EnviroEconomics.ca

The climate policy intelligentsia gets all knotted up on key aspects of climate policy design from targets to coverage, to allocation to auction and then recycling. But, I would argue that none of this really matters. Instead, what matters is what emitters believe. And so the most important question in climate policy is not the target, or the instrument or overcompensating through free allocations or technology subsidies but “do emitter believe?”. All else then flows from this and all else becomes secondary.

Getting going with credibility matters, period. And then expectations drive outcomes. Which brings me to this today,

Carbon Falls as Climate Failure Is Oil Polluter Boon

The inability of government leaders to agree on stricter pollution controls at meetings in Copenhagen last month is showing up in commodity markets, where it’s getting cheaper to emit greenhouse gasses.

The price of permits to emit a ton of carbon dioxide sank 10 percent in London, while oil gained 6 percent in New York since Dec. 7, when 8,000 delegates attended a summit in the Danish capital to prepare for a successor to the Kyoto Protocol, the climate treaty that expires in 2012. Not only did the summit fail to increase regulation on polluters, it also reduced incentives to invest in clean energy.
“There are surely two factors impacting carbon prices: the failed summit in Copenhagen and a probable surplus in the EU emissions-trading system,” said Jacek Kaczorowski, chief executive officer of Poland’s Belchatow coal-fired power plant, the biggest polluter in Europe, according to EU data. Any “sustainable recovery” in carbon markets is unlikely this year, he said.

The work a number of folks did for NRTEE on expecations and outcomes is illustrative, so if you are feeling teckey see here

But this graph says lots. Simply, with low expectations there are low reductions and so one of two things happen: either you don’t hit your targets as the graph from the NRTEE modelling suggests, or carbon prices must climb in the future to knock out all that high emitting capital that is the result of unbelievable policy. But either way, delay is costly, and policy credibility is key.