reduce carbon emissions.

“I should also make the point that by providing this assistance the government does not reduce the signal for these industries to reduce their carbon pollution. If the assistance is in the form of free permits, these permits are an asset. These businesses have an opportunity to reduce their carbon emissions and sell surplus permits. If they cannot there is a very substantial level of shielding against carbon leakage.”

Wrong, minister.

It’s not just Combet, of course — he was merely articulating the approach favoured by Labor and the Liberal moderates who backed Malcolm Turnbull’s ETS amendments, which was even more generous to polluters than the CPRS.

Combet is making the implicit comparison of households to business: we’re compensating households through tax cuts and transfer payments, but economics says (correctly) that they’ll still change their behaviour in response to changed prices. So too, he wants us to think, will business change its behaviour.

The first problem with that is that under any of the models advanced for a carbon price by Labor, businesses would be compensated differently to households. They wouldn’t get a tax cut or a grant, they’d get free permits. That is, they would see virtually no price signal, whereas consumers would see the full signal. It’s like giving householders a “no carbon tax” card they could wave every time they had to make a purchase.

If the carbon price revenue was being directed into a corporate tax cut, it might make more sense to argue businesses would respond to carbon price signals, but not when the price signal is almost entirely neutered.

But experience also suggests Combet is wrong on his principal point, that business will be motivated to reduce emissions by the prospect of selling surplus permits.

You’d never know it from the shock jocks and people like Greg Hunt, but a European emissions trading scheme has been in operation for five years. So there’s plenty of what the consultants call “learnings” to be had from it. The biggest “learning” of all of course is that the impact of a carbon price is far, far less than that alleged by business before its introduction, but we knew that already. Another relates to how businesses react when they’re given free permits, which was also the basis of the European scheme. A US economist, Daniel Matisoff, has looked at how business is supposed to respond in theory, and how they have in reality.

Matisoff identified a number of problems, and found that “companies exhibit a strong preference for business-as-usual operations, especially under conditions of high uncertainty”. Some are problems that turned up were relatively minor and would be addressed as businesses adjust to a scheme. For example, some smaller European businesses initially couldn’t find buyers and sellers of the small number of permits they needed, or wanted to sell — a problem that would presumably be addressed by brokering services.

Businesses can also attempt to pass on what carbon price cost they do face to consumers. At the beginning of the European ETS, power companies notoriously passed on the cost of their permits — despite the fact they had got them for free. The overallocation of permits that led to that has since been fixed.

But Matisoff found more fundamental problems. It’s big utilities that are most likely to operate as economic theory would suggest, and trade their permits after cutting energy use. But they adopted a short-term approach because of regulatory uncertainty around issues like the future regulation of coal-fired power, and put off long-term investment decisions because of uncertainty about the long-term carbon price.

However, those issues are endemic to a trading system, and can’t be fixed no matter what compensation model you use.

Large non-utility companies, however, are much more likely to opt for “business as usual” — as one quote used by Matisoff shows: “Many large industrial firms … have no desire to change behavior, regardless of possible profits from selling carbon permits.” Part of this is because they want to stick to their core business. As one says in the paper: “I’m a brick producer, I want to produce bricks.” The study also found internal issues about which areas of a business are charged with selling permits, which are charged with managing sustainability issues, and “shopfloor”, where the most practical energy efficiency measures are likely to be identified.

And small and medium firms simply don’t have the resources to invest in properly understanding the operation of the carbon permit market. For those business, the ETS is simply a compliance issue, not an opportunity to make money from selling permits. That, at least, is a problem obviated by targeting the carbon pricing scheme at the biggest polluters, something both the CPRS and the new carbon price scheme will do.

The problem of long-term certainty recurs in Matisoff’s findings. Such a problem is likely to be even greater in Australia if the Coalition remains in the grip of climate denialists and opportunists, who may be able to cruel the effectiveness of a carbon price simply by keeping businesses uncertain about whether there’ll still be a carbon pricing scheme of any kind in, say, 2020.

