Comhar SDC has released its blueprint for a Green New Deal. An Bord Snip Nua has proposed the abolition of Comhar and they have now strengthened that case.
The Green New Deal is a stimulus plan for the economy: 3.7 billion euro a year for the next two to three years. We all wish Ireland had that sort of money for a stimulus.
Comhar proposes to finance the Green New Deal from the revenue of a carbon tax (400 million Euro a year), from the auctioning of carbon permits (which will not start before 2013), and with new borrowing (but with “green” bonds, so that’s alright).
The aim of the stimulus is not just to revive the economy but make it environmentally sustainable too. Most experts reckon that the transition to a low-carbon economy will take 50 years (give or take a few decades) but Comhar seems to think that 2.5 years is enough to make a dent.
The stimulus comes mostly in the form of subsidies for “green” investments. A carbon tax has the wonderful property of equalising marginal costs across all emitters, and being robust against special pleading. Subsidies break the principle of uniform pricing, and politicians have been tempted to pick winners. This is double regulation, and half of it is bad regulation.
The Green New Deal is meant to create jobs, just like the original New Deal. It would. The Green New Deal would create jobs a plenty in certain sectors, but these jobs would be at the mercy of state intervention. There would be more subsidy junkies. The Green New Deal would destroy market-based jobs in other sectors. Because the Green New Deal would raise the price of energy and keep labour taxes higher than needed, the economic recovery is slowed down and jobs are destroyed. Similar policies have been tried elsewhere, and there are natural experiments too. The empirical evidence is clear. A plan like the Green New Deal would destroy more jobs than it creates. Net unemployment would go up.
If there were money for a stimulus, then we should reduce VAT rates and labour taxes.
The Green New Deal does not stop there. The carbon tax revenue would be put into a National Decarbonisation Fund to be managed by the National Treasury Management Agency — as if absorbing NAMA isn’t enough. Anglo-Irish would be turned into a “green” bank. Anglo-Irish should maximise its return to the shareholders (aka the taxpayers), and placing constraints on the type of loans it can give and the type of investments it can make would reduce its profitability — higher taxes in the future, therefore. Comhar also argues that the pension funds should be forced to invest greenly. I would argue that pension funds should provide pensions, and to that end they need to invest in whatever gives the highest risk-adjusted return, regardless of whether it is green or blue or yellow.
In short, Comhar’s Green New Deal for Ireland is full of bad economics. It also has all the right buzzwords, so expect glowing endorsements from our dear leaders.
52 replies on “A Green New Deal for Ireland”
I do have an ongoing issue with this rhetoric entailing the word “jobs”, so loved by such central planning advocates
Some links to this clear evidence of which you speak in paragraph 6 would be nice.
This is a blog, not a library. You may want to start with the Hourcade chapter in IPCC AR2. AR3 and AR4 confirm those results, but without spelling them out as they are so uncontroversial.
“Anglo-Irish would be turned into a “green” bank.”
Insanity heaped upon idiocy.
A succinct, masterly – and very necessary – demolition job. And the case for taxation re-balancing – from labour and consumption to carbon – and for market-based solutions is well made. But then the real challenges surface. In general, the specific nature of the assets required to transform the pattern of energy use means that investments are dedicated, irreversible, long-term and, often, large-scale. Investors will require rock-solid assurance of full investment recovery at an appropriate risk-related rate of return. In a small, relatively isolated market, dominated by state-owned companies and with considerable uncertainty about the policy commitment and the allocation and performance of policy and regulatory responsibilities can there be any confidence that the “market” will deliver?
On the question of stimulus spending and its efficacy see this from today’s WSJ Europe.
By ROBERT J. BARRO
AND CHARLES J. REDLICK
The global recession and financial crisis have refocused attention on government stimulus packages. These packages typically emphasize spending, predicated on the view that the expenditure “multipliers” are greater than one—so that gross domestic product expands by more than government spending itself. Stimulus packages typically also feature tax reductions, designed partly to boost consumer demand (by raising disposable income) and partly to stimulate work effort, production and investment (by lowering rates).
