Carbon tax?

If carbon market is not doing its job, what about carbon taxes?

Rachel Notley on carbon taxes 

Despite the concerns of its impact on economic growth, carbon tax has recently regarded as one of the emerging climate change mitigation tool.

When the carbon market has been manipulated by different stakeholders for personal interest and has failed to tackle the problem, carbon tax seems to be a more efficient tool.  Carbon tax, unlike carbon market, can have a direct impact on individuals.  Carbon tax will increase individuals' private cost so to match with the social cost of individuals' carbon emission.  For example, the cost of a person choose to drive to work rather than walk or using public transport will increase to reflect the real cost of his/her action.

The podcast is the premier of Alberta, Rachel Notley, explaining the Canadian province carbon tax scheme.  The tax of emission will be C$20 a tonne and will rise to C$30 a tonne in line with inflation.  The objective of imposing carbon tax is to 'provide incentive for people to change into a low-emission lifestyle', according to Notley.  She also mentioned in the long term, carbon tax will bring economic growth from the increase in green jobs.  While the statement is rather controversial as will discuss in later parts, there is an increasing numbers of countries and subnational governments imposing carbon tax.

Bloomberg

Indeed, carbon tax may not necessarily harm the economy and lower competitiveness.  All four countries from the graph has recorded an increase in GDP due to carbon tax.  One possible explanation could be a reduction in other form of tax which stimulates the economy.  For example in Canadian's province of British Columbia, thanks to the carbon tax revenue, BC has the lowest Canada's income tax and its GDP has kept pace with Canada's over the period.  Fuel consumption on the other hand, has reduced by 17.4% per capita. (Skeptical Science)

The scheme may success in some regions/countries, however there are quite a lot of uncertainties in economic aspect:

1. The cost of production of goods and services, especially in the electricity and transportation sector, which has large amount of CO2 emission, will increase and the cost will transfer to consumers.
2. The increase in price of goods will decrease the real wage of households.  Moreover, income inequality will increase because low-income household will suffer more with the increase of tax.  This is because low income-household has larger proportion of income spending on carbon-emission goods.  According to the US Congressional Budget Office, price hike for a 15% cut in emission will cost 3.5% of the low-income household after-tax income, compare to 2.7% and 1.9% for middle and high-income households. (Institute for Energy Research)
3. The difficulty in getting the correct tax level.  It is a basic economic problem.  Due to imperfect information, it is difficult to impose a economically-efficient tax.  The problem is more complicated if the tax is not regional but in a wider range.  This would require more information to figure out the equilibrium and there would be a risk of market failure, by over- or underestimating the tax level.

Both carbon tax and cap-and-trade is to price carbon and to raise the cost in consuming carbon to reduce carbon emission.  However, they are fundamentally different.  Cap-and-trade gives a certainty of the quantity of carbon emission as the total emission is capped, but the cost is uncertain.  This lead to the current problem of low price in the carbon market.  Carbon tax, on the other hand, provides certainty of the cost of carbon emission but with low control on total carbon emission.  Policies have pros and cons and will conflict interest of different parties.  Whether to use carbon tax or cap-and-trade or a hybrid of both may depend on one's economic structure and geographical location.  One thing for sure, carbon emission has to be reduced and we have to act now.

Source:
Government of Alberta
CBO
the Guardian

Why are carbon markets failing?

European Union Emission Trading System (EU ETS) is the most important and largest carbon market.  Its principle was from the 1997 Kyoto Protocol.  After 18 years, has the concept worked and played a significant role in combating carbon emission?

How the EU ETS works?  The regulator of the system sets a cap on the total emission EU sectors are allowed to emit and permits are distributed to polluters.  These permits are allowed to be traded between market participants.  Market participants here do not only refer to polluters (consumers) but also include suppliers, intermediaries, end users and regulator.  The EU ETS is an interactions between these participants and connects buyers of carbon credit with buyers.

The idea of carbon market is to reduce the demand by increasing the price of carbon emission and creates incentive in low-carbon technologies, why has it failed?

1.  Too much of carbon permits

Basic economic concept:  too much supply without sufficient demand, price falls.  During the first period of the trading system, too many permits were allocated by the regulator because countries had inaccurate emission data.  Whether this is resulted from countries protecting their industrial sector is not know, but asymmetric information in the market had created.  This form of market failure results from economic agents in the market do not have perfect information of the market and drives the price too high or too low.  The overcapacity is roughly around 2 billion tonnes which is around a year's emissions.  As a result, price fell by 75% from €20/tonne to €5/tonne in 2 years.  (carbon price is roughly €8.5 at the moment).  The intention to raise private cost of polluters to meet the social cost to eliminate the negative externalities is therefore not significant.

