Monday, October 12, 2015

The China Cap

Environmental Defense Fund had one of their sporadic podcasts recently, this one on the planned China cap-and-trade program (EDF has been heavily involved there). A good backgrounder.

China's future emissions are more important than America's, so the whole thing deserves more attention. One partly-valid reason why less has been said is there's nothing known about it so far. In two years it'll be in place, they say, although EDF says no one has done it that fast before. China has a pilot cap-and-trade program for "only" 250m people, so they do have experience. I didn't know prior to the podcast that China also has a cap-and-trade program for SOx, which might have helped develop their confidence.

Anyway, something to watch.

I'm looking around for info on the pilots, probably a good basis for predicting the national program. They've only been around for two years, about as long as California's program. Here's some good background, although EDF notes above that the offset program hasn't actually been used - no trades have happened. It also says utilities can't pass along costs, so the entire adjustment has to be internal instead of through reducing demand.

This says the opening price in one pilot was $4.89/tonne, not all that substantial but maybe more meaningful in a low-margin economy.

With a multi-pronged attack on carbon emissions and related pollution, cap-and-trade may be only one component, or the price may even collapse if they don't establish the right cap or a floor on prices. That's not the worst thing in the world, it would mean they could tighten up the standards.



Kudos to Mike McElroy, who has been promoting this through academic exchange programs with China ince the '90's

E. Swanson said...

Cap-and-trade sounds great until one considers some of the associated impacts. For example, consider the resulting push for palm oil production, which are said to have resulted in massive rain forest clearing in Indonesia, among other nations. Read this report from the Weather Underground about the resulting air pollution. There's a link to a video from GreenPeace in the post for some visual impact.

Cap-and-Trade policies attempt to put a limit on CO2 emissions, but the actual impact of such programs as seen at the consumer level will be higher prices. Thus, the result appears the similar to a carbon tax, except that the price increase isn't a fixed amount, as it would be with a tax. Ultimately, in either situation, the consumer will make the choice whether to cut back on carbon emissions or to simply pay more to continue to consume as before. Also, I think this would result in massive rejection of either approach, as the stiff price increases which will ultimately be required would result in near rebellion by the consumers, much as we've seen from the spike in oil prices after 2008. Worse, the cap-and-trade approach would likely result in many schemes to game the system for financial advantage.

As I've pointed out previously, the most direct approach to limit CO2 emissions would be a direct rationing program with a white market for trading the allocations. Given that the Earth's peoples must rapidly begin to make serious reductions in CO2 emissions, such a rationing plan would appear to be the only approach which would provide a strong, steady message to the public while minimizing the economic impact on individual consumers, who are, ultimately, the folks who must change the way they/we live out our daily routines...

Brian said...

I agree the palm oil problem is huge, I've written about it and was in Indonesia 2 years ago. I don't think it has much to do with cap-and-trade though. It has multiple causes, and one of them is EU directives on biofuels.

Cap-and-dividend, revenue-neutral carbon taxes, and other tax givebacks are ways to get public acceptance of carbon pricing.

Steve Chu thinks $50/ton is enough to send markets in the right direction. If he's right, that's not a huge price. California is already at a third of that.

E. Swanson said...

Brian, The problem which I see is that the use of Cap-and-Trade or taxes to increase the market price of carbon does not take into account how the economic system will respond to the resulting increases in costs to the consumer. In the short term, such price increases will have an immediate impact, but over the long term, those increases in cost to businesses and wage earners will be watered down as the entire economy adjusts. As a result, a fixed tax would steadily lose it's impact over time and would need to be steadily increased to have the same impact.

As a prime example, consider the increase in the world price of oil over the past 30 years or so. The Saudis cut their price of oil in 1985 by increasing their the production, breaking the high market prices which appeared as the result of the Iranian Crisis of 1979-80. Fast forward to the 2000's, with prices around $25/bbl at the start, then approaching $100 a barrel as the market tightened. In 2008 prices briefly approached $150/bbl, only to drop back to around $30/bbl after the Great Recession, only to drift back near $100/bbl last year. Guess what? After some slowdown, the US consumer is again beginning to increase the use of oil, even though the nominal price is about twice what it was in the early 2000's, as the effects of the Recession fade from view.

But, the price of carbon isn't the problem, it's the rate of consumption and the resulting emissions. If the economic system just passes on the tax increase and then the consumption exhibits only a temporary reduction, things would be back to "square one" after a while and a higher tax would be necessary just to keep the level of consumption/emissions from increasing. But, what's needed is a steadily declining rate of consumption/emissions, perhaps as great as an 80% reduction for the US over time. Heck, our Congress can't even raise the gas tax to pay for road repairs, the last increase at the Federal level was in 1993.

As much as I favor renewable energy (I live in a solar heated house I designed and built), I have my doubts that there's the political will in the US to actually carry out the measures required to make the transition away from carbon fuels. This present election cycle may give a clear answer...

Fernando Leanme said...

I know professionals who live in China, I worked there many years ago, and my daughter used to teach at a Chinese university. Based on what I have learned, their main worries are a) air pollution, which makes the communist party lose support. And b) propaganda effect to convince foreigners China is doing its part.

The Chinese communist party is controlled by oligarchs, many of them want to make sure their children inherit power, and this requires a growing economy. But a growing economy plus unbreathable air aren't a solution. So they are sacrificing some economic growth to get around the lousy air problem. They aren't concerned about CO2, they are more worried about energy security.

I suspect the Chinese think like me, realize we are running out of fossil fuels and thus they have to prepare for it. On the other hand I focus more than they do on human rights, democracy, etc. i sure hope that dictatorship of theirs falls gently, but it has to fall. Otherwise it'll enslave humanity in 100 years.

E. Swanson said...

As a reminder of the basic policy situation regarding climate change in the US, here's another example of the inability of the US Congress to address an obvious problem.

House transportation bill proposes 6-year plan but funding likely short by half

The US can't even raise taxes to keep up with inflation in order to maintain the most vital transportation infrastructure upon which our economy depends. Do you think these guys are going to save us from Climate Change 50 or 100 years in the future???