But it’s also an issue for Labor. The final version of its CPRS extended free permits well into the 2020s, meaning businesses could safely put off the need to plan for the full impact of a carbon price for several years. That’s why Ross Garnaut’s proposal to limit CPRS-style compensation to just three years until the PC develops a new set of compensation guidelines makes more sense than the original CPRS model — businesses will still be uncertain, but they’ll know that whatever the PC comes up with, it won’t be as generous as the CPRS compensation model.

Better still to abandon compensation altogether, and concentrate on providing transitional assistance that business will know expires after a limited period, say three or five years. And if provided via grants or tax cuts, it’s likely to maximise the chances of business acting in accord with how economic theory says they will.


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39 thoughts on “Carbon price compo for business v households: not the same thing

  1. John

    Greg Combet will compensate households through tax cuts and transfer payments:
    “Millions will be better off under a carbon price.”

    You can thank Tony Abbott’s scare campaign for this permanent redistribution of income from the rich to the poor.
    Who would have thought that the Liberal Party under Tony Abbott would become responsible for socialist welfare policies?
    Neocons will be turning in their graves.

  2. JamesH

    Excellent comparative analysis Bernard; this sort of thing is why I subscribe.

  3. Captain Planet

    Outright compensation or transitional assistance will only result in our corporate “citizens” taking everything that is given to them, and then crying like babies in however many years, that they are unable to cope with the expiration of the compensation / assistance, and holding the country to ransom, demanding permanent special treatment.

    Free permits clearly don’t work as they eliminate the price signal, despite what some might think.

    All money raised from the Carbon Tax, and the longer term sale of permits, must go towards subsidising the only industry which is deserving of help and will actually play a role in decreasing the impact of a Carbon Price on all other industries.

    Renewable Energy.

    To say that a carbon price will “change behaviour” in terms of energy consumption sounds great. It is very difficult to choose to buy your energy from renewable sources when the industry does not yet have sufficient infrastructure on the ground to provide that energy.

    We need to create this change in two ways:
    1. Make CO2 emitting activities more expensive. A Carbon Tax will do this.
    2. Make non – CO2 emitting alternatives available. The prevailing orthodoxy places faith in market forces to do this – In theory, private industry will rush out and build windfarms and electric car infrastructure all over the place to supply zero carbon energy. IN practice this will take an unacceptably long time unless direct assistance is given to these industries – and the blindingly obvious source of funding is the carbon tax itself.

  4. Jimmy

    I find it hard to believe that the top 1000 emitters in the country will choose “business as usual” rather than spend say $20 a tonne reducing emmissions they can sell permits for for $25 a tonne and be able to market themselves as “green”, especially when the compensation will eventually be removed and they will be forced to make the investment anyway. I would of thought not doing this would be acting against the best interests of the shareholders.

    Captain Planet – Transistional Assistance is necessary to avoid a massive shock to the economy, big emitters can’t just flick a switch and start emitting less they need time to adapt.

  5. Scott

    The price signal to business is only one aspect of the ETS.

    The major aims of an ETS here is to reduce emissions and compensate for carbon’s externality effects. The fact that only a limited number of permits get distributed every year (and the number of permits reduce every year to a Government decided limit), means that a reduction in emissions will occur if an ETS is implemented correctly. It is better if these permits get auctioned off (to provide compensation to the government for the externalities as well as to accurately price carbon), but initially free permits are acceptable as a means of enticing business into the program. The problem with the European model was that initially, these free permits were overallocated (so emissions actually increased for the first couple of years). However, as long as this does not occur with the Australia model, reduction of emissions is assured.

    After that, it is up to business to decide whether they will reap the profits of trading or not. Some businesses will decide it’s all too hard and ignore the trading aspects of the ETS to focus on it’s core business. Others will use carbon trading strategies as a competitive advantage. But like everything in business, let the directors and shareholders decide what is good for their own companies.

  6. david

    Abbott is being cornered like the rat he is.

  7. D. John Hunwick

    As Bernard Keane has well-argued – the most sensible approach is NOT to have free permits. The real reason for this is that the decline in CO2 emissions is now more urgent than ever. The climate scientists that really know what they are talking about (and feaured on Crikey) are saying the 2 degrees of warming (or 450ppm of CO2) is a dangerous level not a possible safe one. To be slow in responding to this only increases our chances of passing some irreversible tipping point that will make life on earth hell for all our descendants

  8. kuke

    Yes, excellent post thanks.

