Emissions Trading Furphy

by Cameron Murray.

Is the Rudd Government’s proposed Carbon Pollution Reduction Scheme (CPRS) the most effective policy for controlling emissions that can be implemented at a national level?  Will it curtail our carbon footprint while minimising the impact on Australian business and households, as the delivery of the Government’s CPRS Green Paper (in July 2008) and White Paper (in December 2008) claims it does? Cameron Murray, an economics graduate of QUT’s Master of Business (Research) program, believes it can.

This brief essay aims to inform the curious onlooker of the theoretical arguments that have informed the political debate over the Rudd government’s proposed CPRS in recent times. There has been a fiery debate over whether the scheme inhibits the ability of households and businesses to take a proactive approach to reducing their own demands on emission producing energy sources.   Cameron Murray disagrees.

One of the key arguments that has challenged the effectiveness of the CPRS was originally promoted by Dr Richard Denniss, director of the Australia Institute. In his published research paper, Fixing the Floor in the Emissions Trading Scheme, he ascertains that energy and emissions conservation efforts by households will be rendered ineffective due to the proposed CPRS. He purports that any pollution reductions made by households will allow industry to offset their own emissions, rather than them achieve their own emission targets.

For example, if households reduce their electricity demand through efforts to conserve, the electricity producer now needs to produce less electricity, and can then sell some of their emissions permits to other polluters. Since the number of emissions permits is fixed, the CPRS provides a floor, or limit, on emissions reductions that cannot be passed, as permits can always be traded to other potential polluters. Some consider this redistribution of pollution to be a fundamental flaw in the scheme. They say that a 5% emissions cap, for example, means that a 6% reduction in emissions is not achievable with the scheme. This message has been widely reported by the media and in the blogosphere.

However, the fundamental assumption in Denniss’ paper is that the behaviour of individual households can actually reduce energy demand and subsequently reduce greenhouse gas emissions. Unfortunately, this is not likely to be the case.

There are two radical assumptions that need to be made in order to believe Denniss’ argument:

  1. That an individual’s consumption choices will be able to reduce energy demand, and
  2. That if demand for energy actually declines, energy prices will not adjust, and no other energy consumers will increase their demands.

Let us examine each of these in turn.

While it appears obvious at first that reducing electricity consumption in the home will reduce demand for electricity from the power station, this is not at all guaranteed. Rebound effects must be considered. When money that was previously spent on electricity is spent on other goods, it raises the demands on energy from the producers of those goods, and all upstream producers. It is unlikely that the behaviours that are apparently rendered ineffective under the CPRS would be effective at reducing energy demand under any circumstances.

Even if we accept the first assumption and ignore the previous paragraph, there is still no guarantee that household actions can reduce energy demand for a sustained period. Given that not all households will attempt to reduce energy demand, we have an interesting situation. If, for example, total demand for energy is reduced because 50% of households have changed their behaviour, energy producers are likely to respond by reducing prices. The remaining 50% of households (and industry of course) will then respond to the lower price and increase their demand. This may even happen at an international level. If a single country reduces its energy demands, energy prices will adjust and energy demands from other countries will increase.

In all, we can say that while the CPRS is based on sound theoretical foundations, it raises questions about other climate policies. For example, subsidising energy efficient lighting and appliances appears to be inconsistent with the theory that justifies the CPRS which after all, provides the required cap on emissions. Recipients of these subsidies can simply increase consumption of other goods with the money they save on electricity.

This leaves the government in a difficult position. To properly justify the CPRS, they must concede that other climate policies are ineffective. To say that they complement each other as part of the ‘climate toolkit’ is politics of spin at its best.

Cameron Murray is a Policy Officer at Queensland’s Department of Environment and Resource Management. He completed his Masters of Business (Research) program in Economics in 2008 and has his own blog site.

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5 Responses to “Emissions Trading Furphy”

  1. Cats Says:

    Cameron Murray makes a pertinent point. The question is were the policy decision-makers aware of the rebound effects or was it a deliberate attempt to ignore it for obvious reasons? This is very interesting!

  2. Long Suffering Says:

    The lesson from rebound effects is that, so long as economies grow, so will extent of environmental degradation. It is time that society re-examined the idea of the steady state economy which, as John Stuart Mill has said, “implies no stationary state of human improvement. There would be as much scope as ever for all kinds of mental culture, and moral and social progress; as much room for improving the Art of Living and much more likelihood of its being improved, when minds cease to be engrossed by the art of getting on.”

  3. Angel Nemet Says:

    I’ve noticed your website a while ago, just never really got a chance to post anything back. I found it to be very useful and would like to see if you are able to get in touch with me and maybe we can have a discussion on a few of these topics. Would appreciate a response back.

  4. WebAdmin Says:

    Hi Angel, your supplied email address does not exist. If you like to post another comment, I will endeavour to respond. Also, be sure to read my regular blog http://ckmurray.blogspot.com Cameron.

  5. video marketing Says:

    Really informative blog post here my friend. I just wanted to comment & say keep up the quality work. I’ve bookmarked your blog just now and I’ll be back to read more in the future my friend! Also nice colors on the layout it goes well with the blog in my humble opinion 🙂

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