Thursday, June 18, 2009

Climate change: the return of the clowns

Back in 2008, when the ETS was before a select committee, the NZ Institute for Economic Research produced a report [PDF] claiming that it would destroy the economy. The report was spectacularly flawed, being based explicitly on an assumption that there would be no international action to combat climate change (it also assumed there would be no technological change, no benefits from action, and no costs of inaction - all of which are similarly dodgy). So naturally, when National wanted economic modelling to help its stacked Emissions Trading Scheme Review Committee decide how best to gut the ETS, it turned to these clowns again.

Their new report [PDF] seems to share many of the flaws of the old one - most notably, that it assumes in almost all scenarios that New Zealand is acting unilaterally, and that the rest of the world does nothing. With almost all of our major trading partners either committed to emissions trading (the US, Australia) or already doing it (Europe), this is simply laughable. It still deliberately excludes both the benefits of action and the costs of inaction (their statement that "the welfare gain from less global warming is not captured in the model" says it all, really). And while it deals with technological change in some scenarios, this is represented as single large "silver bullet" technologies. There is no modelling of ordinary technological improvement over time, and (more absurdly) no response of the electricity generating mix (and consequent reduction in emissions per megawatt-hour) to carbon prices. We've already seen the latter happening - companies have preferentially invested in wind rather than gas, and Genesis is burning less coal and more gas in an effort to avoid emissions (and anticipated future carbon costs) - so it seems particularly unsupportable. All of this chicken-strapping naturally leads to the conclusion that the best policy is no policy, and that the government should pick up the tab. However, even the NZIER realises that this is simply "an untenable political economy approach to emissions reduction in the longer term" as it would compromise our position in international negotiations. And so they conclude:

On balance, our recommendation in the short run is to introduce an ETS with free allocation to competitiveness-at-risk sectors, with agriculture excluded if measurement of its emissions is prohibitively expensive. Free allocation should be output-linked and phased out as our competitors adopt carbon pricing. If agriculture is initially excluded it should be transitioned into the ETS, with free allocation if required, as measurement becomes economic.
There are a number of important differences here with the current (on hold) policy. Firstly, "output-linked" free allocation means giving polluters a set proportion of their current, rather than 2005, emissions. In other words, a direct government subsidy of pollution. This is the exact opposite of the "polluter pays" principle, and is simply morally untenable. I take it as axiomatic that polluters should pay the full costs of their pollution, just as they should pay the full costs of their raw materials, their taxes, and their wages. And if a business is not profitable if it pays those costs - or, to put it another way, if it is only profitable if it ignores its environmental effects, rips off its suppliers, cheats on its taxes and robs its employees - then it is not really profitable and should go to the wall (and, in some of those cases, to jail). While businesses will whine about their "competitiveness", those costs don't cease to be real if other people ignore them, just as the cost of wages doesn't cease to be real if factories in China can use sweated labour, and it is odd that economists have no trouble recognising that in the latter case but not the former.

Secondly, agriculture is currently in the ETS after 2013, though massively subsidised. The point of obligation has not yet been determined, but there is provision for it either to be measured at the farm level, or at the processing level through dairy and meat factories. Either way, measurement is likely to be cheap and based on existing data; the government is not going to come along and stick a methane-meter in every cow - rather they are simply going to count heads and charge on average values, at least initially. So NZIER's concerns about high measurement costs are simply fictitious (not to mention pulled out of their arse - they don't discuss this anywhere else in their report). Unfortunately, its what the farmer government wants to hear, and seemingly designed to give them a pretext to give farmers - our biggest carbon polluters - even more of a free ride. And the rest of us will be expected to pay for it - to the tune of almost a billion dollars a year.