Besides being one of the best soccer players of all times, Johan Cruijff is also a sage who spouts wise platitudes in a heavy Amsterdam accent. One of them is that every downside has an upside.
The economy is contracting rapidly. This is bad. However, greenhouse gas emissions are also contracting rapidly. This is good.
The EPA will today announce that we will be much closer to our Kyoto targets than previously thought. See Harry McGee’s piece in the Irish Times. This means that we will not have to spend all of the 270 million euro that is reserved for importing emission permits. Every little bit helps.
The details in today’s announcement are of historical interest. The latest EPA emissions projection is based on an ESRI economic projection of mid January.* How times flies. Back then, we thought that cumulative contraction would be 7% between 2008 and 2010. If only.
Should anyone want to update the emission projections, the output elasticity of CO2 is about 0.7 while the output elasticity of all greenhouse gas is about 0.5.
*We also projected emissions at the same time. See another piece by McGee.
9 replies on “The Johan Cruijff principle”
Amongst sporting sages, the Yankees’ batter Yogi Berra addressed the economics profession directly: “In theory, there is no difference between theory and practice. In practice, there is”.
Richard,
has anyone calculated the share of emissions accounted for by the flows of goods from China to the West? I ask since it seems likely that this flow will decline substantially in the medium and perhaps longer term (i.e. not just in the here and now) as part of the necessary rebalancing of the world economy.
Kevin: Glen Peters is the current champion of this line of research. See
http://www.cicero.uio.no/employees/homepage.aspx?person_id=1067&lang=en
His work on based on input-output models. There is a greenhouse gas module for GTAP, but the CGE crowd seems more interested in fancy questions.
Kevin: Newspaper reports today (see for example http://www.earthtimes.org/articles/show/260145,china-rich-nations-should-pay-for-pollution-from-exports.html) report China arguing that the West should be responsible for emissions from Chinese exports, which an official puts at 15 per cent of China’s total emissions.
More significant is the principle enunciated by China that the cost of reducing emissions should be borne by the consumer, not the producer. This would seem to create the right incentives, but unfortunately is the opposite to the Kyoto Convention accounting conventions. I wonder is this evidence of policy-making excluding economists? The issue is important for Ireland when it comes to tackling our agricultural emissions, for example. If we were to try to reduce our agricultural emissions by reducing our livestock herd, if consumption remains unchanged, we just see carbon leakage as production moves to unrestricted regions. In my view this makes it impossible to seriously tackle agricultural emissions as a pollution source.
Richard: The impact of the downturn is felt not only in Ireland but also in Europe, where carbon prices on the European Climate Exchange for EUA futures have collapsed to around 10 euro per tonne. There seem to be two views about this. The first is that the volatiliy in emission prices makes it impossible to think seriously about investments for a green economy, and that we need the certainty of a carbon tax (slowly increasing from a lowish starting point, if I understand your views correctly). The opposite view is that the current low carbon prices are precisely the advantage of emission permit markets, because lower carbon prices are just what businesses need in a recessionary environment – it is an example of an automatic stabiliser. Do you favour one side or the other in this debate? Also, presumably the fall in carbon prices has repercussions for some of the rather grandiose estimates of what a carbon tax might yield in revenue terms in Ireland, if we follow the received wisdom that the tax should be set to follow the permit price in the EU ETS.
On China (4): Indeed, reguatlion would improve if accounting were based on consumption rather than production.
Economists are not just absent in the climate negotations, they are often villified. The starkest example is the Clean Development Mechanism. This market was designed by lawyers and environmentalists. Transaction costs are often higher than the value of the product, and many permits are fake but legal.
On the cyclicity of permits (5): At first sight, cap-and-trade is anticyclical. The price (implicit tax) falls as the economy slows. However, emission abatement is more about redirecting investment than about anything else. Therefore, a rapidly growing economy offers more opportunities to cut emissions. Cap-and-trade is thus not necessarily anti-cyclic.
That said, an explict carbon tax is necessarily more pro-cyclic than cap-and-trade.
The ESRI estimates of the revenue of a carbon tax were all based on 20 euro per tonne of carbon dioxide. The price fell to €8/tCO2 a few months ago, but has risen to €12/tCO2 since. So, my €500 million a year estimate of last summer is off by a factor two at the moment.
It can be noted that these estimates of a carbon tax yield are at the lower end of those now in circulation. Stephen Collins in the Irish Times last week quoted a figure of €800 million http://www.irishtimes.com/newspaper/frontpage/2009/0305/1224242305529.html; Enda Kenny has suggested a full yield tax revenue of €750 million based on a carbon tax of €25/tonne http://www.irishtimes.com/newspaper/ireland/2009/0304/1224242234133.html; while Pat McArdle, chief economist at the Ulster Bank, has written that a carbon tax could yield a billion http://www.ulsterbank.com/content/group/economy/ri_indicators/downloads/articles/Examiner_2009.02.23.pdf, even if in a rough and ready context where he was trying to bring home the gravity of the crisis in the public finances
The yield from the tax would obviously depend on the rate at which it is levied, and some of the higher figures could be due to including the ETS sector in the carbon tax regime (which does not make sense) or extending the tax to include methane and nitrous oxide (as in the infamous ‘cow tax’). However, if we are to introduce the tax as a sensible way of guiding the economy towards least cost abatement solutions rather than simply to raise revenue, it appears yield expectations from a carbon tax need a reality check.
I fully agree.