    How much will the carbon rise each year by? This is the key. And if it changes into an ETS, how do we keep rising the minimum price?

  9. Frank Campbell

    “the unlikely phrase ‘millions will be better off under a carbon price'”

    When a caahbun price cheerleader like Bernard Keane realises there’s a rancid smell emanating from this govt. policy, you know the game is up. It’s no longer a tax, it’s a bonus! The magic pudding has become steadily more supernatural since the cooks announced it, matching the ALPs slide in the polls rather neatly. If this goes on, everyone will end up with an enormous cheque and their own coalmine. Result: Labour landslide, mostly mullock heap.

    But Darth Combet-I worry about him. He exudes more anxiety than a family of Freuds. That fixed, obsessive stare. The thin censorious mouth. The endless chain of engineering similes: market “mechanisms”, policy “settings” , price “signals”, “adjustments”…the Controller’s technocratic dream….

    Maybe it’s just ALP desperation. After all, they’ve staked the lot on this idiotic tax. It’s a carbon referendum. In effect a referendum on anthropogenic global warming, or rather belief in it. The polls don’t look good there either. Declining belief since 2006.

    As even Keane is aware, the tax will not change corporate behaviour. Too small for a start. And now Gillard’s giving away all the revenue to bribe voters. Fuel will be excluded next. Farmers and their farting stock are already exempt. That leaves thermal coal. Killing that will drive up power prices even faster than now. The alternatives are laughable: not a baseload renewable technology in sight- and no money for the essential R and D. More wind turbines, useless unreliable power at 3 times the cost? Or Solar the Unready? A billion dollars spent on domestic solar managed just 0.1% of power production. A sickening subsidy to the the middle class: you pay for their carbon guilt.

    In a decade we’ll look back on this collective mania with disbelief.

    2020: in the long dark corridors of The Lodge, the Prime Minister pedals remorselessly, the lino worn thin. Now permanently naked except for his Tour de France helmet, he’s no longer allowed out, but is always voted in.

  10. Jimmy

    Kuke – rising the minimum price under an ETS is easy you just cut the amount of permits available.

  11. Scott

    KUKE – by reducing the number of permits available for auction, the price of permits will increase.

    D.John Hunwick – Whether or not the permits are free will have no impact on the rate of decline of emissions. Only the number of permits issued (free or for auction) will have that impact.

  12. Captain Planet

    @ Jimmy,

    I understand the point about big emitters not being able to convert their operations overnight. Nonetheless I believe transitional assistance to be counterproductive – I believe it will simply be used to delay action ad infinitum.

    Industries which are not competitive under a carbon price will have to go to the wall. That is the harsh reality.

    There may be a case for transitional assistance in instances where it can be demostrated that a change in business model over a few years (at most) will result in the industry being competitive in its own (unassisted) right. I would suggest these should be approved only on a case by case basis and the onus should be on the business, to prepare the business case which demonstrates the long term viability of their business in a carbon constrained economy, in order to qualify for assistance in the short term.

  13. Jimmy

    Captain – “Industries which are not competitive under a carbon price will have to go to the wall. That is the harsh reality.” That is true but an ETS won’t become a reality if that is that attitude taken.
    Those industries need to be weeded out over time, or given time to adapt or a new technology to arise not just smashed first up. Jobs need time to be created in other “green” industries before we shut down the old ones otherwise the economy will go backwards and we’ll all feel a lot of pain.

  14. Captain Planet

    The real risk, under at ETS which operates as a cap – and – trade system, is that when you start to get into international trading of permits, the potential for fudging the figures is phenomenal.

    It would require unprecedented international cooperation and international regulatory bodies with wide – ranging powers of inspection, to effectively monitor and check compliance with actual reductions in emissions. The Rabid Right will tell us that this is all part of a conspiracy to bring about a One World Government
    (as though such a thing were actually:-
    a. possible, and
    b. a bad thing.)

