The ETS is stupid, part n + 1

I don’t think I’ve insulted the ETS recently but the Tata Steel brouhaha provides yet another excuse.

Emil Dimantchev, also a climate policy analyst with Thomson Reuters, said membership of the EU emissions trading scheme (ETS) had delivered Tata Steel’s European operations a £780m windfall through the over-allocation of carbon credits between 2008 and 2014. In estimates that Dimantchev considers conservative, the Port Talbot works alone received more than £239m over that period.

Source: Graun. And that’s the ETS for you: a scheme so badly designed that something that should have helped reduce emissions instead delivers profits to people who emit. There’s more, in a similar vein, though not directly related:

The UK operates a carbon floor price, which it recently doubled and has now frozen until 2020, which does affect the competitiveness of UK industry with its continental competitors. But research from the UK government Committee on Climate Change (CCC) found that this was compensated to a large degree and thus was a small factor in the struggles of the steel industry.

So, again, madness: we have a carbon price floor, which in itself is stupid, but then we help people evade it.

These trading schemes are so riddled with political abuse that they are worthless. Carbon Tax Now.

21 thoughts on “The ETS is stupid, part n + 1”

  1. A political system that creates a bad trading system will also create a bad tax system. Either way, lobbyists will try to win exemptions and deductions and so on. You can imagine a simple tax. I can also imagine a simple trading system.

    [I disagree. The trading system is corrupt from the outset, because the permits need to be allocated, and there is no non-corrupt way to do that. Unless you’re proposing no allocation of permits? That would be sensible, of course, which will explain why we didn’t do it -W]


  2. Washington State will very likely get a vote for a carbon tax with offsetting cuts to other taxes.

    Only problem is that the offsetting cuts to other taxes seems to be much larger in budget impact than the money raised by the carbon tax. In other words, this is a bad change to the tax system. Assuming, of course, you want to fund schools, which are underfunded by this state already.

    [Sounds like a good change to me. Perhaps they might choose to fund the schools as a higher priority? -W]


  3. Maybe I didn’t explain it well. Initiative 732 was supposed to be revenue neutral. Turns out, it isn’t.

    Adding carbon taxes and cutting other taxes removes about $914 million over the next four years from Washington State budget.

    Cutting state budget means cutting school funding, and probably other things.

    Exactly does this sound like a good change?

    [I agree that if you’re selling this as a revenue-neutral change, then slipping in changes under it will make people not trust you, and this is a bad thing. Whether you’re increasing or decreasing the total take, you shouldn’t, if you’re aiming to be neutral -W]


  4. I think that Krugman and other usually smart guys advocated for exchange trading for economic reasons that underestimated the corruption potential and also because it would better hide the implicit tax from the outraged consumer. Real carbon taxes are harder to corrupt precisely because they are open.

    Tax Global Warming Now!


  5. And getting a carbon tax high enough to change behaviour will create winners and losers. Unless you somehow fiddle things so it is not only revenue neutral but distribution neutral. Good luck with that.

    Much simpler to have the government construct the 100 odd nuclear plants we need to actually fix the problem, together with the other infrastructure. But of course that would be dread heresy..


  6. Andrew Dodds: “And getting a carbon tax high enough to change behaviour will create winners and losers. ”

    Any carbon tax will at least create losers, if not winners. Under tax-and-dividend ala Hansen, those who use the most fossil fuel are the biggest losers (except for fossil fuel producers), and those who use the least are the biggest winners. Losers can become winners by reducing their fossil fuel consumption to below the average, which will itself (we hope) decline over time.

    Of course, the biggest losers with any carbon tax high enough to change behavior will be FF producers. That’s perfectly OK with me, but one assumes them to be the strongest opponents of any effective carbon tax proposal.


  7. Mal Adapted,

    “Of course, the biggest losers with any carbon tax high enough to change behavior will be FF producers.”

