Carbon tax assumptions: international permits

As Henry points out below the Treasury carbon tax modelling makes several assumptions. Nothing wrong with that – all modelling makes assumptions. What is important, however, is the sensitivity of the modelling to variations in the assumptions.

The assumption about international permits is very important. The Treasury set out the assumptions in their Table 3.1

This is the important bit from the table.

Mechanism: from 2013 to 2015 uncoordinated global action, no trade in permits, differentiated carbon prices. From 2016 onwards, countries trade, either bilaterally or through a central market.

The Treasury modelling report also states quite clearly (in chapter 3 – pages are unnumbered but it is in section 3.1.4).

By 2016, a more coordinated international policy regime allows countries to trade either bilaterally or through a common central market. As a result, a harmonised world carbon price emerges in 2016.

Compare that with what Lenore Taylor suggests the government really means

Treasury’s separate macro-economic modelling came under fire later in the week from a respected economist, Henry Ergas, who claimed that because it assumes a harmonised $29 carbon price for developed economies after 2016, it must be making the entirely unrealistic assumption that they all have an emissions trading scheme or a carbon price by then. The government says it is not assuming countries such as the US actually have an emissions trading scheme, but rather that they would try to reach their emission reduction targets at a cost no higher than the international price.

Is Australia going to be buying permits from countries that don’t have similar carbon taxes? Really? The government should have to nominate potential trading partners. As the recent Productivity Commission report indicated

However, no country currently imposes an economy-wide tax on greenhouse gas emissions or has in place an economy-wide ETS. Of the study countries, the United Kingdom, Germany, some parts of the United States and New Zealand have emissions trading schemes operating — but these apply only to particular sectors, such as electricity generation.

The Treasury, however, tells us what abatement would occur in the absence of international permits.

In the absence of the international market the government’s policy cannot and will not actually meet its target – any target. The assumption about the existence of an international permit market is a lynch pin assumption. Emissions in 2000 were 558 MtCO2-e, Treasury estimates that without an international permit market emissions in 2050 will be 545 MtCO2-e. That isn’t even the 2020 target.

What Treasury isn’t telling us is what the economic impact of an absence of an international market will be. Yesterday the Financial Review (subscription required) reported that without access to international markets the coalition policy would cost double the government’s policy. To the extent that Treasury assumes unlimited access to international permits and the government’s policy only allows 50 percent of permits to be internationally sourced the domestic cost is already higher than Treasury estimates.

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8 Responses to Carbon tax assumptions: international permits

  1. entropy says:

    next question time the opposition should ask a separate question for each assumption querying if Treasury did any sensitivity analysis for key outputs from the model, and it did, could the sensitivity analysis be made publicly available. If treasury did, and it is not publicly available, it should be FOIed.

    Another option would be to get the Parliamentary library to get Treasury to run it.

    if blocked for any of the above, well that would be interesting wouldn’t it

  2. The current “international” price for a carbon credit is around AUD 13.00. However credits from reputable projects with millions of credits available can command a price of 30, 40, even higher per credit.

    And that’s before demand from Australia kicks in.

    Protip: demand makes things more costly.

    Gillard and the rainbow socialists are not even interested in the economics, it’s just wealth distribution under a green blanket.

  3. Don says:

    Who will be the gatekeeper for valuing these scams? Moody’s, Standard and Poors? They are great with valuing imaginary concepts based on modeling

    How much will I get paid for my carbon abatement if I promise not to start my annual tire fire? or do I have to start burning tires now to get a track record?

    If we are seriously about to leak billions as a nation into such hocus pocus – I feel it is my duty to profit by setting up a scam, sorry ‘green business’ in a country with needy accountants.

  4. derp says:

    Why stop at carbon as a unit?

    We could trade in international permits for the right to have children. The Chinese would be happy to accept $$ for some of their excess quota of child permits. And we know they’d not rort them either because, well, they said so!

  5. Don says:

    Of course, genius…

    What other ‘intentions to behave’ can we sell?

    I can purchase a credit to never live in the outer suburbs to offset my current V8 powered guilt on the way to golf on the weekend.

    Would Bob Brown like to “offset some carbon” with me using his own money?

    Is my promise better or worse than those available offshore?

  6. Jim Rose says:

    as I recall, the 20% greenhouse gases reduction plan put out by the NZ green party also assumed a major international trade in carbon credits to make the numbers work!

  7. Michael Sutcliffe says:

    If we are seriously about to leak billions as a nation into such hocus pocus – I feel it is my duty to profit by setting up a scam, sorry ‘green business’ in a country with needy accountants.

    You don’t need an artificial market to exploit this situation. It adds a whole new and exciting dimension to the resources and power industries. I don’t think it’s a good idea, but I’m happy to play around in it on your dime!

    A couple of years ago I got to do the systems engineering for a UAV that was being developed. Much of the project kept saying up the chain that it was a bad idea with big risks, and a different approach should be taken to ensure money wasn’t wasted. No one listened. A prototype was built but the project (or at least that aspect of it) ultimately folded costing one of the parties quite a penny. Not my problem, I enjoyed my part, learnt heaps and got to do some unique engineering from that little exercise, all on someone else’s dime!

    I’ve always felt being an engineer often has difficulties, because there’s not much work like I just described above. Generally speaking, customers expect things to work and you’re held accountable. The renewable energy industry opens up a whole new world of subsidies for developmental work, with that typical governmental ‘all care and no responsibility’! And there’s one of those multi-million solar projects starting near my town!

  8. Don says:

    The way I figure it, the easy dollars are always made in getting paid upfront for future commercial outcomes

    Investment bankers love this concept – it means you have been paid and retired before the smell rises.

    Even better, this opportunity has the benefit of rubbery models / left wing approval / a publicly owned buyer with no ability to measure benefit and dirt poor sellers (and auditors)

    Middleman’s delight

    We are on the path to becoming the World’s Idiot

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