Tuesday, January 15, 2008

Climate change: the market solution

The government is currently pursuing a market solution to climate change, with the goal of fully internalising the cost of carbon into the economy via emissions trading. But what would the effects of such policies look like? This:

High petrol prices have begun to bite into big-car sales, with surges in registrations for motorbikes and a significant slowdown in the 1600cc-plus vehicle category.

Figures supplied by Westpac show registrations for 1600cc to 2000cc cars dropped 5.5% in 2007, while gas guzzlers in the 2500cc to 5000cc range rose only 0.5% on the back of two years of "thumping growth" in registrations, says Westpac senior economist Doug Steel.

Motorcycle registrations rose 18.9% last year to 11,540 the highest increase for 20 years. On a monthly basis, motorbike registrations were 50% higher in October 2007 compared with October 2006.

As a share of the total market, sales of vehicles over 2000cc have dropped from 24.8% in 2004 to 20.7% last year, while under-1600cc cars have leapt from 20.9% in 2004 to 24.8% in 2007.

This is just in the road transport sector, and its the result of sustained high petrol prices caused by Bush's war and a global supply crunch, but after a couple of years it has already effectively flatlined growth in our domestic fuel consumption (the latest New Zealand Energy Statistics for the September 2007 quarter paint a similar picture). Internalising the cost of carbon will strengthen this signal, and encourage further shifts towards smaller, more efficient vehicles.

Internalising the cost of carbon should see a similar change throughout the entire economy, with new investment driven towards cleaner and more efficient options (which in turn will create a push to develop more such options). And that ultimately is an important part of how we are going to solve this problem: by using the market as a weapon against itself, to push consumption and investment in a more sustainable direction.