    This is something I don’t understand. Should not one reason to employ a carbon tax be to use the revenues for R&D and/or subsidy of existing alternatives? Demand for oil and petrol being relatively inelastic, it seems that an entirely revenue neutral carbon tax scheme with the aim of changing individual consumption would be less effective than a subsidy/rebate scheme which brings alternatives closer to parity. I’m not saying it should be either/or … some mix sounds right to me.

    [Apologies for this taking ages to appear. I was travelling -W]


  8. Under a carbon pricing system, coal producers are the biggest loser; natural gas and petroleum producers much less so. If there’s a true cap on total emissions, natural gas and petroleum want carbon pricing so that coal gets priced out and oil&gas can sell more of their stocks.

    [Well, only in that they end up selling less because their customers have to pay more to burn it. They don’t lose directly -W]

    “These trading schemes” sounds like you want to insult more than just the european ETS (which seems to suffer from a lot of holes, including that it was way cheaper to reduce emissions than expected, so now there’s an oversupply of credits). The sulfates trading scheme worked very well though.

    A carbon tax has the problem that, as it’s usually laid out, the price is linear with emissions — but actually the price grows to infinity.


  9. 1. a price floor isn’t stupid, it’s an acknowledgment that if the cost of adjusting total carbon emissions turns out to be sufficiently low, then we should increase the effort and knock emissions even lower, because it doesn’t cost society that much to get an additional reduction.

    [I disagree. It is stupid. The point about the permits is that you decide in advance how much you can get away with emitting, and limit it to that level by permits. If the cost of doing this turns out to be low, then that’s great. There’s absolutely no reason to adjust the permit level or set a floor. That’s just unthinking -w]

    Part of this argument is acknowledging there’s no Platonic ideal price of carbon – the prices are best guesses.

    The other name for a cap-and-trade system with a very narrow width between a price floor and a price ceiling is a carbon tax.

    [Does that mean anything? There is no ceiling -W]

    2. The more free allocations you give in a cap-and-trade system, the more possibility for some emitters to make a profit from it. However, that can also help get the political system to accept a price on carbon. Having at most some but not all free allocations, and ratcheting that down over time to zero, is a reasonable way to do it.

    California’s cap-and-trade does that, but it had the advantage of learning from the ETS mistakes. The problem isn’t inherent in cap-and-trade.


  10. Forgot to comment on Washington state’s upcoming carbon tax vote: I don’t think it was a deliberate attempt to reduce taxes by a sneakily inadequate carbon tax, it was just a mistake. The lesson may be that if you’re trying to create a revenue-neutral carbon tax, don’t try to be perfect at the start but include a corrective mechanism in case you got it wrong.

    Regardless, that measure is opposed by both major parties IIRC, many enviros have walked away from it, and has little likelihood of succeeding. Too bad, maybe they’ll try again.


  11. Brian Schmidt:

    Part of this argument is acknowledging there’s no Platonic ideal price of carbon – the prices are best guesses.

    A full accounting of the external costs of fossil fuel use may be impossible, but all that’s needed for an effective carbon tax is a minimum estimate that’s enough (along with eliminating tax breaks and direct subsidies for FFs amounting to $37.5 billion annually in the US) to make carbon-neutral energy price-competive. The US EPA used $37 US (2007) dollars/metric ton of CO2 for its rulemakings since 2010. That works out to an average annual cost of $222 per American.

    I found Understanding the Social Cost of Carbon – and Connecting It to Our Lives, on Yale Climate Connections, to be a good summary of a complicated subject. Pull quote:

    “[Former Chief Economist of President Obama’s Council of Economic Advisors, Michael] Greenstone, now director of the Energy Policy Institute at the University of Chicago, hastens to add, “It’s not just wonky cost-benefit. It’s what our grandchildren would want us to do.”

    So, would adding $222/yr to the price of fossil fuels motivate Americans to start switching consumption to, and ramping up R&D and production of, carbon-neutral energy? It would be a (non Platonic, non-wonky) starting point, even without eliminating FF subsidies.


  12. > economic reasons that underestimated
    > the corruption potential

    Wait, which school of economics _does_ include an estimate of the corruption potential as a factor in its economic model?
    Do they assume some “rational” actors are engaged in corruption?


