Monday, October 09, 2006

Climate change symposium: the morning

On Friday I attended the Climate Change: the Policy Challenges Symposium in Wellington. The symposium was organised by VUW's Institute of Policy Studies as a followup to the Climate Change and Governance Conference earlier in the year, and brought together by New Zealand and international speakers to discuss specifically policy rather than the broader questions discussed at the earlier event. I've already covered the keynote speeches of David Parker and Nick Smith, but here's a rundown of the rest of the morning session:

Professor Jonathan Boston (VUW) opened the symposium, highlighting some of the recent evidence of climate change and lamenting the fact that most of it went unreported in the New Zealand media. As a result, the debate in New Zealand is still stuck on whether climate change is happening, where most of the rest of the world has moved on to what we are going to do about it. He also noted the scale of the problem we face: to avoid a temperature rise of 2 degrees Celsius over preindustrial levels (now widely accepted as the threshold for "dangerous" levels of anthropogenic climate change under the UNFCCC), we need to stabilize equivalent CO2 concentrations at no more than 450 parts per million (which means about 400 ppm of CO2). But we're already at 385 ppm CO2, and around 420ppm CO2-equivalent. If we are to avoid breaching that cap, developed countries will need to reduce emissions by between 70% and 90% by 2050 - and more the longer we delay.

Professor Michael Grubb (Chief Economist, The Carbon Trust) gave a good, chunky presentation on "climate change solutions in theory and practice: national and international dimensions". The first part of the talk looked at the general analytic framework of climate change policy, which recommends some combination of energy efficiency, economic instruments, and technology as a solution. Unsurprisingly he concluded that each has its own strengths for targeting particular sources of emissions, and that all three were needed for comprehensive policy.

The Carbon Trust has done a lot of work on mapping sources of emissions by sector in an effort to work out the coverage of current policy and where future policy should best be targeted. One of their interesting results (from this report [PDF] is presented below:

This tracks UK business emissions by sector, their source, and the number of entities in that group; total emissions are represented by area. It is immediately apparent that the orange parts of the graph - representing emissions from buildings (either direct heating from coal and gas, or electrical load for heating, lighting, computers etc) make up a large portion of emissions. But policy is primarily targeted at the blue bits, and primarily in the large energy-intensive industries sector via the European Emissions Trading Scheme. The large proportion of emissions from buildings is only weakly targeted, and so potential for reduction is unrealised, despite the fact that huge gains (at least 15%) are cost-effective. One of the Carbon Trust's jobs is to find ways of realising this potential, and to break down the barriers to uptake (which mostly seem to be systematic and behavioural rather than economic).

He then moved on to discuss the EU Emissions Trading Scheme (ETS) - an emissions market covering 46% of the EU's greenhouse gas emissions. He noted that there have been major problems with overallocation, which have affected pricing, and that "grandparenting" of permits in the electricity sector had resulted in their making windfall profits which had undermined confidence in the scheme (the price of electricity went up to reflect the added cost of carbon, but generators had been given the permits for free, so they collected the increased price and laughed all the way to the bank). Effectively the ETS had turned into a massive rent-grab as governments and industries fought over who would capture the revenue from carbon prices. Grubb was fairly sanguine about this - its what politics is all about, after all - but at the same time clearly hoped that some of that rent-stream could be put to use by governments to push the technological innovation needed to move towards a lower-carbon future.

Grubb will be speaking again on the same topic on the 18th at the School of Government in Wellington, if anyone is interested. Details here.

Dr Steve Hatfield-Dodds (CSIRO) spoke on "building climate policy momentum through improving incentive alignment". His key idea was that "economic culture" (of which he is highly critical) impedes a public policy response, and encourages three misconceptions about dealing with climate change: that it will require lower living standards; that it will result in increased energy prices, and less affordable electricity, and therefore "hurt the poor"; and that delaying action can reduce costs. On the first misconception, he expanded on the talk he gave last time, arguing that economic growth and living standards will continue to increase even with extremely harsh climate change policy, and that the difference it makes is that it will take 52 years rather than 50 for incomes to double. He also rehashed previous material about the asymmetry between willingness-to-pay and willingness-to-accept, and added some empirical data (reported (badly) here) showing that framing policy in terms of costs rather than "you'll simply benefit less" results in a 15% reduction in support.

