More on operations, less on investment – a better approach for ETS policy makers

Posted on February 13, 2014 by James Atkins

EU policy makers have wasted a lot of time because of their fixation with investment as opposed to operations.  Sadly the 2030 energy paper does nothing to change this, it just continues the focus on investors.

The EU ETS Directive starts by saying that the EU ETS is established “in order to promote reductions of greenhouse gas emissions in a cost-effective and economically efficient manner”.  Despite this goal being expressed in a way that is agnostic to how emissions would be reduced, in practice EU people insist that the goal of the scheme is to promote investment in low carbon technology.  By doing that, they create a rod for their own back.

Investment decisions don’t affect emissions today, since investment decisions made today will not come to fruition for many years.  But if you look at it more rigorously, investment decisions themselves don’t affect emissions any time.  The mere fact of investing is not the key thing, because you could invest in your plant but not operate it.

The key thing is the decision to operate, since it is only by operating an industrial facility that significant emissions occur.  To cut emissions you have to ensure that economic circumstances are not favourable for operating carbon intensive facilities.

Thus the key task of an emissions trading scheme is not so much to make investment in high carbon technologies unappealing but to make the operation of these technologies unappealing.  If the operation is unappealing – now and in the future – then it follows directly that investment in them will also be unappealing.

A lot of the debate on the state of the carbon market circles around the low price and whether the low price affects investment decisions or not.  Purists say that the low price today does not affect investment decisions about facilities which will exist in the future; pragmatists say that the decision-makers still look, practically, at today’s carbon price to gauge the viability of a facility which will operate for the next thirty years.

While they all debate about investment decisions, operators of coal-fired plant today are cheerfully stoking up the furnace because coal is cheap compared to gas.  The result of this is that emissions are rising again.

Climate change policy makers should talk more about the need to influence operating decisions, not just investment decisions.   The one is no more interventionist than the other.  They could and should interpret the purpose of the EU ETS to be as much about low carbon operations as about low carbon investment.  If they framed discussion about the EU ETS in this way, they would have more ammunition for intervening into the EU ETS during Phase 3.  As a result opposition to back-loading and other forms of intervention would be less compelling.

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What is (fundamentally) wrong with the 2030 climate and energy package

Posted on January 31, 2014 by James Atkins

Last week the European Commission published its 2030 climate and energy package – a bundle of proposals to set out climate and energy policy between 2020 and 2030.  It was an effort at working a compromise between different political and industrial groups, but it remains a long way from what we should be doing.  It does not represent the long-term interest of most Europeans and future generations.

We are talking about the principal set of policies aimed at cutting emissions up until 2030.  Between now and 2030 we have 16 years – that’s a big and very important period of time bearing in mind that emissions definitely, definitely need to have peaked by the late 2010s or early 2020s.  And yet there is something fundamentally missing from the package, or from the thinking of the Commission.

The package is fundamentally unbalanced because it is all about mechanisms.  It is nothing about getting people to want those mechanisms.  All the policy mechanisms in the world will be ineffective if people don’t actually want them.

Therefore, to make the policy package balanced, you need two extra things: first, you have to get people to want to get emissions cut; second, you have to castrate the anti-democratic monster which is lobbying – because that stops change as long as a favoured few don’t want it.

This blog has written much about how getting people to love nature is essential for balanced climate policy, so no more on that here.  But even if people want to cut emissions – that is, even if a significant majority of people want to cut emissions – it’s not enough.  This is because policy decisions are not made in the long-term interest of the majority but through the pernicious influence of lobbying.

European law-making remains desperately exposed to lobbying, a most seedy enterprise.  One of the most despicable activities a man can do in a democracy is to take wages from an interest group – industrial or otherwise – and, in secret, often with detachment from his own personal beliefs, press the case of that interest group, with a view to influencing the making of law.

Why is lobbying so pernicious and vile?  The acts of lobbyists generally lead to the interests of the wealthy few overriding the interests of hundreds of millions of ordinary people.  This turns our democracy into a plutocracy – the rule of the rich.  As long as democracy should be about one man-one vote and not one-euro one vote, what lobbyists do and the way they do it is wrong.

There is a second problem with lobbying, but perhaps a less persuasive one.  People lucky enough to be gifted with intelligence and ability, should spread truth, or at least refrain from falsity.  Google isn’t far off with its aspiration of “Don’t be evil.”  Taking cash to argue for something you don’t believe to be the truth, is a sad and depressing squandering of human talent.

It is clear that lobbying acts as a huge brake on progress on environmental legislation.  There are countless reports of industrial companies fighting to get important green legislation diluted, delayed, blocked or even reversed.