The existing empirical evidence on the response of real gross domestic product to added government spending and tax changes is thin. In ongoing research, we use long-term U.S. macroeconomic data to contribute to the evidence. The results mostly favor tax rate reductions over increases in government spending as a means to increase GDP.
For defense spending, the principal long-run variations reflect the buildups and aftermaths of major wars—World War I, World War II, the Korean War and, to a much lesser extent, the Vietnam War. World War II tends to dominate, with the ratio of added defense spending to U.S. GDP reaching 26% in 1942 and 17% in 1943, and then falling to -26% in 1946.
Wartime spending is helpful for estimating spending multipliers for three key reasons. First, the variations in spending are large and include positive and negative values. Second, since the main changes in military spending are independent of economic developments, it is straightforward to isolate the direction of causation between government spending and GDP. Third, unlike many other countries during the world wars, the U.S. suffered only moderate loss of life and did not experience massive destruction of physical capital. In addition, because the unemployment rate in 1940 exceeded 9% but then fell to 1% in 1944, there is some information on how the multiplier depends on the strength of the economy.
For annual data that start in 1939 or earlier (and, thereby, include World War II), the defense-spending multiplier that applies at the average unemployment rate of 5.6% is in a range of 0.6-0.7. A multiplier less than one means that, overall, other components of GDP fell when defense spending rose. Empirically, our research shows that most of the fall was in private investment, with personal consumer expenditure changing little.
Our research also shows that greater weakness in the economy raises the estimated multiplier: It increases by around 0.1 for each two percentage points by which the unemployment rate exceeds its long-run median of 5.6%. Thus the estimated multiplier reaches 1.0 when the unemployment rate gets to about 12%.
To evaluate typical fiscal-stimulus packages, however, nondefense government spending multipliers are more important. Estimating these multipliers convincingly from U.S. time series is problematical, however, because the movements in nondefense government purchases (dominated since the 1960s by state and local outlays) are closely intertwined with the business cycle. Thus the explanation for much of the positive association between nondefense spending and GDP is that government spending increased in response to growing GDP, rather than the reverse.
The effects of tax rates on GDP growth can be analyzed from a time series we’ve constructed on average marginal income-tax rates from federal and state income taxes and the Social Security payroll tax. Since 1950, the largest declines in the average marginal rate from the federal individual income tax occurred under Ronald Reagan (to 21.8% in 1988 from 25.9% in 1986 and to 25.6% in 1983 from 29.4% in 1981), George W. Bush (to 21.1% in 2003 from 24.7% in 2000), and Kennedy-Johnson (to 21.2% in 1965 from 24.7% in 1963). Tax rates rose particularly during the Korean War, the 1970s and the 1990s. The average marginal tax rate from Social Security (including payments from employees, employers and the self-employed) expanded to 10.8% in 1991 from 2.2% in 1971 and then remained reasonably stable.
For data that start in 1950, we estimate that a one-percentage-point cut in the average marginal tax rate raises the following year’s GDP growth rate by around 0.6% per year. However, this effect is harder to pin down over longer periods that include the world wars and the Great Depression.
It would be useful to apply our U.S. analysis to long-term macroeconomic time series for other countries, but many of them experienced massive contractions of real GDP during the world wars, driven by the destruction of capital stocks and institutions and large losses of life. It is also unclear whether other countries have the necessary underlying information to construct measures of average marginal income-tax rates—the key variable for our analysis of tax effects in the U.S. data.
The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP.
—Mr. Barro is a professor of
economics at Harvard. Mr. Redlick is a recent Harvard graduate. This op-ed is based on a working paper issued by the National Bureau of Economic Research in September.
“The state controlled Anglo Irish Bank should be reconfigured as a Green Bank and offer innovative financial products such as green mortgages, green loans and green SSIA saving accounts. These would provide loans at favourable lending rates and provide a one stop shop for environmental finance.”
