{"id":1031,"date":"2013-08-13T17:53:14","date_gmt":"2013-08-13T17:53:14","guid":{"rendered":"http:\/\/kevinanderson.info\/blog\/?p=1031"},"modified":"2013-10-01T23:47:21","modified_gmt":"2013-10-01T23:47:21","slug":"why-carbon-prices-cant-deliver-the-2c-target","status":"publish","type":"post","link":"http:\/\/kevinanderson.info\/blog\/why-carbon-prices-cant-deliver-the-2c-target\/","title":{"rendered":"Why carbon prices can\u2019t deliver the 2\u00b0C target"},"content":{"rendered":"
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After two decades of bluff and lies, the remaining 2\u00b0C budget demands revolutionary change to the political and economic hegemony.<\/strong><\/em><\/p>\n

This article builds on a lengthy Twitter exchange between Glen Peters (@Peters-Glen), Paul Burke (@PaulBurke_econo) and myself (@KevinClimate); with occasional comments from others, particularly Brent Hoare (@brenthoare). The article below was later picked up by The\u00a0Independent\u00a0 and a partial version\u00a0<\/em>published under the title Plan to use\u00a0financial\u00a0markets to halt climate change is ‘doomed’<\/a>.<\/em><\/p>\n

Glen and Paul contend that the radical (non-marginal) rates of mitigation necessary for 2\u00b0C (i.e. around 10% p.a.) are best delivered through market-based instruments (MBIs) \u2013 where a price is placed on each tonne of carbon dioxide emitted. By contrast, I hold that such an approach is doomed to failure and is a dangerous distraction from a comprehensive regulatory and standard based framework (within which price mechanisms may play a niche role).<\/p>\n

Flavour of the Tweets <\/em><\/strong>(29 Jul. to 8 Aug.; slightly abridged. MBI = market based instrument)<\/em><\/p>\n

PB: If we w<\/em>ant more or quicker abatement? Just increase the price or tighten the cap
\n<\/em>KA: Hi emitting consumers are effectively inelastic to carbon prices. Lead with regulations
\n<\/em>PB: In theory MBIs can achieve large changes in a least-cost way
\n<\/em><\/em>KA: What Market theory holds for MBIs delivering radical (non-marginal) rates of chance e.g. ~10%p.a.?\u00a0<\/em>
\n<\/em>PB: Pollution pricing is least-cost way to achieve big cuts. The theory holds fully. See textbooks!
\n<\/em>BH: Standards are useful complementary measure to carbon pricing & MBI’s in achieving abatement?
\n<\/em>KA: MBIs allow wealthy hi emitters to buy out of major reductions as poor suffer high energy prices
\n<\/em>GP: Could adjust for inequalities in many ways, & not obvious this concern applies only to MBIs.
\n<\/em>GP: “We” promote MBIs as evidence suggests they are most effective means of delivering abatement?
\n<\/em>GP: Wouldn’t a broad based carbon price take precedence over a patchwork of regulations & altruism?
\n<\/em>KA: Set standard at level of best technology, tighten ~8%p.a. Avoid picking winners & plan for rebound
\n<\/em>GP: Individual behaviour & end use regulations are not going to change the energy supply systems, etc.
\n<\/em>KA: Set standard at ~350gCO2\/kWh for suppliers electricity portfolio & 100gCO2\/km for new cars.
\nTighten standards at ~10%pa & the supply system will change
\n<\/em>GP: Policy needs to be environmentally effective, economically efficient, and politically feasible
\n<\/em>PB: Can’t get much more certain on emissions outcome than via a cap
\n<\/em>PB: “Tax then relax” seems better option for the moment, both fiscally & for emissions.
\n<\/em>GP: Use an emissions cap and reduce it at 10%\/yr. Take the price you get
\n<\/em>KA: l could take the price but the 5 million UK households in fuel poverty would really suffer.
\n<\/em>GP: Are you saying regulations have no costs to the poor and high costs to the rich?
\n<\/em>GP: A price\/cap would seek the low cost options, leading to lower system costs?
\n<\/em>KA: Most of the world are already low emitters; its us hi emitters that fear any change!
\n<\/em>KA: Yesterdays paradigm will fail. We need courage to make a paradigm shift<\/em><\/h6>\n