    The more likely outcome, in the short term, is that once international permits trading gets underway, countries with endemic corruption and less than robust legal checks and balances on commerce, will profit from emissions trading fraud on a grand scale, and developed countries emissions will continue to rise, while fraudulent “emissions reductions” offset programs in the developing world turn the money they have made from selling emissions permits, into fleets of gold plated mercedes benz, all the while achieving nothing in the way of emissions reductions, except on paper, of course.

    Sorry about the appalling sentence structure but hopefully my point is clear enough.

  15. Captain Planet

    @ Jimmy,

    I understand your point, but I can see the potential for abuse of well – intentioned “cushioning” measures. Many are the businesses which will take advantage of such leniency.

    We’re talking about a pretty miniscule carbon price initially, I really don’t think compensation is needed in the short term – for business or for households.

    Regarding giving industry time to adapt and for new technologies to arise, I feel that notification that the carbon tax will turn into a permit trading scheme in “x” years is giving sufficient time to adapt. Businesses know what is coming – get on with making your changes, you have “x” years (3 or 4 sounds about right) of very very light carbon “tax” pricing in the meantime.

    Again, the revenue from the tax needs to be allocated to kick – starting the low – emissions technologies, so that when the trading scheme commences and the price of permits skyrockets (as it must if the scheme is to have the necessary effect) then alternatives are available.

  16. Jimmy

    CAptain – “Again, the revenue from the tax needs to be allocated to kick – starting the low – emissions technologies” From what we have been hearing I would suggest a large portion of it will be but people can and will argue about the mix no matter what.

  17. freecountry

    Mike O’Brian of Mundura, WA, has summed it up perfectly in a letter to the Oz today:
    [It’s a magic pudding. Everyone will be compensated, including the polluting industries, and the planet will be saved too. We need more taxes like this!]

  18. Pdaddy

    “small and medium firms simply don’t have the resources to invest in properly understanding the operation of the carbon permit market.”

    Why does everyone think that small to medium firms are run by morons who can’t do anything but their core business activities?

    First we are told that they need easy IR laws because they can’t be asked to follow the same sort of rules as other companies i.e they must be able to fire people on a whim.

    Now we can’t expect businesses to take the time to follow up on a new set of rules which may impact on their business. I thought small business people were meant to have the initative to adapt to this sort of change, especially if there was a dollar to be made.

    Surely if your livelihood depends on it, getting a grasp on the carbon tax is not too much to ask. Bernard, I dare say you haven’t given these owners the credit they deserve.

  19. Pdaddy

    I’m with you Free Country. But the right needs to make up its mind whether they don’t like the Tax because they don’t think it does anything, or they don’t like the tax because the day after it comes it the world will collapse around us.

    You can’t giggle about everyone being off under it and then claim we’ll all be ruined, ruined I tell ya!

  20. David Hand

    You’ve got to wonder what they are thinking at Bluescope Steel HQ about all this. A trade exposed industry which burns a lot of coking coal for which there is no alternative. Without protection from the carbon tax, this company will be out of business, or more likely, relocating operations to Asia.

    Sell your Wollongong house now.

  21. Catequil

    You have to love the demonising of the “big polluters”. Well here is a message. They only exist because of all us little polluters. We don’t need a tax to get rid of them. All we have to do is stop using power. Even better let those who fell morally strongly about this pay the tax and let ant non believers alone. Terry McCrann was right this morning. If you find someone who is willing to buy this pap then I have a bridge I want to sell him and I might even throw in an opera house. I mean “we are giving more than half back” – well why take it in the first place. This is the governments idea to replace ponzo schemes surely.

  22. no_party_preferred

    Personally, And I can’t believe I am saying this… I think a carbon tax is a good idea, Whether this on is a good example of one I don’t know. As a race we have to stop burning resources, if not to reduce emissions then at least to make them last. We are going to need coal and oil as a source of material for plastics etc for long time to come. When our great great grand kids are mining dump sites to find what’s left of what we buried they’ll be saying “I can’t believe they just burnt all that stuff”

    The carbon tax is not really going to be the final answer to making this planet last long enough to see out the human race. Human population growth is not sustainable no matter how you paint it. There are too many of us now and we are still multiplying. Unless we start putting in place policies to get our population in decline, which means a MAJOR paradigm shift from where we are now, we as a race, are fucked. And that is the real inconvenient truth.