Is this reference to Anglo Irish Bank as a Green Bank a joke? I have an open mind on the whole Green Deal idea but delete any reference to Anglo Irish Bank asap.
Indeed. We should be selling those state-owned companies that have a lower return on capital than the interest we’re paying on state loans. We should be breaking up monopolies to lower the costs of business and living. The two go hand in hand.
For what it’s worth, ESRI research shows the same. If the carbon tax revenue is used to reduce labour taxes, economic growth accelerates. If the carbon tax revenue is used to subsidise renewable energy, economic growth decelerates.
No joke. That’s a quote from p. 65.
WTF is a ‘green’ savings account?
Green savings are undefined in Ireland (as far as I know) but well-defined in the Netherlands and a few other countries.
Green investments are investments that meet a range of criteria, and are certified as such by the Dept Finance. There are tax breaks on the returns to green investments. Green savings accounts are greenly invested — the bank takes the tax breaks and the saver gets a nice warm fuzzy feeling.
Because of the tax breaks, the required rate of return on green investment is lower than on ordinary investment. Dodgy projects are thus financed, and there is the reputational damage to sound projects that comes with all positive discrimination.
And of course the certification process is spiked towards certain suppliers. Squeeky-clean hydro, for instance, is not “green” in the Netherlands because we don’t like lobbyists with Norwegian accents.
Why don’t Governments augment the green savings accounts and green bonds by printing new ‘green’ currency notes?
The seignorage could be earmarked for green investments in job-creation and shoppers using the new notes would feel much, much better.
“The state needs to have in place the ability to rapidly introduce an emergency currency into circulation in addition to planning for the introduction of a longer term currency. Such a currency should not be debt based, but rather spent into circulation by government.”
from Economic Growth & Its Future – Report to the Green Party, Comhaontas Glas, Ireland, 8th December 2008
Thanks Richard and contributors. This is a great debate about green economics. On the one hand the Politicians and state bodies who want to be seen doing something to up their ratings at the next elections or keep themselves in a job and on the other hand to let economics of a country sort itself out by reducing tax burdens,tapping into the huge creativity of a nation that all of a sudden can afford to invest again. I totally agree with Richard, when policians stimulate this only creates a polical feel good within polical circles but creates a non competive economic environment that can only result in collapse at some stage as we have seen happening over the past year. Keep up this great debate, I hope politicians take note!
From a tax point of view, my business will be paralised for many years to come as I have to pay huge amounts of tax this year and to some extend next over a booming period but at a time of greatly reduced income. Had to let go almost all of my staff and had to revert to working twelve hours a day, just to save for the next two ever increasing tax bills. No investment possible for the next few years in a time that the country needs investments. I am sure that does not only apply to me.
No disagreement with the thrust of either of your posts. Just a minor point. The CER-determined WACC exceeds the Government’s cost of funds. This, of course, should have encouraged a higher gearing and some Exchequer equity investment. However, the debt percentage has been kept low and no Exchequer funds were forthcoming. Instead consumers have been compelled to finance a share of investment up-front that would have been more efficiently financed by a mix of debt and equity. Result: higher prices.
The current fiscal constraints mean that the Government can’t (and probably shouldn’t) inject equity, but privatisation would reduce prices and attract investment.
Market size and the lack of bankable long-term commitments are also constraints. The contractualisation of gas pipeline capacity in the much larger US market shows how markets can deliver the required investment efficiently. The UK and the rest of the EU are nowhere near establishing these arrangements for gas, electricity or carbon abatement infrastructure. Therefore there is the usual call for Government intervention and public funds.
Given the dominant position of the ESB, the Government’s desire to maintain it as a “vibrant business” (which explains the willingness to compensate it for the loss of generation market share and the transmission network) and the requirement to be seen to be doing something expensive and green, I think we should be resigned to “business as usual”. What are the odds we’ll see the subsidy junkie developers – who contributed to the property bubble – being reincarnated as green evangelists?
“I think we should be resigned to “business as usual”. What are the odds we’ll see the subsidy junkie developers – who contributed to the property bubble – being reincarnated as green evangelists?”
