Everybody except Nick Smith thinks the emissions trading scheme is dumb. Unhappy with mainstream climate change policy responses, environmentalists are looking elsewhere. Here’s a new idea, that we’ll hear more of in 2011: an election year idea, all about tax and cuts

When is a tax not a tax but a dividend, that cuts carbon, and boosts the economy?

Environmentalists are backing away from mainstream climate change ‘response’ measures. They’ve lost faith in the process and the policy; they no longer consider carbon trading, or the Copenhagen emissions reduction pledges, fit for purpose. Last month the IEA World Energy Outlook 2010 confirmed it, concluding that even in the unlikely event governments meet their pledges, the resulting emissions are likely to see at least 3.5 degrees warming, nearly double dangerous levels. Domestically, there’s pretty much universal agreement about the essential uselessness of the emissions trading scheme (ETS).

To remind you, the ETS calls itself a ‘cap and trade’ scheme. But there is no cap, on emissions. It’s intensity-based, so they may increase. There’s provision for the purchase by emitters of emissions units, with a cap on their price, and a ‘half obligation’ subsidy, and other big long-term subsidies for trade-exposed polluters. There’s no provision at all for our biggest polluter, agriculture. Early evidence suggests that, as a carbon pricing signal, it's erratic at best.

The ETS is not loved. Indications by Labour and the Greens (who passed the earlier version) suggest waning commitment to it. These are but straws in the wind, but enough to see what way it is blowing. Even Nick Smith agrees that, as a mitigation and indeed adaptation measure, it will do very little. The government’s explicit objective has been not to properly price carbon, for fear of what it would do to the economy.

In 2011, we will hear more about something different: James Hansen’s proposal (here, here, here and here) for ‘fee and dividend’.

'Fee and dividend' means that a fee is set and charged when greenhouse gas-emitting products are made domestically, or imported. The fee is returned to individual taxpayers in equal shares, in its entirety: this is the dividend part.

Under Labour’s version of the ETS, there was a household fund, for energy efficiency and conservation (the government would set aside and decide how to spend some of the income generated by the ETS, for green purposes). This has been deemed by the current government to be “no longer necessary” and repealed. Labour had also previously proposed a partial carbon tax (on fossil fuels, having abandoned the agricultural ‘fart tax’) that would have been exactly that: a tax collected and spent by the government.

‘Fee and dividend’ is something different. All of the money goes back to individuals to decide how to spend it.

(‘Tax cut’ was a cheap trick, to get you in election-year mode and get you reading. There is no tax. The ‘cut’ was the hoped-for resulting cut in carbon emissions.)

The government could, if it wanted, keep some of the money for funding carbon abatement (similar to the former household fund), or paying Kyoto liability. That would be just one among the policy design issues and options, but Hansen proposes full redistribution, which would be more popular.

In short:

  1. directly price, to everybody, CO2 emissions through the fee;
  2. raise the cost of emissions-based products, to cut consumption of them, and promote cheaper greener alternatives;
  3. stimulate the economy with the dividend; and
  4. reallocate the dividend progressively, in equal shares.

Why would you do this, rather than a straight carbon tax? A carbon tax is like GST: it hits the poorest hardest.

Hansen’s idea, you see, is not just a money-go-round. The PM, in more flippant times, may have had something to say about it. The redistribution -- redistribution in full in equal shares to everybody, but not necessarily to those who paid it -- would be one of its obstacles.

Those whose consumption is heavy would indirectly pay more than they receive; those who work hard to reduce their carbon footprint would be better off. Those more focused on, and able to reduce, their carbon footprint are perhaps more likely to be those on middle to upper incomes; but these will also consume more, probably. Business would pay the fee, but not get the dividend.

The expectation, therefore, would be that all individuals (as opposed to the “vast bulk”) are better off.

Hansen’s glancing comment on population and family size is another wrinkle: the proposal from him suggests that only the first two children in each family would be eligible, thus hitting larger families.

The ETS is our current domestic way to make polluters pay. Polluters do not want to pay at all: they would, presumably, be grumpy about paying twice. Hansen’s idea, if adopted, would make the ETS a bit pointless, as well as an irritant.

It offers a mechanism for carbon pricing that the ETS lacks. It is a progressive policy. It tries to maximise emissions reductions and minimise economic cost.

The ETS does none of these things, with the possible exception of the last -- except that the only costs it minimises really are those to polluters.

It’s also interesting to think about how Hansen's idea might be adapted for global use, as the tool for shifting funding from developed to developing countries.

Comments (10)

by Petone on December 03, 2010

The ETS doesn't set a cap, or incentives to actually reduce emissions, partly because Nick doesn't buy into  the more worrying climate change possibilities.  He told me that James Lovelock had lost the plot (or words to that effect), I wish I'd thought to ask him what he thought about Jim Hansen.

This was in 2008, I really hope his thinking has shifted since then with more recent evidence but somehow I doubt it.

It has often been said that the poor will suffer most from climate change and I'm sure that's true, but it is not just the poor that will suffer. And given that some of these others possess an unreasonable amount of weaponry and archaic ideas “The idea that carbon dioxide is a carcinogen, that it is harmful to our environment, is almost comical.” in denial of science worked out by Fourier in 1824, the road ahead could be rocky.

by DeepRed on December 03, 2010

At best, the NZ ETS has been perverted from its original intent, into some kind of polluter welfare scheme.

by Claire Browning on December 04, 2010
Claire Browning

A few afterthoughts, that I should've put in the post, and would've, if I'd thought of them in time ...