  23. jeebus

    Any market that is created off the back of trading carbon permits will need incredibly strong safeguards to stop financial speculators from buying up and hording permits. Rampant speculation in the oil and commodities markets has created huge and unpredictable price swings, along with artificial scarcity that leads to massive waste and inefficiency on a global scale for the sake of enriching a few bankers.

    As you mentioned in the article, the brick making company wants to focus on what it does best. They don’t want to be forced into a system where the health of their bottom line hinges on the person managing their carbon permits.

    Any businesses who don’t rely on carbon permits for their operation (speculators) should only be allowed to trade carbon permits on the barest fringes of the market for the sake of liquidity.

  24. Frank Campbell

    David Hand: No need to wonder what ex-BHP Bluescope Steel think. They’ve said so.

    And everyone forgets about Whyalla. Sole industry there.

    Today we have Paul Howes (on the conveyor belt…next Member for Safeseat)
    threatening to sink Gillard “if one job is lost” because of the caaahbun tax.

    OK, it’s just a mating call to his base, but he’s also positioning for future greatness: Howes knows the carbon tax is now a farce. Gillard’s reign as Regent will shortly end. Howes is looking two elections ahead, timing his arrival…it’s not called the Beltway for nothing.

  25. Liz A

    I agree wholeheartedly with your analysis Bernard, and we have seen a great example of exactly what you have described occurring here in the electricity market.

    The wholesale (derivative) market was designed to allow large users of electricity to enter the market directly to enable them to by-pass the retailers if they so chose. After an initial entry into the market by the likes of Bluescope, they retreated fairly quickly to the arms of retailers because they realised that they did not have the skills / expertise to participate directly in the derivative market: even though they participate in the FX market on a regular basis.

    Its about perception of “core” and “non-core” business: FX hedging is core, electricity price hedging is not: assisted by the fact that the cost to production of electricity was (and remains) so low that it does not “deserve” that degree of management attention. It is unlikely that carbon pricing will be sufficient to justify internal derivatives managers eve after the introduction of a carbon price – the price will still not be high enough.

    There are a score of aggregators & brokers from the energy markets who will be able to slip into the role very easily, and the hedge positions will be “outsourced”.

    I also agree that free permits should not be handed out, or should be limited to 3-5 years. These organisations are more than capable of finding energy efficiencies within production processes, and much of those efficiencies will not occur without an RoI that is sufficiently high to justify implementation. Free permits merely delay the timeframe of the return thereby delaying the implementation of efficiency measures.

    Please don’t forget that the cost of electricity for most of these businesses is only a third to half of the price that we consumers pay, and the energy component is locked in for 3-5 years. These businesses WILL have a window under existing contracts in which they are still paying well below what household consumers will have to bear.

  26. freecountry

    An ETS has one advantage over a tax, which is international trade in permits, getting the most out of comparative advantage.

    For example, coal dug up in Australia is cheaper to buy here than in China because of the extra freight and handling, while other factors make it cheaper to build a wind farm in China than in Australia. Combine these and you could find that an Australian firm, instead of replacing one unit of coal-fired electricity with one unit of wind power locally, for the same cost could pay someone in China to replace two units of coal-fired electricity with two units of wind power.

    That’s twice the carbon abatement for the same cost. But the Green community consistently refers to this as a “get out of jail free card”, which just goes to show that they can talk price signals as if they’re channelling Adam Smith, but get down to nuts and bolts and Greens quickly reveal they haven’t got a clue.

    The phrase is actually a giveaway: to them it’s largely an issue of industrial crime and punishment. They’re not really serious about doing whatever it takes to avoid the catastrophe they believe is coming.

    Such an attitude is self-defeating. I assume you don’t want this program to run out of horsepower before it’s halfway up the hill. If the system is designed to be as painful as possible for the old energy industry (maybe not yet, but later as targets get tougher, permits rarer and prices higher) then it could come to a point where the next industrial step towards clean energy can’t be done for lack of economic horsepower.