NB.<\/strong> The arguments developed in this article relate directly to a global 2\u00b0C characterisation of avoiding dangerous climate change<\/em> and that this equates with a reduction in emissions from Annex 1 nations of around 10% p.a.<\/em> \u2013 starting now and preferably yesterday.[1]<\/a><\/p>\n

I have previously written about my concerns regarding what I consider to be the obstructive and misguided dominance of economics (or more correctly finance) in framing both the climate change issue and the mitigation agenda (see Climate Change in a myopic world<\/a>; A new paradigm for climate change<\/a>; Coaxing the mitigation phoenix from the ashes of the EUETS<\/a>; on a more fundamental level this was the focus of my PhD \u2013 the high-level framing of which is captured in Will Self\u2019s recent piece for the BBC<\/a> and to some extent in a lecture by Steve Keen<\/a> \u2013 also on the BBC). The points I make in this article build on my previous analyses and comments.<\/p>\n

To start, I disagree with two thirds of the headline framing suggested by Glen Peters that \u201cPolicy needs to be environmentally effective, economically efficient, and politically feasible\u201d.<\/em><\/p>\n

Perhaps at the time of the 1992 Earth Summit, or even at the turn of the millennium, 2\u00b0C levels of mitigation could have been achieved through significant evolutionary changes within<\/strong> the political and economic hegemony<\/em>. But climate change is a cumulative issue!<\/p>\n

Now, in 2013, we in high-emitting (post-) industrial nations face a very different prospect. Our ongoing and collective carbon profligacy has squandered any opportunity for the \u2018evolutionary change\u2019 afforded by our earlier (and larger) 2\u00b0C carbon budget. Today, after two decades of bluff and lies, the remaining 2\u00b0C budget demands revolutionary change to<\/strong> the political and economic hegemony<\/em>. And if that\u2019s too challenging to countenance we should be honest and reject 2\u00b0C as either too onerous an endeavour, or acknowledge that we lack the courage to try. However, for this article and our earlier Twitter arguments, 2\u00b0C remains an attainable goal (just); and one to which our leaders, with our advice[2]<\/a>, annually commit.<\/p>\n

The financial dogma : why price can\u2019t deliver 2\u00b0C mitigation
\n<\/strong>Returning to Glen\u2019s framing \u2013 we agree policy needs to be \u201ceffective\u201d<\/em>, but I disagree when he suggests responses to 2\u00b0C need to be \u201cpolitically feasible\u201d<\/em> (within the existing political Zeitgeist). Nor do I agree 2\u00b0C policies must be \u201ceconomically efficient\u201d<\/em> \u2013 at least not within the neoclassical (market) framing of economics and efficiency. Travel back to the Greek framing of economics as oikonomia<\/em> (broadly \u2018stewardship of the household\u2019) <\/em>\u2013 or even perhaps the more recent classical political-economy framing of value \u2013 and 2\u00b0C policies become more economically viable. But stick with the narrow neoclassical (chrematistic<\/em>) framing of economic efficiency, or more properly financial efficiency, and 2\u00b0C is a non-starter.<\/p>\n

Glen, Paul, et al, suggest that a carbon tax, trading scheme or some other form of market based instrument (MBI) would provide the \u201cmost efficient\u201d<\/em> umbrella for delivering 2\u00b0C rates of mitigation; i.e. reductions in emissions of ~10% p.a. \u00a0But, as I understand it, the theoretical foundation underpinning Glen and Paul\u2019s assertion is premised fundamentally on marginal<\/em> change (i.e. small incremental adjustments) \u2013 along with a suite of other market\/neoclassical axioms. Market theory does not address large (non-marginal) rates of change; and certainly 10% p.a. fits into the non-marginal<\/em> category. Paul took exception to this, and when asked specifically about theories demonstrating the efficiency of markets for radical change he pointed me towards standard economic textbooks. However, I could find no such support in the textbooks. Moreover, in lengthy discussions with many economists (of different hues), I have not managed to elicit any appropriate theoretical framing for the \u2018efficiency of markets\u2019 and price mechanisms for delivering non-marginal rates of change.<\/p>\n