Lobbying reform is needed.  One-on-one meetings between interest groups and bureaucrats must be banned.  Any bureaucrat found to breach the ban would be prohibited from holding public office for the rest of his or her life.

Yet since political participation is important, open meetings should be encouraged.  Any meeting connected with influencing legislation should be held in public forum with plenty of notice given to all interested parties.  Then lobbyists can make their case, publicly, and not privately, in secret.  If they want to influence the law, it must be done in public.  That is a necessary (but not sufficient) condition for being sure that elected officials and bureaucrats are acting in the public interest.

Without ruthless reform of lobbying, and without measures to get people to want to cut emissions, the 2030 policy package is unlikely to be effective.  The earnest efforts of academics, economists and consultants, their clever schemes of taxes and market mechanisms, will have been a waste of time.

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Leaky logic about leakage

Posted on January 30, 2014 by James Atkins

Carbon leakage is the idea that if a carbon price is imposed on manufacturers in the EU, then manufacturing will shift from the EU to other markets where there is not a carbon price or where the carbon price is lower.  It is argued that this process causes losses of manufacturing jobs in the EU.

In order to protect manufacturers from carbon leakage, the Commission produced a list of companies which are vulnerable to carbon leakage, and these were given significantly more free allowances than other companies not vulnerable to carbon leakage.

The list is published in this decision: Commission Decision of 24 December 2009 determining, pursuant to Directive 2003/87/EC of the European Parliament and of the Council, a list of sectors and sub-sectors which are deemed to be exposed to a significant risk of carbon leakage.

A sector or sub-sector is considered exposed to a significant risk of carbon leakage if the direct and indirect cost of carbon is over a certain percentage of gross added value or the intensity of trade with third countries is above a certain threshold, or a combination of these.

When making its calculations for the leakage list for 2013-2014, the Commission, in 2009 unaware of the forthcoming surplus of allowances, used in its assumptions an EUA price of 30 euro.  Now we know that in that period the actual average price is more likely to be somewhere around 5 euro.  As a result the Commission grossly overestimated the impact of the EU ETS on a number of industries, thus including a lot of companies in the “leakage list” which are actually far less vulnerable to carbon leakage according to intent of the Directive.  Calculations by the consulting firm CE Delft published in 2013 suggested that using realistic assumptions about the EUA price would result in only 10% of industrial emissions being covered in the leakage list instead of the current 90%.  http://www.cedelft.eu/art/uploads/CE_Delft_7917_Carbon_leakage_future_EU_ETS_market_Final.pdf

Looking forward to the revision of the leakage list for the period 2015-2019 it would be reasonable to assume that the Commission would take heed of its earlier forecasting error and would revise its assumptions to reflect reality.  This would ensure that the Directive is implemented in the manner in which it was intended.  But no!  On 22nd January the Commission announced, in connection with the 2030 policy framework, a proposal which would maintain the current criteria and existing assumptions (including an assumed carbon price of 30 euro) for the rest of Phase 3.

No sane person thinks that it is reasonable to assume an average EUA price for Phase 3 of 30 euro.

Thus the Commission is knowingly proposing a false assumption for a very important mechanism in the EU ETS.  What a sad day for the credibility of our laws, when, in order to make a policy politically feasible, it has to be stuffed with lies.

Is there some cunning plan behind this apparent conversion to mendacity by the good men and women of Brussels?

Political pragmatism tells us that the 40% reduction target for 2030 is the more important fight to fight.  Therefore they should keep their rather damp gunpowder as dry as possible for that big fight.  The Commission perhaps sees the leakage compromise as a small titbit for the dog of industry, to make the 40% target more palatable.

I am not so sure.  Industry isn’t going to be grateful for the leakage gesture.  It might gnaw for a while on the leakage bone, but it will still fight the 2030 target with teeth and claws.  And, even if industry does not fight it now because 2030 seems a long way away, it will surely find a way to weaken the target if the carbon price begins to hurt.  Now that industry has seen the Commission blink on leakage, it will fight with renewed vigour.  Lobbyists might have kids and like walking in the hills, but they are utterly ruthless and amoral when it comes to their client’s narrow interest.

 

Note

The logic of the leakage list seems flawed in any case.  It aims to protect companies from the economic impact of climate change legislation.  Why make a special case for climate legislation?

How about child labour?  What if we allowed companies in the EU to employ children if they can show that their competitors outside the EU employ children?

How about health and safety?  How about building standards?  Water treatment and sanitation? Animal husbandry standards?

Doing things right can indeed cost more.  But the upside is that our societies are a bit safer, freer, fairer and more pleasant to live in.

