Transcript Climate Policy For New Zealand After Kyoto

2007 A.W.H. Phillips Memorial Lecture
Climate Policy For New Zealand
After Kyoto
Warwick J. McKibbin
Centre for Applied Macroeconomic Analysis ANU,
& The Lowy Institute for International Policy
& The Brookings Institution
Overview
•
The Climate Policy Problem

•
What Needs to be Done?

•
Why the Kyoto Protocol Approach has stalled
The New Zealand Situation
The McKibbin-Wilcoxen Blueprint for national and
global action

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•
The Role of Prices
What Has been done so Far

•
•
What makes climate change policy so difficult?
an Application to New Zealand
the recent Australian application
Conclusion
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Figure 2: Global Temperature Record, Vostok Ice Core Data
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450,000
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350,000
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Years Before Present
150,000
100,000
50,000
0
Difference in Mean Temperature, C
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Figure 1: Global Carbon Dioxide Emissions from Fossil Fuels, 1751-2002
8000
Millions of Metric Tons (MMT) Carbon
7000
6000
5000
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0
1750
1770
1790
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Year
1890
1910
1930
1950
1970
1990
Emissions versus Concentrations
• What matters for the climate is the
concentration of greenhouse gases in the
atmosphere
• Concentrations are the accumulation of
annual greenhouse gas emissions
• Emissions is any particular year are not
critical but the path over time is
5
What makes climate policy difficult?
1.
Committed warming
 Need both mitigation and adaptation
2.
Geography
 Broad range of sources of emissions, caused by decisions
made by a diverse range of households and firms
 Many jurisdictions - coordination problem
(international, national, state, local)
3.
Time scales
 Exceptionally long-lived problem and policy
4.
Uncertainties
 Numerous, large and intractable
6
What’s uncertain?
Emissions Levels
CO2 Concentrations
Temperature Change
Ecological Effects
Economic Damages/benefits
7
Climate Policy is
about Managing Uncertainty
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Issues in Regime Design
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Coverage
Equity
Politics
Institutions
Fundamentals
Flexibility
9
Coverage
• Need major current and future emitting
countries involved not necessarily all
countries
• Need all of the economy involved not just a
particular sector
• Need to change the sources of demand and
supply of greenhouse gas emissions
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Issues in Regime Design
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•
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Coverage
Equity
Politics
Institutions
Fundamentals
Flexibility
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Equity
• A climate policy will probably lead to
winners and losers
• Need to deal with the distributional issues
within countries and between countries
 Within country distribution is up to governments within
countries
• Need to recognize the differences across
countries’ stages of development and
relative contributions to current climate
problems
12
Some Issues in Regime Design
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•
•
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Coverage
Equity
Politics
Institutions
Fundamentals
Flexibility
13
Politics
• Need to build constituencies across society
that support the policy in their own
financial self interest
 Fossil fuel producers facing reduced demand for their
products
 Consumers facing higher energy prices
 Politicians with an incentive to lobby to reject a policy
in favor of a narrow constituency
14
Some Issues in Regime Design
•
•
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Coverage
Equity
Politics
Institutions
Fundamentals
Flexibility
15
Institutions
• Build on existing national institutions
 Legal, accounting, financial, market experience
 Developing new international institutions will delay
action and will likely be infeasible
16
Some Issues in Regime Design
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•
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Coverage
Equity
Politics
Institutions
Fundamentals
Flexibility
17
Fundamentals
• Need to
 establish clear property rights over carbon
emissions over a long period of time to provide
incentives for all involved within a country to want
to reduce carbon emissions
 create a capacity for individuals and companies to
manage climate risk
 Encourage the emergence, adoption and diffusion
of existing and new technologies to reduce emissions
18
Fundamentals
• Need to
 Manage the demand side of energy use while waiting
for technologies to emerge
 Enable compensation for those hurt by higher energy
prices if technology is expensive or slow to emerge
19
Flexibility is important
• Need to be able to start in individual
countries with known costs
• Need to be able to add countries over time
• Need to be able to adjust the system as
information is revealed
• Need to allow for particular national
circumstances
20
The Role of Prices
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Figure 3: GDP, Energy Use, CO2 Emissions
USA
2.2
2
1.8
1.6
CO2 Emissions
1.4
Energy Use
1.2
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Index 1965=1
GDP
Figure 4: GDP, Energy Use, CO2 Emissions
Japan
4.5
4
GDP
3
CO2 Emissions
2.5
2
Energy Use
1.5
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89
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Index 1965=1
3.5
Ways to give price signals:
• Carbon tax
• Subsidies
• Binding targets with penalties for noncompliance
• Cap and trade Permit trading
• McKibbin Wilcoxen Blueprint – a hybrid of
the above approaches
24
The Role of Prices
• Price signals should be both short term
and long term
• Price signals should be credible
 Otherwise investment will not be forthcoming
• Price signals are crucial for encouraging
 Demand side management
 The emergence of alternative technologies
 The adoption and diffusion of alternative technologies
• Short run prices can more easily be used
than emission targets to line up costs with
expected benefits
25
What has been Done so far?
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The UN Framework Convention on Climate
Change
• Negotiated at the Earth Summit in 1992
in Rio
• Set Goals (not targets)
 “preventing dangerous anthropogenic interference
with the Earth’s climate system”
 Annex I countries (industrial countries) were to adopt
policies to “aim” to reduce their emissions
 Entered into force in March 1994
• Set in process a series of meetings of the
“Conference of the Parties” (COP)
27
The Kyoto Protocol
• Protocol to the 1992 UN framework
Convention on Climate Change,
negotiated at COP3 in 1997
• Annex 1 countries agreed to reduce
emissions of 6 greenhouse gases to
5.2% below 1990 levels on average
between 2008 and 2012
• Entered into force February 2005.
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The Kyoto Protocol
• No commitments for Developing
Countries (countries such as China ratify
but have no targets!)
• Some flexibility allowed through
 permit trading
 clean development mechanism (CDM)
 joint implementation
29
Kyoto Protocol
• There are many problems with Kyoto
• The most obvious problem is the approach
of targets and timetables
 Hit an emission target independently of what it costs
30
Problems With International Permit
Trading
• Permits are ultimately promises of
governments whose value depends on the
credibility of governments
• There is a reason why there is not a single
world currency
31
The Kyoto Protocol
• New Zealand together with most
countries have ratified
• Australia and the United States have not
32
Are there any other alternatives?
•
Need a policy with best features of permits, taxes
and subsidies
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Like a tax:

