Back to carbon markets versus carbon taxes. Yesterday, I wrote a long (too long) post on the subject. To save you reading it, the gist was this:
Isn't it surprising that many pro-market economists have come down against carbon markets, and in favour of carbon taxes?
The UNFCCC is adamantly pro-markets. So today I asked its Secretary General, Yvo de Boer, why many economists take a different view, preferring a carbon tax.
[quote]I think most economists are saying it's a mixture of markets, taxes, and policy and measures [regulation, to you and I].You need a variety of instruments.
It's much easier to capture industry through a market mechanism than it is to address the behaviour of households, or to come to grips with the transportation sector.
Transport is easier to address through policies and measures. You can set emissions standards, efficiency standards for vehicles. For households, if you affect the price of electricity and natural gas through taxation, that sends a price signal to them.[/quote]
After the press briefing, I got an opinion from Eric Haites. Haites is an economist and lead author of the UNFCCC's recent report on financing a low carbon economy. We'll get to his answer soon, but first a little on the research he was promoting today at the conference.
Haites's report asks the following question. If emissions were to have stabilized in 2030, how much extra money would we need to spend?
His answer - additional investment would have to rise each year, reaching around $200-210 billion by the time we got to 2030.
Unpacking these figures shows that Haites expects power generation to actually get cheaper. We'd save a few hundred billion on fossil fuels and energy transmission, and only have to sink 150 billion or so into nuclear, renewables, and carbon capture.
But the report reckons almost half of all emissions reductions would come from increased energy efficiency. And this doesn't come cheap. Across the energy sector, as whole then, around $100 billion would be needed in additional investment.
Where does the other $100 billion go? Most of it on reducing emissions from agriculture (a subject little discussed here at Bali) or from deforestation (which is, in contrast, a hot topic).
A big chunk - $35-45 billion - would also have to go into technology research and development. (The principle is obvious, though presumably we need R&D now rather than in 2030!)
Now these numbers are remarkably (almost unbelievably) small. Assume there's around 8 billion of us by 2030. We'd have to spend only around $25 per person in 2030. The total figure would be just 0.3-0.5% of GDP and 1.1-1.7% of total global investment.
If true, that's a bargain. It's about as much as the insurance industry already has to spend on claims due to extreme weather events.
The report reckons that most of this money, around 86%, will come from the private sector, so governments aren't that big a player. Getting the money to the right places, though, will be a critical challenge. Invest half in developing countries and you'll achieve 68% of the total global emissions cut that is needed.
Which brings us - eventually - to carbon markets. Their role is to ensure investment goes wherever carbon can most cheaply be removed from the system. They are an automatic mechanism for directing money to developing countries.
So what could economists have against that? At the heart of their objections is the concern that if you cap and trade emissions, you'll introduce a dose of unwanted volatility into the economic system as the prices of carbon credits jumps up and down according to demand.
Far better, they argue, to allow emissions to fluctuate a little. After all, small changes in annual changes in emissions have only a limited impact on the stock of greenhouse gases in the atmosphere.
Taxes need only be adjusted up or down if the longer-term trend for emissions seems too high or too low.
"But that assumes, implicitly, that you have a global government that has a choice in the level of taxes," Haites argues. As we don't, it would prove almost impossible to set taxes at a level that drove emissions close to the target.
In addition, Haites believes that transfers from rich to poor would be problematic under a tax-only system. If you wanted to cut 'cheap' carbon out of developing country economies, you'd need to transfer tax revenue from the rich to the poor world.
"That's a lot more difficult than letting the market sort it out," he says.
Price stability can be achieved in other ways, he suggests. For example, prices can be capped, allowing more permits to be released if a ceiling is reached, or companies can be allowed to save permits from one year to the next.
That's the economic one. Haites also tried to allay the political fears expressed by commentators like Martin Wolf. Trading was for businesses, not for individuals, he argued. He described individual carbon accounts as an administrative non-starter.
Thus the mixed system that Yvo de Boer favours. Why not use taxes and regulations to incentivize individual behaviour? It's just important that markets are allowed to do the heavy lifting between big economic actors, and across national borders.
So that's case in defence of carbon markets. I'll come back to this subject once more, I think, when we'll try and fix up some kind of debate between the two sides.