Sadly there is plenty of evidence that is already happening.
Allowing ESB to replace coal/peat with nuclear would dramatically cut electricity co2, maintain security of supply and aid competitiveness.
That does not fit blinkered ideology, nor does it feed subsidy-hungry green industry. Nevertheless it is the right thing to do.
“If there were money for a stimulus, then we should reduce VAT rates and labour taxes.”
At the risk of taking things off topic, why so? Surely the multiplier is worse for tax cuts than for spending? I understand that you think the state should be shrunk substantially from its present size but from a specifically stimulus point of view does this make sense?
It’s incredible how ideologicaly driven economists can present their material as objective analysis, and be taken so seriously (almost admirably) by their peers. This piece (like the rest of Richard Tols work) is a classic unapologetic, anti-empirical, neo-classical evaluation of what is a relatively sound proposal. Why not just state up front: ” I am opposed to anything that does not fit the neo-classical approach to economics, and anyone who moves away from this set of assumptions is wrong, and through non-empirical deductive reasoning, I will show how”. It is not science. It is ideology.
You may want to re-read Barro and Redlick above, or look at http://ideas.repec.org/p/esr/wpaper/wp251.html for Ireland.
Would you mind taking on any of my points rather than me personally?
More germane to the main topic:
1) Surely more expensive energy will follow from any carbon tax plan.
2) Your favoured policy appears to be “just price the carbon etc. adequately and let the market do the rest”. I’m sympathetic but is this undermined by the fact that there are plentiful subsidies for carbon-intensive activities (most obviously driving), not to mention the many ways that public authorities can promote such activities through regulatory and planning policy. (Yes, I know public transport is subsidised too…) I know the carbon tax is a subsidy of its own to non-carbon intensive sectors but it’s not like absent the more visible green subsidies advocated by Comhar we’re going to be in some kind of free market level playing field with all the externalities successfully internalised…
He wrote the book on growth 😉
1) Indeed. While Comhar wants to use the carbon tax revenue for subsidies with a dubious return, I would rather cut labour costs and VAT.
2) I agree. Fossil energy is supported in many ways. Those supports should be dismantled. That would cut emissions and save money.
The Barro & Redlick piece strikes this naive and untrained observer as…odd. I’m as fond as the next man of the theory of “military Keynesianism” but surely noone would expect spending that takes the form of sending hundreds of thousands of people off to the other side of the world (and spending much of the “stimulus” there) to have as high a multiplier as civilian spending?
And surely we might expect the multipliers of spending/tax cuts to vary according to how much spare capacity there is in the economy – the reason people normally expect spending to be be better than tax cuts is that people might sit on tax cut money in a depressed economy whereas at least with the spending programmes the money is spent once.
These are good points. Any spending programme has to be “shovel-ready” to be effective as a stimulus. The proposals by Comhar are not that.
Returning to the taxes, a cut in VAT may well be saved rather than spend, but it would shift spending from the North back to the Republic. An increase in take-home pay may again be saved, but a reduction in gross labour costs would mean that fewer are fired / more are hired.
Thanks for the references, though I must add that this is the internet, not a newspaper, and since it is very easy for bloggers to link to existing evidence sources it tends to arouse suspicion when they don’t.
Similarly, simply waving away James’s quite sensible comment with ‘just read Barro’ doesn’t inspire confidence either, since there is hardly much consensus behind what Barro has to say on stimulus.
You object to ‘…just tax the carbon and let the market do the rest…’ since maybe some activities, like driving, are subsidised.
It is not clear that private car use in European countries is subsidised – there are purchase taxes, annual taxes plus fuel taxes, which may or may not cover the attributable costs of road provision, and externalities.
These taxes are however fixed (purchase and annual), especially in Ireland, rather than use-related (fuel, tolls) and there is little or no congestion charging. But lots of carbon use is not taxed at all, eg aviation and marine fuel, diesel in trains, politically-favoured fuels, including €300 pa in fuel subsidies worldwide, very little of which is in Europe.
