Betraying Socialist Principles to Combat Climate Change

Jo Nova reports that a Carbon Tax is coming to Australia. This is to be followed by carbon trading. Comment submitted

In economic theory, in a closed economy and zero transaction costs, with all other things being equal, a carbon trading should work quite well to reduce carbon emissions. In the real world consider these points.

1. The oil price has more than tripled in the past decade. There are enough incentives to improve energy efficiencies from this alone. The marginal impact of carbon trading will be much lower than if the oil price had been static.

2. Those businesses which can most easily pass on the extra costs to the customer are those with no competition from abroad. Supermarkets, which consume huge amounts of energy, are a good example. Australians cannot hop over to New Zealand or Singapore for their weekly groceries. The biggest burden relatively, will be borne by the poor. Manufacturing businesses will be incentivised by the profits from selling carbon credits to ship production abroad to China. High polluting, old production processes will gain a new income stream. New, efficient, competing ventures will have to pay the incumbents to enter the market.

3. The energy trading schemes are highly complex and need experts to set up the rules. Or rather people who read up on the theory, and know more than the naive punters the elected representatives of the people. Enron was bidding to be a big player, before it went bust. Lehman Brothers was bidding to be a big player, before it went bust. With mortgage securitisation now so out of fashion, this presents a new way for the masters of the universe to make extraordinary profits.

I do not keep up with politics much, especially on t’other side of globe like. (I am from Manchester, England). So have I got this reet? A socialist government in Australia is bringing in a regressive policy that could cause consumers to subsidise the movement of manufacturing jobs abroad, and help a return to the multi-million dollar bonuses in the financial services industry. All this, in the name of a policy that will be near impotent in constraining CO2 emissions.

If you follow the UNIPCC or Stern Review line, the policies to combat climate change are highly cost effective. But that requires correctly identifying the low-cost alternatives and successfully pursuing those options. Politicians have not the skill-sets, the incentives, the staying power, the knowledge, the longevity, the power, or the incentives to achieve these aims. They may inadvertently undermine the very things in which they originally believed.

Antony Watts in addition reports that whilst the socialist government in Australia is taking on carbon trading, the Republicans of New Hampshire are ditching the same policy. I commented

I do not keep up with politics too much, so Anthony, are you sure that you have things the right way round? A socialist government in Australia is bringing in a regressive policy that could cause consumers to subsidise manufacturing jobs abroad, and help a return to the multi-million dollar bonuses in the financial services industry. All this, in the name of a policy that will be near impotent in constraining CO2 emissions. The Republican Party (who represent business interests) in New Hampshire is proposing binning a policy that would help their real constituents.

Revision on 25th February.

  1. Having slept on the issue, I would like to put a perspective on my comments above. Carbon trading will have some early successes over and above rises in the oil price, as it gives a cost-bias to non-GHG energy sources. However, given that

    1. Regulation is making it difficult to build high-carbon power-stations, particularly coal. So the movement away from high fossil-fuel power is happening anyway.
    2. High carbon-emitting manufacturing has been moving away from the developed countries for years. For instance, steel, shipbuilding and bulk chemicals are goods examples, along with labour-intensive low-carbon options.
    3. Government subsidies for clean energy sources.

    So even with a well-designed and well-run policy, the impact will be limited to start off with. That is the cost per unit of CO2 saved will already be high. Then as the policy is progressed, diminishing returns will set in.

     

        

Kent Wind Farm – A dead loss to society

The Kent wind farm subsidy is mostly a waste of money, even measured by UNIPCC’s case for taking drastic action on CO2.

First, two statements and a bit of data.

“… the Kent windfarm. £780m invested to chase £50 ROCs. Offshore is double bubble, so £100/MWh generated.” (Sep 25, 2010 at 1:41 AM | Atomic Hairdryer at BishopHill )

“An effective carbon-price signal could realise significant mitigation potential in all sectors. Modelling studies show global carbon prices rising to 20-80 US$/tCO2-eq by 2030 are consistent with stabilisation at around 550 ppm CO2-eq by 2100. For the same stabilisation level, induced technological change may lower these price ranges to 5-65 US$/tCO2-eq in 2030.” (P.18 UNIPCC Summary for Policymakers)

An alternative for a wind farm is a small power station consisting of diesel engines. The most modern diesel engines can produce less than 500kg of CO2 per MWh. (See note)

So the subsidy should be no more than the trading credit CO2 of 12.5-50 £/tCO2.

Based on these figures, it is possible to state that of the £100/MWh subsidy, at a very minimum £75 is a dead loss to society. At most it could at much as £95. This is before you undertake a present value calculation on the trading credits value in 2030, or start questioning the underlying economic assumptions. Further this is whilst accepting UNIPCC consensus position in its entirety.

For an alternative take, see Christopher Booker in the Telegraph

Note on CO2 output for a diesel power plant

A large container ship engine has around 470kg to 560kg of CO2 output per MW (emission comparison table on page 13), with around 58% engine efficiencies. (See a MAN Diesel & Turbo paper “How to influence CO2” – 5MB pdf). Power-plants can higher up to 90% more efficiencies by heat recovery processes, potentially cutting the CO2 out per MW to 350kg. However, this would need to be verified by actual measurements.

Note on carbon credits v Subsidies

A carbon credit aims at adding to the cost of producing CO2 directly, with the objective of encouraging the most cost-effective means of saving CO2. That is if cost saving is less than the cost of the credit, you purchase the credit. If it is greater, then you make the investment. For power plants it might be very effective for bringing forward investments in newer power plants. It would not be so effective in choosing between new power plants with massive differences in cost per unit of output.