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economist

2.  Intention of participant

"If global warming is inevitable, why don't we invest in businesses that will profit as the planet gets hotter".  The problem of failing to correct the market failure as mentioned is that firms simply switch to (or maintain) high carbon emission production.  As Bloomberg reported , big energy companies are putting their efforts in increased extraction of fossil fuels rather than renewable energy as will yield more profit. (theguardian)

The inefficiency of the market is also examined by Crossland, J (2013).  Crossland mentioned in the paper that the main participant can earn profit simply using the historical price information.  If a market is not efficient it will open door for investor in the market to earn abnormal profit.  The trading system has violated the principle of efficient market because price is predictable.  A market is efficient if price don't exhibit predictability.  Carbon price followed a certain patterns within a year because it is heavily influenced by weather factors.

The focus of reducing carbon emission seem to be shifted away.

3. A single price

Certain sectors (power sector with 64% of permits) and countries have more influenced in the market.  This will create some kind of monopoly power within these agents in the market.  Because carbon price is homogenized, agents with significant market power may result in misuse of market power such as price formation.  One solution is to include the factors of carbon intensity or output based goals into the settings of carbon price.  Those sector with higher market share tend to produce largest amount of carbon emission.  The potential price differential for these sectors will force them to reduce more emission (rather than buying cheap permits from the market) and will also stop them from abusing market power.(Carbonpulse)

Energy mix without nuclear?

The combined earthquake/tsunami which triggered the dramatic events at Fukushima Daiichi nuclear complex on March 11, 2011 has raised the concern on safety issues of nuclear power plant.  Nuclear power will not result in direct CO2 emission and is therefore, according to Nuclear Energy Agency "Red Book", worldwide nuclear power capacity is expected to increase up to 110% by 2035.  

What would happen if nuclear power policies is more restrictive thus this alternative option of fossil fuel emission is less available for climate change mitigation policies?  What are the cost to the global economy?  How do we fill the energy gap under carbon budget?  

Bauer. N et al. (2012) is my main reference in this post.  In the 22nd round of the Stanford Energy Modelling Forum, nuclear power generation is expected to increase 34%-180% by 2035.  However with the safety concern of nuclear power plant, the future of nuclear power is uncertain.  

Fig.1 

Bauer compares the economic impact and energy mix differences under two scenarios.  The baseline scenarios is nuclear renaissance without the imposition of carbon budget and to compare it with when carbon budget is imposed.  In the reference case (w/o carbon budget with old power plants refurbishment), global nuclear power generation remains the same until 2050, however the majority will be shifted towards OECD and Asian countries.  If under carbon budget and nuclear power production phase-out scenario, the decrease in use of fossil fuels would be, compare to 2020: coal by 40% and gas by 18%.  The net shortfall is compensated by low carbon technology (including nuclear power) and renewable energy 

The impact of nuclear renaissance is very small in short term until 2035 when nuclear starts to play a more significant role in the energy mix.  Renewable energy such as wind deployment is unlikely to fill the energy gap as the increase in production of these sources significantly increase the already high cost.

How costly is nuclear renaissance?  Bauer claimed that the larger the strength of climate polices the more costly the nuclear phase-out would be.  This is due to the fact that the energy gap can not be filled by cheaper alternatives i.e. fossil fuels.  Without carbon budget, the cost phase-out scenario (old power plant refurbish) is as low as 0.0006% of global real GDP differences (base: 2010).  However full exit with carbon budget could be as much as 0.75%.

Therefore, the impact of restrictive nuclear power policies is actually not significant, as nuclear power is only moderately important in carbon emission policies.  The impact will kick in in the medium term but combination of alternative energy sources could well compensate the gap.

However some people hold a different view, claiming that nuclear power is essential in the energy mix, at least for their countries, or perhaps for their interest.  

#Eskom CEO Brian Molefe

"There is an urgent to build more nuclear plants in South Arica" 

"We don't think it is possible to have an energy mix without nuclear" 

#James Hansen, former NASA scientist and professor at Columbia University.

"We do not have a prayer of winning this fight without it (nuclear)” 

Even 8fact is supporting Stern.

Source: twitter

What can we learn from economic models even if they are constantly proved wrong?

Economic models usually fail to predict the future accurately as it should.  What are the examples and why do they fail?  What are the usefulness of economic models despite they are constantly proved wrong?

You can find hundreds of models that have failed to forecast the future correctly.  One of the biggest failure of all time is the recession in 2008.  The diagram below from Bloomberg shows how badly economic models are in predicting future.  Even at Q3 of 2008 when global economies started to decline, all models failed to recognise the upcoming big recession.

What are economics models?  Economic models are just like other science models, they try to simulate the reality using assumptions and constraints to simplify the complexity of reality.  They are 'designed to yield hypothesis about economic behaviour that can be tested' (IMF).  Mathematics equations are often include in economic models about how economic agents behave or how economic works.  Economic models under climate change mitigation are empirical models.  They verify the prediction of theoretical models and convert these prediction to precise outcomes.