First, the ETS will be reviewed in 2011. I imagine Nick Smith hopes this will take it off the election agenda!

Second, on the redistribution matter. Of course, under Hansen's proposal, if anyone finds it truly egregious that their pollution charge is redistributed amongst others who pollute less, the power to fix that rests entirely with them.

Third, picking up on DeepRed's comment, Hansen's proposal would upend carbon pricing policy quite nicely: instead of taxpayers subsidising big business polluters, as under the ETS, vice versa.

Petone - Nick Smith isn't alone, though, in thinking James Lovelock has lost the plot. Whatever may be his other views about the science and size of risk.

by Mark Wilson on December 05, 2010
Mark Wilson

Greenies are always slow to understand they are being mocked and even slower to understand when their grand ideas are not being taking seriously by the part of the world that actually makes things happen (as opposed to holding talk fests.)

"Environmentalists are backing away from mainstream climate change ‘response’ measures. They’ve lost faith in the process"

No one else involved ever took the process seriously at any stage!  Kyoto and Copenhagen et al were political theatre and only the greenies actually thought they were anything other than a political junket.

It is time for the greenies to learn that nothing effective is going to be done about climate change and they would be more usefully employed (sorry - wrong word to use in the same sentence as greenies) occupied in marching somewhere against something or holding the usual seminar to tell other people how to live their lives.

by Claire Browning on December 06, 2010
Claire Browning

Your comments are tedious enough the first time, Mark: please stop posting them twice.

Hansen's idea is, in fact, as much about personal responsibility and personal choice, as telling "other people how to live their lives".

Your sense of irony is about as well honed as your analytical skills. 

As you acknowledge yourself, "the part of the world that actually makes things happen" (by which I take it you mean, well, you) is doing "nothing effective" in this instance (or indeed generally), and the future life choices of all of the rest of us will suffer in consequence. Properly pricing externalities doesn't limit choices. It just informs the market about true costs.

There's as much in Hansen's policy for the right-wing as there is for so-called "greenies".

by Mark Wilson on December 06, 2010
Mark Wilson

But my point is regardless of the rights and wrongs of the global warming argument nothing effective is going to be done by those who have the power to do so.

On the Labour Party's Radio NZ National today Matthew Hooton also pointed this out to Andrew Little who literally was unable to grasp the point (and if you think I am kidding listen to the broadcast). The Greens say that we are past the point of no return and that the damage cannot be stopped, at best it can be slightly minimised. Maybe, despite their track record, they are right for a change.

Making the huge leap that they are right the only responsible policy, according to Hooton, is to beef up our armed forces to defend our shores and concentrate all our efforts on preparing for the alleged results of global warming - climate change or whatever it is called this week.

And he of course is right. There is nothing NZ can do that will make any effective difference to climate change whatsoever. Little's argument was that our example would somehow have an impact on the major polluters (China, India and the USA). There  is no possibility that this is correct. 

If you are right that "the future life choices of all of the rest of us will suffer in consequence" then it is morally wrong and totally irresponsible to waste time and money on a completely ineffectual  process to set an example that no other country will notice let alone care about. We should be preparing for the results of climate change.

It is cynical to suggest that there is a possibility of an effective global policy and even more cynical to not plan for the alleged catastrophe.     

by Claire Browning on December 06, 2010
Claire Browning

I think you might mean Andrew Campbell.

The Greens - and it's not just the Greens calling for an effective climate change response policy - don't say that at all. That is just another big fat straw man for you and M Hooton to hide behind, to justify more inertia, and characterise your opponents as loopy doomsday-type extremists.

They say that some adaptation will be required, because some irreversible damage is already done. It is not too late to mitigate further damage, tipped to end up being catastrophic. Don't take my word for it. Go and have a wee chat to some scientists.

As to whether NZ would be ineffectual on its own, of course it would. Hell, the US would be ineffectual on its own. It's all or none, which is kind of the point.

I agree with you though, that it is daft not to plan for the worst case scenario; and also, that it has been an open secret for some time that Smith, Groser, and this government are expecting and hoping for these Copenhagen, Cancun, etc talks to fail.

So, what are your plans? What are theirs? Because once the rhetoric runs out, I don't think they, or you, have any. That's just another way of putting the question I keep trying to ask, in different ways, here on Pundit.

[PS. "I agree with you though, that it is daft not to plan for the worst case scenario ..."

And it's not just climate change, either, by the way - but the whole perfect storm of economic/ecological global challenges.]

by Claire Browning on December 09, 2010
Claire Browning

... they no longer consider carbon trading, or the Copenhagen emissions reduction pledges, fit for purpose. Last month the IEA World Energy Outlook 2010 confirmed it, concluding that even in the unlikely event governments meet their pledges, the resulting emissions are likely to see at least 3.5 degrees warming, nearly double dangerous levels ...

Tangential to this post, but ... this UNEP Emissions Gap Report (November 2010) joins others in asking: are the Copenhagen Accord pledges sufficient to limit global warming to 2C or less? Or will there be a gap between what is needed and what is expected as a result of the pledges? What is the gap between scientific reality and the current level of ambition of nations?

It is more optimistic than some. It concludes that there is a gap between what is needed and what is expected (if the pledges are met), and: "if only the lowest ambition pledges are implemented, and if no clear rules are set in the negotiations, emissions could be around 53 Gt of CO2 equivalent in 2020 – not that different from business-as-usual". However, "tackling climate change is still manageable, if leadership is shown ... Cancun must demonstrate to society as a whole that Governments understand the gaps left by Copenhagen ...".

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