  13. tangentially:

    I am told that this is known in the climate business as “double counting.”

    excerpt follows:

    Today about 70% of new solar systems are owned by third parties that typically resell the associated RECs to a company with a well-publicized goal of being “carbon neutral” or to a power company that wants to claim it’s delivering a high percentage of green energy. (Homeowners are notified of this in the fine print of their contracts, which they probably never read.)

    One might see this as a creative way to make both the solar homeowner and the REC buyers feel good about saving the planet. But the Federal Trade Commission is a real killjoy when it comes to such double counting of virtue.

    The FTC recently issued legal guidance that says if a solar company sells certificates, it is deceptive to tell homeowners they are getting “clean,” “renewable,” or maybe even “solar” electricity with their lease or power purchase agreement. The FTC guidance uses this illustration:

    A toy manufacturer places solar panels on the roof of its plant to generate power, and advertises that its plant is ‘‘100% solar-powered.’’ The manufacturer, however, sells renewable energy certificates based on the renewable attributes of all the power it generates. Even if the manufacturer uses the electricity generated by the solar panels, it has, by selling renewable energy certificates, transferred the right to characterize that electricity as renewable. The manufacturer’s claim is therefore deceptive.

    To be clear, there is nothing necessarily wrong with installing solar panels in one location and letting someone in another location claim credit, as long as everyone understands that is what’s happening. But many individuals who signed up for a rooftop solar system might be unhappy to learn that they were enabling some fossil-powered company to claim it has gone green.

    The lesson here is that if you choose to go solar, find out what will happen to the RECs. If they are sold to someone else, you still get to use the electricity, but you have to give back the halo.


  14. Wikipedia explains:

    “Renewable Energy Certificates provide a mechanism for the purchase of renewable energy that is added to and pulled from the electrical grid.

    These certificates can be sold and traded or bartered, and the owner of the REC can claim to have purchased renewable energy. According to the U.S. Department of Energy’s Green Power Network,[2] RECs represent the environmental attributes of the power produced from renewable energy projects and are sold separately from commodity electricity. While traditional carbon emissions trading programs use penalties and incentives to achieve established emissions targets, RECs simply incentivize carbon-neutral renewable energy by providing a production subsidy to electricity generated from renewable sources.”


  15. Ah, this may be the economist I was looking for:

    “… a Berlin-born economist called Albert Hirschman, a giant in modern economic thinking. Hirschman died in 2012 at the age of 97, but it’s his concepts that really set in context what’s so disturbing about the Panama Papers.

    Hirschman argued that citizens could protest against a system in one of two ways: voice or exit. Fed up with your local school? Then you can exercise your voice and take it up with the headteacher. Alternatively, you can exit and take your child to a private school.

    In Britain and in America, the super-rich have broken Hirschman’s law – they are at one and the same time exercising economic exit and political voice. They can have their tax-free cake and eat it….”

    [Is there some reason why people are only allowed to protest in one way? -W]


  16. political abuse … Carbon Tax Now.

    Trouble is, a carbon tax just opens up a whole new level of political abuse in the form of scare campaigns aimed at the hip pocket nerve by ruthless climate-science-denying political parties.

    It’s all very well to say “carbon tax now” but in a world bulked up with people who care about their own interests before anything else, a carbon tax doesn’t stand a chance.

    [Original with links approved, so I’ve rm’d the dupe. As to the substance, I disagree; you should honestly argue for the thing you want, not try to sneak it in as an ETS and then wonder why it doesn’t work -W]


  17. > they are at one and the same time exercising
    > economic exit and political voice. They can
    > have their tax-free cake and eat it….”
    > [Is there some reason why people are only
    > allowed to protest in one way? -W]

    Why, no, of course not. They can control the politics _and_ the economy, as they are doing now.
    Unless the outcome suggests any reason to tolerate it.


  18. [… The trading system is corrupt from the outset, because the permits need to be allocated, and there is no non-corrupt way to do that… -W]

    You could disintermediate the crooks by offering the World Cup venue to the contender with the year’s lowest emissions.


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