…environmental economics and the implications of environmental policy

Archive for the ‘russian hot air’ tag

If “Cap and trade isn’t the solution” decreasing abatement flexibility is certainly worse.

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I am not sure what this writer was thinking when this article was published in the Globe and Mail. Essentially the author argues that cap and trade will necessarily result in freeriders and hot air and therefore should be scrapped. While the case on freeriders and offsets may be a good one, railing against cap and trade seems dubious,

“with the shutdown of numerous uncompetitive industrial facilities following the demise of the Soviet Union, Russia has enormous carbon credits for sale. With little that can be done to reduce emissions from their already state-of-the-art facilities, economically struggling European manufacturers end up sending billions of dollars to Russia.”

Russian hot air was created because Russia was over allocated. Simply, there was no adaptive capacity in the cap setting to allow for the collapse of the soviet economy and the subsequent creation of fake emission reduction credits that could theoretically be used for Kyoto compliance by other Annex I countries. Most well designed cap and trade systems have closure provisions, where there are “use of loss” rules that require credits from closure to essentially be clawed back. So, design could have dealt with the hot air, and it was not an inherent flaw in cap and trade that led to this particular outcome but rather poor policy design.

The article then goes on to say that instead of cap and trade, a series of performance based regulations should be set for individual plants. A provision for a technology type fund is then mentioned, which is good for cost containment (i.e. a price cap that mimics a carbon tax),

The first step is to implement predictable, long-term, progressive targets for emissions reduction tied to each unit of a plant’s output. … Canadian businesses who fail to meet their targets could pay a set price per excess tonne to a federally administered emissions fund. This pool of cash would be designated to specific national environmental objectives; for example global warming adaptation and mitigation studies, energy-efficient city design including densification and public transit, or programs to encourage personal emissions reduction such as home energy efficiency improvements.

But, this is essentially a transfer to government and not between industry, which has obvious political and frankly economic efficiency questions. Adopting the freerider argument one can see a technology fund leading to all kinds of weird and whacky calls on revenue (see post here on carbon tax for Toronto) and high cost and low effectiveness investments. A technology type fund is good, but we are talking billions and billions of dollars in revenue.

Perhaps of bigger concern in this article is the rallying against abatement flexibility. The central premise of cap and trade is to allow emitters to smooth marginal costs. One emitter over complies, one under complies, the latter compensates the former and both are better off. This flexibility leads to innovation and continuous improvement and other good stuff. Stifle this flexibility and higher costs are inevitable.

So, if Canada is to achieve the reductions laid down by the federal governments or the provinces, flexibility is required. Flexibility in policy, flexibility in access to cheap reductions either domestically or internationally and flexibility to adapt to changing circumstances. And domestic reductions at increasingly stringent targets are really really expensive. So before we collectively dis those foreigners, perhaps we should shake their hand and see if there are credible and cheap reductions to trade.

Written by Dave Sawyer

February 5th, 2008 at 4:15 am