It is probably true that trucks are taxed too little, rather than cars, at least in Europe. But it’s an empirical question, and there is a very large technical literature in transport economics and traffic engineering on this precise issue. If you can access journals like Transport Economics and Policy, Transport Policy, Energy Policy, Traffic Engineering and Control, you should find plenty of stuff.
Richard Tol’s recommendation, if I understand it, is to tax the externality and try not to over-egg the pudding by earmarking the proceeds for renewable energy, job creation etc.
The Comhar report is a well-intentioned mistake, and I hope to write something for the newspapers about it next week.
Oops, annual worldwide fuel subsidies are €300 billion.
Is ‘stimulus’ an aka for printing fiat money? If indebted persons get their hand on any extra cash most likely they will pay down some debt – that’s the destruction of money! So bye, bye, Smithian Growth!
For all you Greenies and Sustainers. Have you noticed where the ‘spare’ oil has gone to now that the Western economies are using less? If we ever get back to ‘growth’ you might get an unpleasant surprise as the price of energy starts to escalate and snuffs out the ‘growth’.
Pat Hunt (above) exposed a very raw nerve. The energy resources you need to build out an alternative energy structure. Its massive! Anyone who fails to understand this, is living in Delusion-land.
I don’t necessarily disagree with anything you say, in particular it’s a good point that private driving is heavily taxed as well as heavily subsidised (at least in western Europe). The point about untaxed fuels (especially aviation) is also very important.
I would though add free on-street parking as a little-noticed form of subsidy/externality – not sure how bad we are on this front compared to others. Planning and regulatory policy are also relevant, in particular restrictions on dense urban development encourage/necessitate carbon-intensive lifestyles – not just the commuter belt but also larger houses in the burbs. Here of course the rent accrues to incumbent urban property-owners rather than drivers, who are in fact the victims – but the outcome is again policy driving (no pun intended) carbon intensive activity…
@James / Colm
The de facto monopoly of Dublin Bus is another example. They do not charge exorbitant prices, but they do deliver abominable services.
(This is not a subsidy on private transport, of course, but a sort-of tax on the alternative.)
These things can and should be rationalised. That does not cost €3.7 billion per year. It would reduce emissions (although not to the aspired levels). It would stimulate the economy (although not as much as many would want).
One of the loudest laments of the current international crisis, although it has found it hard to make itself heard over the din of other more pressing laments, has come from environment NGOs. Their fear is that the economic crash has pushed their issue down the agenda, not just with the mainstream political class, but also with a public that has more on its mind than climate change.
Far from being, as Colm McCarthy puts it, a ‘well-intentioned mistake’, the central objective of the Comhar SDC report is to make the case for a ‘zero carbon’ economy in Ireland and to get started on locking a range of related recommendations and proposals into public policy before the end of this decade, or at least before the Green Party Ministers leave office, whichever is the sooner. It is politics masquerading as economics.
The Comhar authors have wrapped up the opposition rather neatly too, by referencing the Fine Gael and Labour stimulus package proposals within their report. At the best of times it takes a brave politician to go on record as opposing any proposal emanating from an environmental NGO. They are even less likely to go up against a state-funded agency dedicated to representing the ‘environmental pillar’ in our society, such as Comhar SDC, particularly in the current politically unstable atmosphere.
The timing of this report appears quite deliberate, just as the current Coalition parties sit down to discuss the framework for a revised programme for government; in the month before the ‘high level’ action group on green enterprise are expected to bring their smart economy proposals to government; when the Spirit of Ireland group – a project Comhar appears to endorse – are about to approach the government seeking approval and, one presumes, massive public investment in their project, and when media attention, at long last, is beginning to turn towards the topic of climate change as the Copenhagen conference looms into prospect.
As Richard Tol points out in his comments, there’s nothing original about the New Green Deal, which has already found its way into public policy initiatives in some other EU member states and is a variation of the Greenpeace ‘zero carbon’ approach. The problem that I see with proponents of the New Green Deal, though, is that they are as selective in what qualifies for ‘green’ status as they are zealous in their rejection of any other technologies – such as nuclear – that they find ideologically incompatible with their environmental philosophy.
