Effectiveness and affordability of an ETS

Guest post from Juel Briggs

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Nobuo Tanaka, Executive Director of the International Energy Agency, has recently said that by 2030, to meet international emission targets, the world will need to have a carbon price of $US180 ($A225) per tonne. (Source: Bloomberg News.)

Ultimately, such costs will be borne by the tax-payer. At Australia’s current emissions (580 million tonnes p.a.) and working population (10.6 million), a carbon price of $A225 would correspond to a cost per working person of more than $A12,000 per year, or around 25% of the average after-tax earnings. Even if we halve our per-capita emissions by 2030, the cost would still be at least $6,000 each year per working person. Additionally, given the aging of our population it could be expected that by 2030 a greater burden will fall on those working.

If this is the necessary end-point that is required for an emissions trading scheme, then such a scheme is severely flawed to the point of being unworkable. The majority of Australians are not able, let alone willing, to pay such costs and this is clearly a financial burden far greater than our society could bear. We could, of course, keep the carbon price low, but this would have a negligible effect on reducing emissions, or we could take some part-way point. But whatever position we take, you don’t have to be an expert to see that under a carbon trading scheme, affordability and effectiveness are inversely proportional to each other, with the price for effectiveness being unaffordably high.

The scientists and climatologists at IPCC may be competent in the science and modeling of climate change, and the associated economists (such as Stern and Garnaut) have been vocal in informing us of the cost of not taking effective action. However, from my analysis above, it seems that whatever this effective action is to be, emissions trading isn’t one of them. For all the billions of dollars that have been spent on climate science/predictions, economic modeling of the (supposedly) dire consequences of climate change and the marketing of these issues to the public, the very least effort seems to have been spent in devising a truly practical, appropriate, economically sound and environmentally effective method that will actually reduce emissions.

Instead, almost as if an afterthought, we got an inappropriate “Cap and trade” system lifted from air pollution technology and law, where this method is used to reduce minor pollutants from the emissions of power stations, such as sulphur dioxide. Such pollutants are present at negligible levels (0% to 2% for sulphur) compared to the carbon in coal (40% to 80%), and where such minor pollutants can be cost effectively scrubbed out (at around 10% or less than the cost of removing carbon dioxide1) using current commercial technology2. And to expect a method designed for smokestack scrubbing, to transfer to agricultural and ruminant methane emissions is beyond absurd. If we truly have determined and agreed as a society, that there is a reasonable probability that “dangerous global warming” will occur as a result of man-made CO2 (+ methane etc) emissions, then it is time we found a way to reduce these emissions, and/or their atmospheric concentrations, that will actually work and is affordable.

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1. To see how a “cap and trade” system is affordable and therefore effective for sulphur dioxide, but will not be for carbon dioxide, the following example is given:

Assumptions

  • CO2 emissions from coal fired power stations –  1 Tonne per mW hour.
  • (Elemental) carbon in coal 60% by weight, (elemental) sulphur in coal 1% by weight.
  • Carbon price $A100/tonne CO2 (expected minimum price required to fund Carbon Capture & Storage)
  • Take a high-end Sulphur price of $A900/tonne SO2 (US$ 600 per ton – a typical high price)
  • Retail price of electricity = A15c per kW hour = $A150 per mW hour

Using this data, under a carbon trading scheme, electricity would go from $150/mW hour to $250/mW hour (an increase of 67%). Under a sulphur trading scheme (even using a high sulphur price), power would go from $150/mW hour to $161/mW hour (a 7% increase.). In other words, a carbon trading scheme is around 10 times less cost effective (per unit of power generated) than a sulphur trading scheme, and would be at least 20 times less cost effective if the IEA carbon price of $225 is used. For more information on this matter go here.

2. The technology to scrub out SO2 and nitrogen oxides from commercial power generation is cheap, universal and well established. However, the technology of carbon capture and storage in large scale commercial application is as yet untested, with its universal application in power generation expected to be at least 20 years away. See here,  Chart 6.29.

9 thoughts on “Effectiveness and affordability of an ETS

  1. So you’re telling us that cap and trade is an unworkable shoddy arrangement? Of course it is.

    It’s the most appalling thing I’ve seen devised for a while now.

  2. Notwithstanding the lack of logic we are going to get some sort of cap and trade system imposed on us. The EU already has one and the US seems to be heading in that direction. Our bunch of donkeys won’t be willing to argue to the contrary.