Stern Review mentioned some existing economic models .  For example, the 'Tol' model (Tol, 2002) estimates the impacts for different market and non-market sectors e.g. agriculture and ecosystems.  It predicts global impacts become negative beyond 1'C beyond increase in global mean temperature and are up to 0.5-2% of global GDP.  However Stern criticised that these 'old' models did not capture the full cost of climate change, including parameters such as extreme weather events and political factors.  

The model Stern uses, PAGE2002 IAM (Hope, 2003), 'take account of risks of very damaging impacts as well as uncertain changes over very long period' (Stern, 2006), to calculate the overall welfare cost of climate change  (Although the studies are somewhat outdated, they are cited as authoritative).  The estimates differences in cost are approximately a quarter higher than those old models.

No models are perfect.  This is simply because the reality is too complex to be simplified and predicted perfectly.  Unavoidably there are critics questioning the accuracy of the IAM models.  Rosen (2014) says we should 'stop trying to asses the long-run economics of mitigating climate change since that is unknowable'.  This is due to the fact that the way that firms minimise cost, the well-being of people and the advance of technology changes over short to medium term and therefore no point in predicting the economy in 100 years time.  On the other hand, Ackerman et al. (2008) suggested that Stern underestimated, even that is what Stern emphasised, the potential costs of climate change damage.

Why do we still care about the predictions?  Even if these models are proven wrong, we could still take some positive away from them.  At least we know we have to act now, despite not knowing the scale of the impact, to combat climate change.  Or else the cost of it will exaggerate.  Moreover, as Rosen says, instead of trying to predict the future, it is better to 'focus on the details of how to mitigate climate change'.

Stern Report I: The overview

The Stern Review on the Economics of Climate Change (2006) is a report  by economist Nicholas Stern.  In the upcoming few blogs I will be giving a breif overview of the report, followed by discussion of some economic models and to compare different critiques from artices and papers to this controversial report.

Stern regarded climate change as the greatest market failure ever seen.  As we know, negative externalities is the form of market failure.  As seen from the diagram on the left, the later actions of GHG emssion reduction happens, the higher the social costs thus marginal abatement costs.

Therefore, Stern called for immediate action to stablize GHG emission as he said 'the benefit of strong, early acton on climate change outweighs the costs' (Stern Review, p.xv).  The economic impact Stern suggested is that, unabated climate change could cost at least 5% of GDP each year.

Climate change mitigation can mean using new technologies which are low-carbon or more eneergy efficient, or changing consumer behaviour.  Developing new, low-carbon technologies according to Stern, could have great net benefit.
- By 2050, it is estimated that the markets for low-carbon technologies could worth at least $500bn.
- Shifting the towrld to a low-carbon path can benefit the economy by $2.5 trillion a year.
- Net cost could be limited to around 1% (+- 3%) of global GDP by 2050.  However this is based on the assumption that the target of greenhosegas atmospheric concentration stablizes at 550ppm of CO2e (current level 430ppm; pre-Industrial Revolution 280ppm).
- The damage of CO2 we emit causes $85 worth damage each tonne;  it only costs $25/tonne to cut down emission.

But how do we reduce carbon emission?  Stern focused on three main elements of policy:  carbon pricing, technology policy and energy efficiency.
- Carbon pricing will reveal the full social cost to people of their action thus increase the cost of generating CO2
- Support from global to technology research and development should be increased at least twofolds, such as draught-resistant crops and overseas delvelopment supports (from rich to poor countries).

The next blog will talk more about the economic models in the report.

Does plastic bag degrade in marine environment

You must have seen this prank on the internet when the 5p plastic bag charge kicked in.  In fact, according to The Guardian, over 60% of the respondent of their survey claimed that they are strongly or slightly agree with the policy.  Why would the government implement such regulation and what are the environmental impact on the plastic carrier bags?

Production of plastics has increased from 0.5m tonnes in 1950 to 260m tonnes in 2007 (Plastic Europe, 2008).  Amongst the total quantity of plastic produced, about 37% of it are made as disposable item for packaging.  While only 14% of the plastic bag are being recycled (EPA office of Solid Waste, 2013), most of the plastic bag accumulates in landfill and wildlife habitat.  The problem is significant in marine environment.  About 60-80% of marine litter is plastic (Derraik,
2002) and for example, it's estimated that more than 300,000 plastic particles km-2 circulated in the North Pacific Gyre (Moore et al, 2001).

Does plastic bag degrade in sea?  As we all know, plastic shows great resistance to aging and minimal biodegradation.  When plastic are exposed to UVB radiation in sunlight, together with the oxidative and hydrolytic properties of seawater, polymers will oxidate.  The only problem is that it takes a further 100 years more for the mineralisation of polyethylene to complete, by then, the plastic would become bio-available.

