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Thursday, May 01, 2008

The Price is Still Wrong

James Wimberley is concerned that the price of European CO2 tradable carbon credits is too low.

cap-and-trade is only a framework: the substance will be how it is implemented. Specifically, how tight the the initial allowances are calculated and how steep the reduction path. The EU's pioneering emissions trading scheme, created by people who are serious on climate change, has underperformed in green eyes. Industry lobbies secured generous initial allowances, and later emitting firms learnt how to exploit the Kyoto loophole - put in at the insistence of US negotiators! - that caps could be raised by buying reductions in developing countries.

As you would expect, the mechanism has its share of boondoggles - you could get very cheap carbon credits for a while by paying a Chinese refrigerator factory to install a simple scrubber for fluorocarbons. There are benefits overall, but the declining price of tradeable carbon credits indicates weak pressures on European emitters (chart here page 12). It's not a bad result to have British polluters finance wind farms in India (footnote), but that wasn't the intention.

I think that one of the prices is still absurdly high. It is almost as high as it was when I wrote "The Price is Wrong" then it was 21.70 Euro per ton of C02. Now it is about 17.50 (eyballing figure 1 on page 12 of this report to which Wimberley linked (same pdf as link above)).

Now the figure shows two prices. This price which I discuss is the right to emit dated December 2008. The spot price for emissions right now, is roughly zero. However, that price doesn't matter much as it is too late to do much about emissions right now. I think that the price which counts is the one relevant for projects starting now as the interest rate which matters for investment is the medium term interest rate.

My objection to the cap and trade is roughly the opposite of Wimberley's. There seems to me to be too little flexibility to achieve emissions reductions in a cost effective manner not too much.

It is odd that Wimberley writes that "It's not a bad result to have British polluters finance wind farms in India (footnote), but that wasn't the intention." What was the intention ? To fight global warming or to fight immoral consumption in Europe ? What case can there be against the US demanded Kyoto "loophole". Why is it a boondoggle for a European firm to obtain very cheap credits by "paying a Chinese refrigerator factory to install a simple scrubber for fluorocarbons." The infrared light doesn't care whether it is reflected by European CO2 or Chinese fluorocarbons, why should we ?

Wimberley's line is "no pain no gain" but, he presents no argument as to why this is so. He objects to "a Chinese refrigerator factory to install a simple scrubber for fluorocarbons." but he gives no hint of a shred of a possible rational for his objection. Does he think the Chinese refrigerator manufacturers would have installed the scrubber anyway ? If so what is he smoking ? Or does he not care that global warming was reduced at minimal cost to European firms and consumers, because he thinks that costs to European firms and consumers build character or something.

On the other hand, he's right about Krugman.

update: I love the way the bloggers at track links. Not as key as the part about them all being geniuses, but very nice. James Wimberley replies to my criticisms.

I reply to the reply.

Dear James

I opened your rejoinder with some fear. You were very kind to me. I got the price (now out of date) from the figure in the report to which you linked.

On wind farms, with further thought I figured your point out (honest) and I agree about "the impossibility of really proving additionality as required by Kyoto." I also think that gains due to offsets are so huge that a well designed anti global warming policy has to be based on an attempt to determine additionality.

My current view (as of this minute) is that there should be an offset factor so if a subsidized activity would prevent as much warming as is caused by, say, 2 tons of CO2 one gets permission to emit 1 ton. There will be fudging of the form of subsidizing things that would have been done anyway, so a penalty factor makes sense. This corresponds to the idea that regulators say that if you provide all the evidence we demand that the activity is additional, you can get our posterior probability up to 50%. Otherwise we round it down to zero.

The idea that the price is too high is based on, you guessed it,*. Mark Kleiman said his approach to fighting global warming would be to ship agricultural waste down the Mississippi and dump it in the Ocean below the thermocline. My calculations suggest that the cost of sequestering the amount of carbon which corresponds to a ton of C02 (12/44 tons if I calculate correctly) is far far lower than 17.5 Euro let alone 23 Euro.

I think the fact that some people made a killing in carbon credits with the Chinese fluorocarbon deal is actually good. If big money can be made by sharp traders in carbon credits than the mighty force of greed will power the quest for ecologically idiotic actions all over the world. I think that would be a very good thing.

On "no pain no gain" my eagerness to use colloquial English led me to write something dumb. I should have written "Little pain little gain." That's just not the way the world works, so long as there are "Chinese refrigerator factories which haven't yet installed a simple scrubber for fluorocarbons. If warming can be avoided for 0 pain the Chinese factory wouldn't be warming the globe (Chinese laundry machine factories don't emit fluorocarbons because preventing such emissions cost less than nothing given the fact that fluorocarbons don't get your clothes clean). However, the Chinese refrigerator factory showed how large gains on global warming can be achieved at a tiny cost. I think it is a great thing if people look very hard for such opportunities. If they are motivated by greed it's fine by me so long as they are motivated.

Thanks for you very kind and polite rejoinder to my not as polite or thoughtful (on the wind farms) as I would have liked criticism.

Robert Waldmann

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