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Like permits:

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Should guarantee that costs won’t be excessive
Should avoid huge transfers to the government
Like subsidies:

it should encourage the search for technological solutions
33
The Situation in New Zealand
• 1997 report McKibbin and Pearce “Impact
on the New Zealand economy of
commitments for abatement of carbon
dioxide emissions”
• Found marginal abatement cost in NZ
amongst the highest in the world.
• From 1990 projected quickly rising
emissions under BAU - 2005 emissions
from energy at 31.43 mt
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The Situation in New Zealand
•
Recommended a uniform carbon tax but better still
the McKibbin Wilcoxen Blueprint
•
NZ climate policy announced in 2002 with reviews
in 05, 07, 010
•
Like most countries NZ has a large range of
policies aimed at energy efficiency and
conservation, public awareness and other factors.
•
Review in November 2006 – asked the right
questions but the December discussion paper
ignored a key policy option.
•
NZ government was to implement a carbon tax in
2007 but it has been postponed
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The Situation in New Zealand
• New Zealand’s Kyoto Target is 1990 levels
• 2005 emissions
 77.2 million tonnes CO2e - 24.7% above 1990!
 48.5% of emissions from agriculture
 43.4% of emissions from energy (33.5mt)
• As in most countries ratifying Kyoto is not
sufficient to reduce emissions
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Source: Ministry of Environment – NZ Greenhouse Gas Inventory 1990-2005
The McKibbin Wilcoxen Blueprint
• Aim
 Impose a long term carbon goal for economies
 Generate a long term price for carbon to guide
energy related investment decisions
 Line up short term economic costs with expected
environmental benefits
 Provide a way for corporation and households to
manage climate risk
 Can be an internationally coordinated system or a
national system that evolves into an international
system
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Components of the Policy
• National permits
 Required to embody carbon in energy
 Good only in country of issue
• Long-term permits
 Allow 1 ton of emissions each year
 Quantity is the long run goal
 Fixed supply (can be diminishing)
• Annual permits
 Allow 1 ton of emissions in year of issue
 Elastic supply from national government
 Price fixed for ten years
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Looking at the policy in more detail:
Long Term
Permit
Annual
Permit
 Allows one unit of emission per year for a
long period
 Distributed once at enactment
 Can be leased or sold within a country
 Quantity can set by treaty: QT
 Price will be set by the market
 Allows one unit for one year
 Sold by government as demanded
 Price set by treaty: PT
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Why National Permits?
• Use existing institutions
 Legal system for enforcing property rights
• Small loss of sovereignty
 No need to cede authority to an international body
 No direct international transfers of wealth
 Enforcement maintains rights of domestic residents
• Robustness and stability
 Easy to join the agreement
 Robust to withdrawal by some participating countries
 Compartmentalization lowers transmission of shocks
40
Why Long-Term Permits?
• Credibility
 Build constituency supporting the policy
 Owners: vested interest in maintaining system
 Reduce the time-consistency problem
• Additional benefits
 Can tailor distributional effects via permit allocation
 Reduces risks (long term vs. short term bonds)
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Why Annual Permits?
• Acts like a carbon tax at the margin
• Efficient
 A price-based policy is preferable to a qnatitative
target given flat damage curve
• Pragmatic
 Governments don’t have to agree to hit a fixed target
in any year regardless of cost
• Flexible
 Government can mandate who can issue annual
permits
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Allocation
• Those who need permits are not
necessarily the same as those who own
the permits
• Allocate long term permits freely to fossil
fuel intensive industry and households
• Only those who embody carbon in energy
need a permit each each.
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Overall
• Creates incentives for investment
 Raises the marginal cost of emissions into the future
• Incentives are credible
 Built-in constituency of long term permit holders
 Robust to accessions and withdrawals
 Operates within existing institutions
• Provides a foundation on which to build
