Wednesday, 30 November 2011

Professor Stavins in Geneva

Last night I attended a lecture by Professor Stavins of Harvard. He started with some basics on climate change and economics.

The fundamental obstacle to introducing measures to reduce carbon usage in our economies is that climate change is a global commons problems. It does not matter is carbon is emitted by a car in Geneva or lawnmower in Wisconsin. The damage is the same. However, actions to reduce emissions incur costs for a national economy even those the benefits of that action are shared globally – the free rider problem.

Economists like Stavins favour market-based instruments because there are millions of emissions sources (from cars to lawnmowers to power station) with hundreds of millions of decision-makers. Each source has a different short term marginal cost to reduce emissions.

Conventional command and control policies (e.g. emission standards) are not cost effective because they impose a regulation that requires compliance in different marginal costs.

Market-based instruments like a carbon tax or cap and trade controls emissions at the same marginal cost. In the longer term, pricing sends signals for low carbon technology development.

Why is carbon pricing a hot political issue?
Because it makes the costs transparent. Politicians want to make constituents think they have something for nothing. Win-win policies don’t exist. For example a gas tax is transparent. A fuel efficiency standard not, so more acceptable politically.

He said a carbon tax not likely in next few years, but that there is some climate policy in the US, e.g.
• 80 billion commited for renewable and energy efficiency
• Energy efficiency standards for auto and appliance
• US Supreme court decision. EPA endangerment findings and CAA triggered to put in place for CO2
• Air pollution leg

He said that carbon pricing is a necessary but not sufficient incentive for low carbon tech development. Why? Because R and D is eventually a public good, even with strong IP systems. For example, Apple spent millions on developing the smart phone. New entrants to the market (Android) have enjoyed the benefits of that development. Apple did not capture all the benefits of their investments. So positive externality mean that low carbon technology development will be undersupplied without government funding.

He then described the prospects for Durban. These are covered in his blog but essentially because of the pressure to extend Kyoto Protocol, the conference risks failure like Copenhagen. He noted that keeping KP going is v important to DCs. Why? They get benefits (reduced damage) but at no cost.

Interesting point about how carbon regulation can develop outside the UNFCCC process. We are now seeing decentralized approaches like the EU ETS and the Australian carbon tax. These can be linked through equivalence schemes (like with private standards). There is pressure to do that to reduce overall costs, market power and price volatility. Systems are already linked when they are both linked through use of the CDM offsets.

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