On the second misconception, he presented modelling results from ABARE (the Australian Bureau of Agricultural and Resource Economics) showing that while energy prices will rise, they will still rise much slower than incomes, meaning that affordability does not decline. He also pointed out that there is significant potential for revenue recycling - and conversely, that insulating sectors of the economy against the full cost of their emissions costs us all.

On the merits of delayed action, there is a strong and reasonable presumption that technology costs will decline over time. But Hatfield-Dodds points out that the argument for delayed action rests on a hidden assumption that timing doesn't matter, and that differences in emissions pathways doesn't materially affect the outcome. This is something climate scientists are not at all sure about, and its not something we can afford to be wrong about. Risk management suggests therefore that we should act early rather than later, on the grounds that this will both ensure that that technology does arrive (something economists just blithely ignore), and that we don't commit to shooting ourselves in the foot.

Finally, he talked a little about the international situation and the problems it presents. Under the "Kyoto model" of constrained and unconstrained emissions zones (i.e. "Annex I" and "non-Annex I" countries), "leakage" is a problem, in that emitters can escape the cost of policy by moving to the unconstrained zone. But a commitment by key players such as China and India that they will move to constrain emissions at some stage in the future (even if they don't say exactly when) will effectively plug that leak. Getting such a commitment (or ideally a timeframe or criteria for key non-Annex I parties such as China, India and Brazil to move towards Annex I) should be a key goal of current negotiations on a post-Kyoto regime.

Dr Tim Denne (Covec Consultency) spoke on "achieving emission reductions at least cost: international lessons for the New Zealand context". He began by pointing out the bleak facts about our continued growth in emissions, and looking at some overseas success stories of emissions reduction. Germany had reduced their emissions by reducing the use of lignite and by the post-unification collapse of the East German economy. Luxembourg had shifted its industries from using coal to using imported electricity, effectively exporting its emissions to other countries in the EU. The UK had been highly successful switching from coal to gas, while France had increased its reliance on nuclear power and reduced agricultural emissions by reducing cattle numbers (though this seems to be primarily due to reduced subsidies rather than any effect of climate change policy). Transport emissions had increased in every country, primarily due to increased demand. The lesson here is that the most significant reductions seem to come from fuel switching, while agricultural and transport emissions seem very difficult to reduce unless you are willing to shoot cows and throw them in a ditch (or, less wastefully, eat them). Unfortunately, there is only limited scope for fuel switching in New Zealand (and due to limited gas supplies, we seem to be going the other way at the moment), while our geography and the fact that we are an agricultural nation compounds the problems for transport and agriculture. This means that we are going to have to rely on emissions trading (buying reductions elsewhere) rather than being able to reduce emissions domestically.

A key question posed was "should transport and agriculture pay?" Denne thought they should, as even a modest charge encourages emitters to look around for solutions. It also avoids any question of subsidising output (an issue we may face over the government's decision to cover agricultural emissions - an enormous environmental subsidy and wealth transfer to farmers). So fundamentally a "fart tax" or agricultural emissions levy is a good instrument. He echoed Steve Hatfield-Dodds in arguing that insulating some sectors costs us all, and presented some figures comparing the cost of agricultural emissions with the cost of a 1% shift in various tax brackets. By my BOTE calculations, the cost of covering the emissions from farmer's sacred cows would handily pay for a 3% cut in the business and middle personal tax rates. Maybe we should all remember that next time they drive a tractor up Parliament's steps demanding that we subsidise their pollution...

More controversially, Denne raised the possibility of economic collapse (a term deliberately chosen to be provocative). Why not kill Huntly, or shut down polluting industries? Leakage is clearly an issue, as are social impacts such as unemployment - but the risk posed by the former seems to be overstated when you consider that the places emissions might leak to will be part of the system eventually, meaning that leakers probably won't be escaping the cost of emissions after all. Social impacts are an issue, but he didn't think the concept should be dismissed so readily (and as an obvious point, the savings from reduced emissions could be used to compensate the losers).

Finally, Denne stressed the need for all emitters to face the international cost of carbon in the long run, and that we need to get a price signal working before 2012 if we are to avoid regrets with long-lived infrastructure (such as power stations and housing). Unfortunately I'm not sure that the government is heading in the right direction on this...

I'll do the afternoon session in another post.