The extrapolation of expressly marginal (market) theory to address non-marginal rates of change has been a long-standing concern of mine. \u201cTo draw an analogy, quantum theories are appropriate for understanding Einstein\u2019s photoelectric effect and other small-scale phenomena, but inappropriate for understanding larger Newtonian scale observations. Similarly, it is foolish to rely on marginal market economics as the mainstay for achieving non-marginal reductions in emissions.\u201d<\/em>[3]<\/a><\/p>\n

So, and despite ongoing protestations, I disagree with Paul & Glen\u2019s assertions that \u201ctheory<\/em>\u201d and \u201cevidence<\/em>\u201d lends support to their view that market based instruments (MBIs) are the \u201cmost effective\u201d<\/em> and \u201cleast-cost way\u201d<\/em> of delivering 2\u00b0C rates of mitigation.<\/p>\n

On a more practical note, if their assertions are valid, then it would be very helpful to have some broad understanding of what the level of carbon price would need to be to deliver an almost immediate 10% p.a. reduction in emissions. I have asked several times for clarification on this, but have yet to receive a clear reply; probably the most illuminating was Glen\u2019s suggestion \u201cuse a cap and reduce at 10%\/yr. Take the price you get\u201d.<\/em> This really is the nub of the issue. The price would almost certainly be beyond anything described as marginal (probably many \u20ac100s\/tonne)[4]<\/a> \u2013 hence the great \u201cefficiency\u201d<\/em> and \u201cleast-cost\u201d<\/em> benefits claimed for markets would no longer apply. Moreover the equity implications, even within the UK and similarly wealthy Annex 1 nations, would be devastating; but nonetheless would pale into insignificance compared with the impacts on the many millions of deeply poor, disenfranchised and powerless people around the world.<\/p>\n

A regulatory and standards framing of 2\u00b0C mitigation
\n<\/strong>Building again on the Twitter discussion, Glen enquired as to whether I could \u201c<\/em>estimate the economic costs of a 10%\/yr reduction via regulations?\u201d<\/em> However, in my view, the question belies the problem; it\u2019s almost a category mistake. It risks muddling short term discounted and monetary \u2018prices\u2019 that impact the few (i.e. higher emitting people) with long term and potentially infinite non-monetary savings that have impacts for \u2018the many\u2019 \u2013 including non-humans. Moreover, it holds the marginal value of money as constant for all; supposing that \u00a31 to a university cleaner is the same as \u00a31 to a professor. That said, even within the narrow financial framing of policy I would argue that regulations (within which the price mechanism may play a supporting role) could start to deliver the necessary rates of mitigation at very little, and potentially negative, costs.<\/p>\n

For example, considering the same size of fridge-freezer, there is an ~80% reduction in energy consumption between an A++ and an A rated device[5]<\/a>; i.e. a radical reduction in energy, and hence emissions, with very little price premium. The difference in appliance price typically varies with criteria other than efficiency (does it have a chilled-water dispenser, is it a fashionable retro-design, etc.). Provisional work suggests this broad scale of savings is available across many other appliance categories; most of which have a two to eight year replacement schedule. Similar savings are available for cars; 80g to 100gCO2\/km vehicles (with standard internal combustion engines) are already available at no or very little price premium.[6]<\/a><\/p>\n

Establishing a maximum emission standard for high-energy consuming devices and equipment, set at or around the level of the best commercially available and tightening at 8% to 10% p.a., would radically and rapidly reduce emissions. Moreover, this could be achieved, at least initially, with existing technologies and at little to no additional cost.[7]<\/a> Given the price of energy, such standards may, in the short-term, deliver net system savings (and therefore require policies to address potential rebound<\/em> consumption).<\/p>\n