Comhar’s exposition of a New Green Deal for Ireland is extraordinary in its scope. The concept provides an umbrella for combining recommendations for a new departure in energy policy with sustainable environmental practices, with the promotion of social cohesion, with taking steps towards the creation of the ‘smart economy’ and with a €4bn economic stimulus package that will banish the woes of world recession from our shores. It tries to do too much and it’s also wrong on just about every level of analysis. For example, its reliance on the Stern Report for its argument on the redirection of pensions funds and indeed for much else of its analysis of the need for urgent action is pretty spurious.
Unlike Stringer Bell above, I find Richard’s criticisms of this report compelling. Irrespective of what ‘school of economics’ he may allegedly belong to, facts are facts. In any event, economists with a specialised interest and acknowledged credentials in this area in Ireland are thin on the ground and without his input a lot of these reports and the feasibility of proposals that are underpinned by a particular environmental philosophy, and biased accordingly, would remain unchallenged by just about everybody else.
“the comhar report is a well intentioned mistake”
I would argue that the recommendations in your report on energy efficiency schemes are a serious mistake. The following is an extract from a blog I wrote on the topic.
“The recently published ‘An Bord Snip’ report recommended that government spending on energy efficiency programmes should be serious curtailed, finding that “in total, these [energy efficiency] schemes will cost €100m of capital expenditure in 2009, up from €44m in 2008. In light of current economic circumstances, this large increase should be substantially unwound to realise Exchequer savings of at least €40m.”
It would be irresponsible not to recognize the enormous challenge presented by the current state of the exchequer finances. Indeed the substantial majority of the savings proposed, while unpalatable, are absolutely necessary.
Yet the group’s focus should be on wasteful spending. The efficiency schemes identified by the group, for the most part, provide grants to homeowners to improve the energy efficiency of their dwelling. These grants have in fact led to the creation of a whole new industry and thousands of jobs, leveraged hundreds of millions of private sector investment, not to mention save energy and emissions. The cost-benefit evaluation of the Home Energy Savings scheme, for example, shows an enormous benefit to society, and, in most scenarios, cost neutrality or better for the exchequer.
The report explains the logic somewhat when it proposes that “energy efficiency schemes should only be funded in the future if the cost of achieving the reduction in carbon output secured by them is equal to or less than the market price for carbon credits”. Presumably the logic is that the exchequer will have to buy credits if emissions are not reduced, and that this simplistic cost-benefit payoff is all that matters at this time of crisis.
This is an almost incredible argument. One wonders if this same logic should apply to all capital spending projects? Not too many roads would get built under such restrictive criteria. Surely investing in energy efficiency should be assessed like all other capital spending and not singled out?
A further insight into the authors’ logic is perhaps unintentionally provided further on, when they state that “furthermore, the introduction of a carbon tax, in due course, should obviate in economic terms the need for any such schemes”. Get it? Markets are perfect and once the correct price signal is provided any truly cost-efficient and sensible investments with reasonable pay-offs will be made. “Market failure” is seen as an oxymoron by the authors it seems.
The only problem with this logic is that it is nonsense. Markets consistently fail when it comes to energy efficiency and numerous well-understood and intractable market failures can be identified in the area of residential energy efficiency. There are split incentives, ill understood benefits, information deficits, lack of trust, uncertainty of payoffs, high up-front costs etc.
The swift withdrawal of funding from programmes proposed would pull the rug out from under an emerging industry which will likely be worth billions in years to come. While the suggestion “to transfer responsibility for appropriate schemes…to the energy companies” is probably a good idea in the medium term, this transition must be managed in a way that doesn’t strangle a vital and rapidly expanding sector of the construction industry”.