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The unbearable fragility of climate regulations

Posted on January 14, 2014 by James Atkins

Someone who loves nature can only be angry at this.  In June of last year the President Obama called for international lending institutions to stop funding coal-fired plants overseas.  The World Bank and the US Export-Import bank both agreed not to fund such plants except in the poorest of countries where there was no alternative.  You just think some progress has been made and now US lawmakers propose a bill to prevent the Export-Import bank from blocking fossil-fuel investments on the grounds that it would harm US exporters.

This is all wrong.

First, a government providing export credit to domestic manufacturers runs against a belief in free and fair markets and common sense business.  There is a reason why you don’t sell to risky countries – there is a high probability that the customers won’t or can’t pay.  So what business has the government knowingly and willingly taking such a risk?  To support domestic jobs.  In this matter there is no difference between a communist government which manufactures goods oblivious to the natural, market demand of customers, and a capitalist government which provides export credit guarantees; since that provision implies that there is no natural demand for the product at a market price which fully reflects the risks of the sale.  Thus the capitalist government is promoting manufacturing for its own sake, just like its communist counterpart.

Second, this move is untenable from the point of view of an ecological morality.  Manufacturers of coal-plant and their political allies know the harm done by fossil fuels.  People intelligent enough to run coal-plant companies are intelligent enough to listen carefully and attentively to the science.  Their failure to attend to this is a mark of cowardice.

But a more important observation emerges from this situation, to do with the effectiveness of government.

Laws work because the majority of people don’t intend to break them anyway.  Laws against theft or random violence, for example, broadly work because most people already culturally know that those things don’t pay. So these laws are needed in order to remind the majority and constrain only a small minority.

The trouble with laws about emissions of greenhouse gases is that they seek to constrain a majority.  Everyone is looking for a way around them, since there is no deep-set cultural acceptance of them, no cultural rejection of emissions.  These laws are a fragile fix and will be as long as the majority are intent on evading or avoiding them.

Rules, regulations, taxes and incentives don’t make bad people good. They help nudge our thinking in the right direction.  But as long as coal-plant manufacturers (like manufacturers of hand-guns) think it is culturally ok to sell their lethal technology, they will do all they can to do so, and seek to overturn any law which stands in their way, by fair means or foul.  Only when those technologies become culturally and socially unacceptable, will the laws which constrain them be robust.

This has implications for climate change policy.  It is not enough to come up with clever schemes. You have to change the hearts of the people.  As written many times in this blog, the best way to do that is shamelessly and intently to bring people to love nature.

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Kleider machen Leute and the corporate cocoon

Posted on December 30, 2013 by James Atkins

There is a scene in Bertolt Brecht’s play, The Life of Galileo, where the Pope is getting dressed.  While he is still in his underwear he is sympathetically disposed to Galileo; by the time he has his papal robes on, he is ready to allow the Inquisitor to show Galileo the instruments of torture.  As the Germans say: Kleider machen Leute.

Something similar was expressed in a blog post on the Bustard a while ago (https://www.thebustard.com/?p=750 ) on how we can be different people at home from at work.  For example, at home we might act for the long-term wellbeing of our children (e.g. teach them to swim) while at work we might do things which disadvantage the long-term the wellbeing of our children (e.g. promote the burning of fossil fuels).

The other day I understood another force which reinforces this split in our character.  I asked someone about being an executive with Shell, where your primary purpose in life is to get oil and gas out of the ground and get it burnt up.  I asked, when does the point come that you have enough money so you can walk away and do something different?  He explained that with a senior job at Shell come a Shell wife, a Shell car, a Shell house and a Shell mortgage.  It’s hard to get off that lifestyle.

But then he said: “Shell is a big family.  We all know each other.  We all feel part of it.”

Perhaps the surrogate family is as strong a lure as the lifestyle.  Within that family there is a shared purpose, a shared set of beliefs and a shared morality: in all, a powerful regulator of human thinking and behaviour; thereby our intellectual independence is dulled.  This is a kind of corporate alcohol which gives us a warm and cosy feeling and softens our mind.

It is good when an employer provides a great working environment and engenders a sense of belonging and common purpose.  But it is sorry at the point that talented people are lured into that warm and conflicted cocoon where they toe the line in order to enjoy the lifestyle.  Not because there is necessarily anything wrong with a nice life, but because, to cut emissions, we need talented people to focus, with clear, independent and sparkling minds, on the long-term interests of their children rather than on the short-term interests of their employers.

This might sound a bit idealistic but there are too many difficult problems to solve for it to be desirable for talented people to be lured into corporate families whose business further exacerbates those problems.

Environmental campaigners and even subversive policy makers might consider the home-work split and the corporate family delusion as areas for further investigation.

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