Direct Action

by zebra on 27 September 2015 · 3 comments

It has been a very long time since there has been a post here on the Stubborn Mule. Even now, I have not started writing again myself but have the benefit of a return of regular guest poster, James Glover.

This is a post to explain the Australian Government’s policy called “Direct Action”. I will spare you the usual political diatribe. So here is how it works. The government has $3bn to spend on reducing carbon emissions. At a nominal cost of $15/tonne that could be 200m tonnes of Carbon.

Okay so how does it work? The government conducts a “reverse auction” in which bidders say: “I can reduce carbon emissions by X tonnes at a cost of $Y per tonne”. You work out what is the biggest reduction for the least cost. You apportion that $3bn based on the highest amount of carbon reduction. Easy peasy. That $3bn comes from government spending so ultimately from taxpayers. [Editor’s note: while not directly relevant to the direct action versus trading scheme/tax discussion, I would argue in true Modern Monetary Theory style that the Australian government is not subject to a budget constraint, beyond a self-imposed political one, and funding does not come from tax payers].

As our new PM Malcolm Turnbull says why should you have a problem with this? There is a cost and there is a reduction in carbon emissions. There will always be a cost associated with carbon reduction regardless of the method so what does it matter if this method isn’t quite the same as a Carbon Pricing systems previously advocated by the PM and his Environment Minister Greg Hunt? As long as there is a definite amount, Xm tonnes reduced.

Well here are a few thoughts:

1. if a company is currently making a profit of, say, $500m a year, producing electricity using coal fired power stations then why would they participate in this process? There is no downside. Maybe.

2. Okay it is a bit more subtle than that. Suppose the difference between the cost of producing electricity using coal or renewables works out at $15 a tonne. You might reasonably bid at $16/tonne. In reality there is a large upfront cost of converting. There is a possibility that an alternative energy provider takes that $15/tonne and uses it to subsidise their electricity cost. That could work. That encourages a coal based provider to move to renewables. But so might a coal based electricity provider at $14/tonne to undermine them. What we call a “race to the bottom”.

3. It seems to be an argument about who exactly pays for carbon pollution. Well here is the simple answer: you pay. Who else would? And you pay because, well, you use the electricity.

4. There is no easy answer to this. Which approach encourages more electricity providers to move to renewables? That is hard to say. Every solution has its downside. I decided while writing this I don’t actually care who pays. As long as carbon is reduced.

I started out thinking Turnbull was just using the excuse “as long as it works who cares?” but I have moved to the view that it doesn’t matter. All carbon reduction schemes move the cost onto the users (of course). There are many subtleties in this argument. I personally think a Cap and Trade system is the best because in a lot of ways it is more transparent. But in the end, as PM Turnbull says who cares, as long as carbon is reduced. Presumably as long as that is what really happens, eh?

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{ 3 comments… read them below or add one }

1 Michael Michael November 4, 2015 at 7:48 am

Agree that we pay. But some mechanisms could be more efficient than others, so you still want to be able to decide which approach is the cheapest.

In theory, subsidies should be equivalent to emissions taxes in that they should arrive at the same marginal abatement cost.

But in practice, there are key differences, not least the fiscal effects – government collects revenue from a tax, but pays out for the subsidy. And the cost of that subsidy increases as greater reductions in emissions are sought.

An even bigger problem may be that the subsidy scheme could end up paying for reductions that would have occurred anyway. Emissions from coal-fired generators have fallen in recent years because of falling energy demand. Why wouldn’t generators seek to claim a subsidy for that?

2 Richard Trett November 16, 2015 at 11:09 am

There is also a very large difference between the functional benefits of a cap/trade versus the others options.

In an economic environment where commodities are extremely volatile and banks risk adverse a trading scheme puts a mechanism in place to confidently insure the cost of a project via buying futures on the cost of carbon or the benefit of carbon credits.

Given that most large scale projects involve borrowed money I am not sure why this isn’t a nail in the coffin for direct action.

Say I want to build a CO2 sequestration facility (assuming viability) . It will cost close to double a standard facility. Even wind and solar have long payback periods and unpredictability of costs/returns is a killer to these industries. No bank is going to lend money based on a maybe. Projects won’t even get on the drawing board if the viability is in hands of politicians.

3 Plunko December 19, 2015 at 11:28 pm

Direct action only works if you require proof from the generating entity that they have delivered a real reduction in carbon (and other greenhouse gas) emissions. It does not seem feasible that any of the generators can be trusted with large subsidies on the basis of making promises to improve their performance. Corporate governance of that performance would be very expensive and eat into the money available to encourage greenhouse gas reductions.

So it would seem that the solution lies in reward for achieved performance, not up front for dodgy promises which may or may not bear fruit. So baseline data needs to be held, and real efforts which achieve reductions rewarded according to a simple set of rules.

It’s far simpler to use the carbon trading price approach, which simply says, the more carbon emissions you create, the more tax you will pay. This keeps the bastards honest!

However, the greater worry is the other emissions which are possibly of greater concern – oxides of sulphur (which are far more devastating per tonne, but get no publicity), CFCs (the air conditioning industry is poorly governed), and the gaseous excretions of cows, pigs, sheep and other domestic and native animals (including humans) which allegedly total more than the industrial emission levels, and the natural rotting of vegetation all over our planet.

So perhaps, the approach is too simplistic. If we gave up all our use of domestic animals or taxed their emissions at the farm gate, and placed a tax on human farting, this might be of great assistance, even though this could bankrupt your father-in-law.

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