Cap in Hand


<>Making the emissions trading scheme “affordable” may  hit future generations hard.

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<>Listener: 10 October, 2009.

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<>Keywords: Environment & Resources;   Distributional Economics;

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<>Global warming is a consequence of a market failure: polluters emit chemicals without having to pay the price of their emissions. Some sort of taxation regime would no doubt make the world better off, but this particular market failure is so difficult to deal with for two main reasons.

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<>First, although the warming is happening globally, no international regime exists to deal with it in the way we could deal with people polluting the local river. Second, polluters are getting freebies that others have to pay for. These “others” often are still not born and/or have much less political clout than the polluters.

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<>New Zealand is such a tiny part of the world economy that our emissions are negligible; the temptation is to ignore the problem. Idealists argue you should clean up your own mess, just like Robert Fulgham in All I Really Need to Know I Learned in Kindergarten. Realists know that the US and the EU – economies large enough to affect the rate of global warming – will require their suppliers to also curb their emissions, restricting the imports of the non-compliers. (Then there are the “deniers” who, a bit like those who argued in the 1930s that Hitler had peaceful intentions, see the global warming issue as so difficult that they reject the compelling scientific evidence that it is human-driven.)

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<>My preference is for a cap and trade scheme, in which polluters are given a capped entitlement (which decreases over time) to emit greenhouse gases. They may trade part or all of this entitlement providing they can keep under their (now reduced) cap. That provides a market incentive to reduce emissions, and a market signal to those who consume emitting products that they must pay for their pollution.

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<>Others argue for a tax (which has attractions given the dire state of the Government’s finances). Advocates want the polluters to pay more directly. They see entitlements as subsidising polluters – which is true.

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<>But it’s the politics that is the problem. Under any emission trading scheme (ETS), the way the burden is shared makes the whole thing very contentious. I’m willing to compromise in the short-run, to get a sustainable, effective long-term regime. Even so, polluters want the implementation of any scheme delayed, putting off their day of reckoning and dumping it on the yet-unborn.

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<>Yet if we are making future generations better off by slowing down the rate of global warming, then we are making someone else worse off today. Each proposed regime has different winners and losers. The lines of disagreement do not follow conventional political boundaries.

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<>For instance, some Maori see opportunities for being paid for their forestry schemes, as they’re carbon sinks. Other Maori forestry owners want to convert their forests into dairy farms, which would require them to pay for the reduction in their carbon sinks.

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<>The farm sector mutterings seem to be that they cannot stop their cows belching, so it is pointless to try and they should be left out of the ETS. However, I am continually struck by the sector’s technological innovations. Farmers will reduce their emissions in the long run. They probably have more to gain from the ETS than any other sector, since it will be farmers’ exports that are clobbered by countries restraining their emissions. Even so, like everyone else, the farmers would rather someone else paid.

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<>In the international regime, if we do not restrain our emissions, we will have to buy carbon credits offshore. In some cases, businesses will be doing the buying, and they will pass the costs on to their customers. Electricity prices are expected to rise by 5% – but the users will pay for only half of the emissions. To cover the deficit, the New Zealand Government will have to buy carbon credits – paying for what the private sector is not.

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<>Ultimately, then, it is taxpayers who will pay for this uncompensated pollution. Except the purchase of the carbon credits will probably be funded by borrowing, so the ultimate payers will be future generations.

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<>The original point of the exercise may have been to minimise the cost of today’s pollution for future generations, but it looks as if they will bear much of the cost of the resulting debt, instead.