    For that reason, it makes sense to do it smart. If you think government “direct action” is dodgy and Adam Smith’s “invisible hand” of carbon price signals is the far more powerful tool, then use it properly and include David Ricardo’s theorem of comparative advantage. Don’t go defeating yourselves worrying about a “get out of jail free card” which is really a “cut twice the emissions for the same cost” card.

    International trade is good, in carbon permits as in everything else. In fact without international trade, there’s no real point in moving from a carbon tax to an ETS.

  27. Scott

    @Captain Planet

    “It would require unprecedented international cooperation and international regulatory bodies with wide – ranging powers of inspection, to effectively monitor and check compliance with actual reductions in emissions”

    We have a global financial system already. We have an international law system. Both of which work pretty well, most of the time. A global ETS will slot in quite nicely without too many issues. Lets not complicate things. At the end of the day, permit trading is just a derivative traded on an exchange. The oversight and compliance can be worked out through a treaty structure and UN bodies (like the BASEL agreements in the banking world), or even by the global exchange itself. This isn’t anything new.

  28. Fran Barlow

    Firstly … thanks Bernard for the link on the Euro trading scheme evaluation.

    Like Scott, Jimmy, FC I regard a well designed trading scheme as the best of the foundational approaches. Like FC (with whom I usually disagree), I don’t have a problem with trading across national boundaries — for mine, this is a strength of cap and trade schemes relative to fixed price, not a weakness, though of course all the due diligence matters are key.

    Reading the article, since transaction costs seem to be a significant constraint, it might be that one kind of “industry assistance” might involve the creation of a dedicated section of the compliance offices that would presumably be attached to such a scheme that concerned itself solely with giving advice and overseeing the paper work needed to make the best of the opportunities. Perhaps any company that wished to avail itself could get free legal advice on related matters, and like the ATO, the office could produce rulings on which businesses could rely.

    Like others, I’m against the giving out of free permits or the equivalent to industry in general or EITEs. If asked to choose between a lower fixed price/higher cap and assistance, I’d prefer the former, provided that there was a definite (and presumably more aggressive) path to and adequate emissions regime. A price of $10 is much too low, but if no compensation to industry were given out and compensation to households focused on the bottom 30% of income earners with compensation disappearing at about the bottom 50% this might be viable. Ideally, at least some of this compensation could be in kind, with the provision of more extensive support for quality low cost housing, free public transport, community food banks or discounts on food staples using stored value cards or other services of a non-discretionary nature. As the price rose, this could be reconfigured to provide more generous end user compensation up the scale.

    In the longer run, I’d like to see the effective price of emissions in Australia up around $80-$100 per tonne Co2e by about 2020. One of the ways that this could happen might be through the setting up of buying trusts for the permits. The trusts could accept money from the public on the basis that the permits acquired would never be sold. Donors would accept de facto, that they would not recover their “investment” but rather regard it as their “vote” on what the CO2 price would be. This is something you could not do under a fixed price system. This could also give each of us a chance to “cover” our own personal emissions if we so chose.

  29. Scott

    Fran, you seem to have forgotten how an Exchange system works.

    Yes, you can bid up the prices for Carbon Permits in the Exchange if you like (if you have enough money to perform market manipulation on this scale..unlikely). But do you honestly think the price is going to stay at that level? Any exchange performs a price discovery role as well. If the price is more than the market believes it is, and $80-$100 a tonne is certainly up there, speculators will start selling their permits for profit taking. Industrials will stop buying them. The price drops until it hits a new equilibrium where people are prepared to buy permits again. All you would have done is add a bit of volatility in the exchange and done absolutely nothing to decrease the amount of emissions in the atmosphere. But if you believe the green movement (and the poor old punter) has nothing better to do with their cash than put money into the hands of carbon speculators (as they are really the only ones to benefit from this), then feel free.

  30. Fran Barlow

    Either you haven’t explained yourself well or I am having a personal moment but I don’t get your point Scott. Asssuming permits covering a givent quantity of emissions are available and not simply duplicated, then all bidders underpin the price. If one or more bidders buy with a view to taking, effectively, a long position — i.e. they aren’t going to ever sell them regardless of the market price — then the quantity of permits available to those deciding whether to abate or buy declines, and the usual supply and demand rule applies.