 Completely consistent with technology policies
 Provides incentives for adoption and diffusion
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Expandable
• Because it is a domestic system, other
abatement activities can be included as a
way to generate annual permits with the
revenue going to these activities instead
of the government
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Main Concept
 The long term permits are the medium term goals for
emissions without a timetable of when they are
reached
 The short term permits are the economic costs to the
economy
 Move through a low cost path from the short run to
the longer run in decadal steps with profit incentives to
reduce emissions wherever cost effective
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A Partial Analogy – Bond markets
 Long term government bond market prices interest
rates over long horizons given a stock of government
debt (like long term permits)
 Central banks set the short term interest rate - the
supply of financial liquidity is generated by the market
(like annual permits).
 The long term interest rate (which is flexible) is the
expected value of future of short term interest rates
(which are fixed in any period)
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Coordination of National Permit
Markets
• Independent but coordinated via PT
US
Japan
PT
EU
New Zealand
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McKibbin Wilcoxen in New Zealand
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Figure 1: Annual Permit Price in New Zealand
350
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50
0
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$US 2002
250
Source: Author's Calculations
Figure 2: Value of NZ Long Term Permits (r=5%)
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$US 2002
5000
Source: Author's Calculations
Figure 3: Long Term Permits and Actual Emissions in New Zealand
Emission/allocations
120
100
80
60
40
20
0
2005
2025
long term permits
2045
2065
actual emissions
2085
annual price reset
Figure 4: Annual permit Sales in New Zealand
Emissions above target
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15
10
5
0
2005
2025
2045
2065
2085
The New Australian Approach
McKibbin-Wilcoxen with political
compromise
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Key differences
• Long term permit bundles are 40 years
• Windows every five years
 Additional medium term permits can be auctioned
• Safety valve
 is a penalty rather than an annual permit
• Initial allocation
 all to affected industry or auctioned
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How to Bring in Developing Countries ?
The MWB approach can be applied in
countries at different levels of
development
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Developing Countries
• Negotiate a long term permit allocation that
is larger than current emissions
• Price of annual emission permits (or
economic cost) is zero in the short run
because more permits than needed
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Developing Countries
• Price of long term emission permits will be
non zero giving important signals for
investment projects
• Over time the permit price in countries will
equalize as developing countries “ability to
pay rises”
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Figure 5: Annual Permit Price
350
300
200
150
China Double
100
50
New
Zealand
China Triple
0
20
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79
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94
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99
$US 2002
250
Source: Author's Calculations
Figure 6: Value of Long Term Permits (r=5%)
7000
6000
4000
China Double
3000
2000
New
Zealand
China Triple
1000
0
20
09
20
14
20
19
20
24
20
29
20
34
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39
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44
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49
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54
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59
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64
20
69
20
74
20
79
20
84
20
89
20
94
20
99
$US 2002
5000
Source: Author's Calculations
Conclusion
• Climate policy at the global level is in a
state of considerable flux and a new
direction away from targets and
timetables is needed
• New Zealand should consider a variant of
the McKibbin Wilcoxen Blueprint for
climate policy both as a way to deal with
the Kyoto dilemma and to be at the
forefront of the post 2012 debate.
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Background Papers
www.sensiblepolicy.com
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