    My interest is in what comes next. It’s inevitable there will be depressed economic growth and increased unemployment. There will also be a debate about whether countries like China, India and Brazil should be forced to curtail their growth by adopting a similar system. Carbon-based protectionism is fairly likely, resulting in more depressed economic growth.

    Australia could ultimately do very poorly out of it. The countries that switch to nuclear energy will have a comparative advantage they won’t want to lose, so there’ll be reluctance to give ground on coal.

    Where that will all lead in political terms is anyone’s guess. You would logically expect any government that caused such a mess to lose public support at some stage, but Spain has 17% unemployment and the socialists are still in government. The peasants don’t inevitably start revolting.

  3. An ETS that effectively cut greenhouse concentrations would cost a lot. I don’t think politicians will follow that path. I think it more likely they’ll introduce a half-arsed scheme which is ineffective and only a bit costly. Most of the cost will be hidden inside continued economic growth and will be hard to notice.

  4. John H

    they’re going to slow down the GDP potential which has been accelerating at a faster clip over the last 40 years.

  5. An ETS ramped up over time is likely to depress wages growth rather than cause unemployment. Still not a good thing. Although if it came with tax cuts in other areas the bad stuff could be somewhat neutralised.

  6. Hi Terje,

    I am sorry, but I think you are mistaken. Ramping an ETS over time, in the absence of competitor countries having a similarly ramped up “real”* carbon price, will increase unemployment, particularly in sectors using larger amounts of energy such as manufacturing (and not just big EITE manufacturers either, despite what the government would have us believe.) In the case of such a manufacturing business, if it finds that the cost of the energy/transport inputs required to make a certain product go up due to the imposition of a carbon price, then surely this makes it harder for this product to compete with the same product imported from a country without a carbon price? If this “loss of market” happens to too many of the company’s products, they can try to reduce non-labour costs but eventually will need to reduce production and costs by laying-off workers. Maybe ultimately the business will have to close.

    The same process happens with the cost of labour and other inputs, which is, of course, why we import so much of the manufactured product that we need. But why impose yet another new cost “inequity” that makes it yet harder to compete, unless it can be shown by cost-benefit and risk analysis that this is the best option? (And I haven’t seen too much of that sort of stuff from Stern, Garnaut, the Government or Treasury.) Note also that it won’t significantly matter how fast or slow you ramp the carbon price up, the cost increase will hit you on the “competition” nerve sooner or later. It’s not as though businesses operate with large amounts of unnecessary costs that they can reduce as the energy price rises. Granted, there may be a slight lessening of energy consumption due to efficiency gains, but in general this would be minimal. Many manufacturing processes need energy, heat and transport and the amount that is required is governed by the basic chemistry, thermodynamics and logistics of what they do.

    I have spent 30 years or so managing or as a Director in a variety of manufacturing businesses, and have found that the hardest job is getting costs down. When margins/sales fall to a certain point, and you simply can’t find any more costs to slash, you simply have to lay people off to survive. Australia’s regulated labour situation usually doesn’t allow for wage reductions in the manufacturing sector (and little significant depression), wages are set by awards and the IRC. I don’t see the IRC and the unions accepting no wage rises just because we bring in a carbon price.

    For an interesting report on the impact of carbon trading on Australian Manufacturers, go to http://www.acci.asn.au/text_files/submissions/2009/Securing%20SMEs%20in%20Australia%27s%20CPRS%20(%20FINAL%20Report).pdf

    * By “real” carbon price I mean one that has the amount and price of free permits deducted.

  7. Juel – If an ETS is introduce gradually over time there is scope for real wages to decline, or else to rise more slowly than would have been the case otherwise. In which case there may be no impact on unemployment. However if that scope for wage adjustment is removed, either due to regulatory rigidities or due to a lack of time for adjustment, then I’d agree that the outcome could and probably would be higher unemployment.

    In stating my view that the former is more likely than the later I am making a guess about how both the economics and the politics will pan out. Obviously I don’t think I’m mistaken (otherwise I wouldn’t take the position I do) but I’ll freely admit that the chance that I’m mistaken on this issue is not insignificant. To put it another way, you might be right.

  8. Its going to be a disaster. Its just one thing piled on another. And it could not be better strategically aimed for destroy our economy. You are acting like there is some sort of doubt in this matter Terje. Like it could go either way. We already know its going to be a disaster.

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