    Thus, if LowerTheCap.org buys 1% of the permits available, then all the other emitters or their agents get to divvy up the other 99%. Surely that pushes up the equilibriuam price because then the speculators/emitters can rely, inter alia in those permits being ringfenced against sale.

    [ if you believe the green movement (and the poor old punter) has nothing better to do with their cash than put money into the hands of carbon speculators (as they are really the only ones to benefit from this), then feel free.]

    “Poor old punters” may decide not to participate, but it seems to me every bit as sensible, and then some, to use one’s discreionary income in part to support such trusts as to buy green products — given especially that the latter may turn out to be greenwash, whereas one would hope that the carbon trading system would be robustly audited.

    Frankly, I don’t see how speculators can benefit from this. Their risk trades are going to be exactly the same albeit around a smaller quantity of available permits. If anything, the action of such trusts might make the market less volatile because at least some of the securities would be held off-market by the articles of the trust. Fairly obviously, the more that are held off market as a proportion of those available, the higher the price, ceteris paribus. If we can (through some combination of lowering of the cap and purchase of permits) push the price to $80 by 2020, then we are going to get a lot more abatement than at $20.

    From the POV of “punters” each of us can claim a certain offset. We have to that extent pulled our weight in the struggle to abate. If 10,000 Australians emitting 19tCO2 each year decide each to purchase 19tCo2 worth or permits and forfeit these to the trust to be held for all time at $30 per tCO2 all of them/us are notionally offsetting 100% of their emissions, whether industry is doing so or not. I could claim Co2 neutrality for about $570 per year. Even at $80tCo2 it would only be $1410 per annum or about $3 per day. (In my case I am probably below the national average anyway becasue I have designed my life around lower footprint, but for simplicity’s sake, I’ll put that to one side).

  31. jeebus

    @Freetrade, just last week there was an article in the SMH about a company in Sydney called Shift2neutral that had deals with the World Bank to run some of the biggest global schemes to offset carbon emissions.

    Turns out they weren’t protecting forests in the third world with the money, and the whole thing was a scam run out of an upstairs office at a suburban shopping village. If this sort of thing can happen in a ‘well regulated’ country like Australia, what do you think will happen in corrupt developing countries throughout Asia and Africa?

    So a Victorian coal plant charges its customers a carbon levy and uses that money to plant trees in China. What’s to stop the Chinese government from clearing the whole forest and burning it down next year to make way for a new train line?

    Perhaps a domestic carbon trading permit scheme might work. Perhaps even one involving other developed countries. But let’s be honest here. If the countries of the world cannot even cooperate to reign in tax havens and tax evasion, what hope do we have for doing the same with yet another fiat currency of carbon permits?

    I can just imagine the international accounting firm brochures when carbon havens start popping up. “Order a ‘Dutch Sandwich’ and we’ll throw in a box of Cuban cigars with a ‘Swiss Filter’!”

  32. freecountry

    Jeebus, be careful where you’re going with the “it can be abused, cancel it” line. You never know where it might lead.

  33. Scott

    The price of carbon on an exchange depends on a lot of factors, not just the number of permits available. That is one factor sure, but there is also amount of production, economic conditions, even interest rates etc. What happens if a company is tracking that it will emit less emissions than first thought? They are going to sell some of their permits putting downward pressure on price. Economic downturn reducing carbon emissions across the board? Price down again. The european model has seen prices fluctuate widely over the years, almost at the same level of commodity prices. Just because a price can increase to $80 doesn’t mean it will stay there.
    In fact, if the permits become worthless after 2 years (due to new tranches of emission permits going on line that invalidate the first lot), they will seriously decrease the price of carbon permits in that second year (as everyone will want to get some value for them). All these factors go into a price for carbon, and probably have a greater effect than a small amount of allocations that are taken off-line by Green Trusts.

  34. jeebus

    @Freecountry, I didn’t say it should be canceled just because it can be abused.

    What I said, is that this sort of system could do way more damage than good to the economy, the environment, and the middle class if it’s not set up right.

  35. Fran Barlow

    Jeebus asked:

    [So a Victorian coal plant charges its customers a carbon levy and uses that money to plant trees in China. What’s to stop the Chinese government from clearing the whole forest and burning it down next year to make way for a new train line?]