Standard method indicating degradation are to test the reduction in tensile strength and loss of surface area.  O'Brine (T. O'brine, 2010) has performed a test on the degradation rate of different form of carrier bags, including bio-degrable bag (made by corn-starch, vegetable oils and compostable polyesters) and standard polyethylene bag.  Unsurprisingly, from figure 2, there were only 2% surface loss of the standard polyethylene after 40 weeks.  While for compostable polyester, no samples are remained at 24 weeks.  On the other hand, tensile strength of all plastic type decreased over time but at a different rate (Figure 1).

Figure 1

Figure 2

O'Brine provides some explanation of why some plastic simply won't degrade over time.  One of the reason is when plastic is immersed in the seawater, the UV light it received reduce by 90%.  This is significant as UV light can initiate the oxidative process which leads to deterioration of plastics.  The reduction in temperature in the marine environment would also reduce degradation rate.  According to Ho et al. (1999), degradation rate of plastics is positively correlated to temperature and relative humidity.

However, degradable plastic bag are nothing magical.  Different formulation of degradable material have different reactions.  Some may merely disintegrate plastic into small pieces that would enter the food chain more easily.  When degradable plastics are broken into small particles, they are no more degradable than conventional plastics.

For sure that the 5p carriers bag charge would alleviate the problem.  Wales and Northern Ireland has recorded 78% and 81% reduction in carriers bag usage after the implementation of the policy.  So why not bringing your own bag for your next shopping in the supermarkets.

Football's carbon footprint

While carbon dioxide is the primary greenhouse gas emitted through human activities, have you ever thought of the carbon footprint that the whole football industry is generating?

According to carbontust's article in 2013, The total carbon footprint generated in a single Community Shield match is 5,160 tonnes.  How much is 5,000 tonnes carbon footprint.  An average U.S. household carbon footprint is about 50 tons per year, that would be the emission of 100 households in one year emitted in one game.

Carbon footprint for a match at Old Trafford in 2013

And it is only for one game per stadium.  Bear in mind that there are thousands of football matches happening each week (at a lower amount of carbon footprint for sure).  Watching the game on TV would surely help us to protect our Earth, to a certain extent.   Thanks to advances in technology, fans can enjoy football games on their tablet and smartphones.  Emission for this can be eight times lower than watching on TV however, mobile data transmission is very energy intensive.  Watching the whole game have the same emission as driving ten miles.

World cup for sure is the biggest event in football, and it also generates the most carbon footprint, mainly due to the long-haul flights from around the world.  Efforts in reducing carbon emission in transportation had been put such as introducing eco-taxi, eco-ferry and creation of bike and pedestrian path.  However, the 2010 World Cup in South Africa is thought to have generated 2.75m tonnes of carbon footprint, which is double of Beijing Olympics and nine times greater than 2006 World Cup in Germany.  Sources other than transportation are mainly energy consumption in supporting facilities. (Environment Leader)

Some countries are involved in the idea of 'football offsetting' for the carbon emission generated from the flights of fans going for the World Cup, including nations such as Uruguay, Korea and Serbia, which would cost only about £25 per flight.

Therefore, think twice before you buy the ticket and go for an away match.

Agriculture: A driver of critical transition?

Is agriculture one of the drivers pushing the Earth towards the tipping point and forcing a global-scale state shift?

Formerly, all people on Earth were hunter-gatherers. Over the last 10,000 years, human started to realise the favourable factors of food production and the balance tipped away from hunting-gathering to food production. Around 8500 B.C. people in the Fertile Crescent started to produce food by themselves and population boom and spread of food production slowly begins (Diamond. J, 1998)

Breasted's 1916 map of the Fertile Crescent (Wikipedia)

Food production exemplifies the autocatalyrics process of population boom. Nowadays, 40% of the terrestrial ecosystem have been transformed into agricultural land. (Barnosky. A et. al, 2012). Theoretically, the physical transformation threshold of land of the last critical transition(~30% glacial ice to ice-free), from Earth land to agricultural, has been exceeded. According to Treehugger, 20% of the U.S. CO2 emission comes from the food system. On a global scale, agricultural land contributes 12% of the world's green house gas emission (IPCC).

Apart from green house gas emission, deforestation for agriculture contributes to the warming of land surface and directly leads to loss of biodiversity.  Over 4000 plants and animal species are threatened by agricultural intensification; more than 1000 threatened bird species are affected during food production process (GRIDA).

Ceasing food production is surely not a solution to the problem.  To strike the balance between food production and its negative impact on the ecosystem is essential in combating climate change.  Ecosystem is the life support system of the Earth.  If human continues to exploit lands and natural resources unsustainably, the consequences of decrease in overall net primarily productivity and biodiversity may contributes to the possible 6th mass extinction.