I\u2019m fully aware that even this level of regulation would face severe political challenges. No doubt everyone from Jeremy Clarkson, Ferrari and BMW through to the plethora of appliance manufacturers, WTO officials etc. would swing into action attempting to weaken the standards. No one said 2\u00b0C would be easy, but, given sufficent political will, suites of appliance standards (expressly not<\/em> dictating the type of technology) could deliver almost immediate and large reductions at very little cost.<\/p>\n

A carbon price can always be paid by the wealthy
\n<\/strong>Professors, MPs, ministers, business leaders, GPs, barristers, etc. would all be able to absorb a significant proportion of any politically-acceptable carbon price. So we may buy a slightly more efficient 4WD\/SUV, cut back a little on our frequent flying, consider having a smaller second home where we may even choose an A+ retro Smeg fridge-freezer (the A++ being a little too \u2018modern\u2019 looking) \u2013 but overall we\u2019d carry on with our business as usual. Meanwhile the poorer sections of our society (remembering that the mode salary in the UK is around \u00a317k p.a.) would have to cut back still further in heating their inadequately insulated and badly designed rented properties. Their children would perhaps begin to suffer more bronchial problems as their houses become colder and damper; so more trips to the doctor \u2013 but the increased price of road fuel makes this more expensive. Perhaps they could cut back on the quality of their food \u2013 after all it\u2019s three for the price of two on processed ready meals at the cheapermarket.<\/p>\n

No doubt some rebate could be possible \u2013 but as carbon prices extend towards the level necessary for 2\u00b0C (i.e. 10% p.a.), so the rebates become prohibitive and the vociferous professors and other well educated elites (with support from the Daily Mail) begin to begrudge the increased taxation to cover the rebates.<\/p>\n

For 2\u00b0C it is difficult to see how price could even begin to deliver the deep and immediate reduction in emissions (i.e. energy consumption in the short-term) necessary from us professors and others in the top 1% to 25% of the income distribution.<\/p>\n

So where does this leave 2\u00b0C mitigation?
\n<\/strong>Though not yet fully fleshed out, some of us in the Tyndall Centre are beginning to shape a sweeping programme of 2\u00b0C emission reductions (a Radical Plan for 2\u00b0C<\/em>). It is true to say such a coordinated and radical framework is not popular with many colleagues, and some major research funders consider it \u201ctoo ambitious\u201d <\/em>and not in keeping with the \u201cGovernment\u2019s 80% by 2050\u201d<\/em> target. Despite, such academic and funder opposition to an agenda of \u2018radical reductions\u2019, others of us consider it worth a punt (See forthcoming Tyndall Centre Conference on \u201cradical emission reductions\u201d at the Royal Society<\/a> \u2013 Dec. 2013)<\/p>\n

In essence a 2\u00b0C energy agenda requires rapid and deep reductions in energy demand<\/em>, beginning immediately and continuing for at least two decades. This lengthens the window of opportunity in which to transition to a low carbon energy supply<\/em> system (almost zero-carbon for 2\u00b0C). Nevertheless, and counter to most low-carbon scenarios, if poorer nations are to be \u2018given\u2019 a longer period for decarbonisation, a genuinely 2\u00b0C energy supply system for the majority of Annex 1 nations would need to be virtually zero-carbon by around 2030; in effect a Marshall plan for energy supply.<\/p>\n

Such immediate cuts in energy demand will require around two decades of revolutionary reductions in energy consumption from high-energy users, and a substantial, but evolutionary, reduction from those with more moderate consumption habits.<\/p>\n

My headline (and very provisional) framing for the UK, or similar Annex 1 nation, would include a suite of regulatory measures, buttressed where necessary with price mechanisms. In addition it would be important to understand the role of behaviours and practices both in helping frame effective legislation, but also in fostering a deeper civic and institutional engagement with the low-carbon agenda. At the risk of being either shot down for absence of detail or deliberately quoted out of context, a provisional and partial list of low-carbon regulations offers a flavour of what such an iterative decarbonisation agenda may include:<\/p>\n