    The credits should be paid in the same way people pay to agist livestock — based on time and volume.

    Thus, if someone builds a carbon sink, or agrees to designate one, they get paid on units/time. If for example they use 1000Ha of land to store 300tCO2e for one year they get a rate based on that. Assuming that the rate we are paying is $30tCO2e and we are aiming to have the Co2e stored for at least 100 years that would work out to $0.03tCO2e/pa. Of course, in the case of a well conceived forest/riparian biome, it might be that there are other ways of funding sustenance of its ecological integrity. It might attract funding on the basis of biodiversity — the preservation of endogenous flora and fauna. If it complemented a larger ecosystem permitting the secure movement of endogenous fauna (here I’m thinking of parts of wildlife corridors essential to the lifecycle of fauna) it might also attract other funding — perhaps from state backed wildlife NGOs. Paying to train and resource local and indigenous people to protect the integrity of their biomes is both socially just and likely to be most effective in sustaining ecosystem services that benefit humanity as a whole.

  36. Scott

    Jeebus…that world bank thing in regards to shift2neitral was bogus. The world bank never endorsed shift2neutral (in fact the world bank issued a statement recently saying “We don’t have any association with the “Shift2Neutral” company and do not endorse any transactions made or being considered by this company.”)

    But you raise a good point in regards to offsets via carbon sinks. I think it is a dodgy way of trying to cut emissions. There is no real certification or regulation of the offset industry (though some governments are getting onto it now…bit late for the early investors however who have lost a lot of their dough); carbon stores in trees are usually temporary (trees die, get cleared or end up in naturally occuring bush fires which release the carbon stored into the atmosphere). It is also more prone to “green washing” than any other sustainable solution (airlines trying to offset their emissions through sinks is a ridiculous concept) and is a wasted use of capital that could be spent on developing solutions to the creating of emissions in the first place.

    In my opinion, we should just be trying to focus on the creation of the emissions themselves; let the absorption issue take care of itself. But this is a separate issue to the viability of an ETS however. It can exist without offsets via sinks. I’m actually hoping it will end the whole carbon offset industry (why buy offsets when you can buy extra permits?. Why buy offsets when you can spend the money developing internal efficiencies and then sell your own permits?)

  37. kuke

    I note David Hand says: “A trade exposed industry which burns a lot of coking coal for which there is no alternative.”

    This is false – it’s just the alternative (DRI/mini-mill) is expensive, yet: “Half of the new steel-making facilities in India use DRI.”


    The hydrogen syngas option sounds quite interesting and the article doesn’t mention scrap steel recycling. I even heard BHP started building a DRI planet but scrapped it due to cost. It’s simply cheaper (and far dirtier) to burn coking coal until we have a price signal that encourages investment/research in reducing the DRI cost and perhaps replacing natural gas with biomass/H2 syngas.

  38. Captain Planet

    Believe it or not…

    Assuming humans avert disaster through cooking our ecosystem with greenhouse gases, and:-
    Assuming humans can also manage to get their collective Sh*t together quickly enough to implement global population control policies which stop us all starving to death, then:-

    Sooner or later, we’re going to be using recycling as our ONLY source of steel, aluminium, gold, copper, nickel, and hundreds of other raw materials.

    As mining and processing depletes supplies (Nickel Sulfide is actually becoming pretty rare in the ground around the world) It will become more and more economically viable to recycle. Whole industries will spring up around stripping down and reusing the materials in everything from cars to containers.

    Once you realise that the naturally occurring supplies of these materials are finite, this is the only conclusion possible.

    It’s just a shame that we appear hell bent to destroy our standard of living through climactic disaster long before the human race reaches such an equilibrium in terms of population and resource utilistation.

  39. whydoihavetoregister

    I love labour- all for the lazy little bludger sitting on his lounge making money from watching tv. I have never seen so much inaction in all my life. make a decision and get it over and done with. all they do is talk and talk and when it falls down they blame someone else for it failiing. people are sick of this debate already. too scared of loosing power to make the change. Time to grow a pair Gillard. You could borrow Kevins but you would have to get them out of his wifes handbag. Two of the most forgettable governments in history.

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