I am writing a research paper on the roll out of a national energy efficiency retrofit programme (not reliant on exchequer funding) which will be launched by the Minister for energy on 21st Oct, assuming the government survives the weekend. The underlying principle is fairly simple: it’s cheeper to save energy than it is to buy it…and we need that cash more than Norway at the moment.
If the Home Energy Savings scheme has such a wonderful return on investment as you claim, then of course it should be continued. I worry, though, that your claim is based on a study that is being kept under wraps.
There are many market failures, of course. Market failure is no cause for any government intervention, though. Market failure is cause for specific government intervention. Typically, a government does less harm when it assumes a perfect market than when it tries to correct the wrong market failure. First best intervention in a second best world is better than second best intervention in a different second best world.
Hi Richard, I saw you on prime time with the wave energy guy, you came across well.
This forthcoming carbon tax, although it seems likely to initially be pegged to the ETS price, do you think there is scope to increase it? €20/ton is about 5c/litre, which is unlikely to have much of an impact. With the government casting around for money in coming years, do you think they will turn to a higher carbon tax?
Also, you said on prime time that insulating houses was an expensive way to save carbon. What were the cheaper ways you alluded to? Thanks.
Fair points on both counts. On the first point more analysis is needed, not on notional modeled energy saving, but actual savings. Hopefully HESS will provide necessary data.
On the other, I understand opinions on government intervention.
This is not an opinion. It is a theorem.
The right second best policy removes a market failure and its interactions with another market failure.
A first best policy removes a market failure, leaves its interactions with another market failure intact, but does not further distortions to the economy.
The wrong second best policy removes a market failure, leaves its interactions with another market failure intact, but does introduce a third market failure.
The statement “markets fail so I am free to deviate from first-best policy” is wrong.
The correct statement is “markets fail so I should deviate from first-best policy in a very specific way, and if I do not know that deviation for sure, I’d better stick with my first-best policy”.
I have not seen the 2010 budget, so I do not know what the carbon tax will be. The futures price for 2010 is €13.39/tCO2.
Insulating houses is an expensive way to reduce emissions. If we believe the announcements of the department, it would cost €30/tCO2 or more. I do not know how reliable that number is, as the background material is not open to scrutiny. But I think it is fair to assume that insulating houses is like paying twice the market price of CO2.
There is no reliable abatement cost curve for Ireland, so we do not know cheaper means of emission reduction. That is the power of a carbon tax. The policy analyst and the regulator do not need to know the cost of emission reduction. A carbon tax uses the market to find that information.
If we stick a carbon tax in our economic models, we find a lot of action in power generation. That is where the cheap abatement options seem to be.
jc: The carbon tax, at the right level, is a Pigouvian tax on the externality, and should yield the ‘correct’ level of emissions. If it is a silver bullet, you load the rifle with just one round, hit the target, and go home.
No need to loose off shotgun rounds at house insulation, or any other of the myriad plausible-sounding programmes, which make sense only as substitutes for the carbon tax.
@ Richard & Eamon:
Why do you not consider this reliable:
In every abatement cost curve that I have seen for anywhere in the world, energy efficiency measures come out as cheapest.
As for your figure of €30 department figure for insulating houses, what is your source? The NEEAP? I
The SEI/McKinsey analysis suggests that the cost of mitigating emissions from the residential buildings sector estimated that a “basic retrofit” package of measures (described as “package 1” (which included low-cost measures such as attic and cavity wall insulation) could “improve average dwelling to a C2 BER” at negative cost of -€44 per tonne of CO2. The study also estimated that a second package of interventions (“package 2”, which included more costly interventions such as external wall insulation and low emissivity double glazing), which would move the building stock towards a C1 level, could be achieved at a cost of €53 per tonne of carbon abated.
What “action” do your models project in power gen? Switch from what to what?
I have no problem with “markets fail so I should deviate from first-best policy in a very specific way, and if I do not know that deviation for sure, I’d better stick with my first-best policy”.
That’s simply not true. I could prove this in many ways, but let me give you a simple example. A Pigouvian tax corrects the negative externality as you point out. But this does not mean that the market will provide an efficienct level of efficiency services, because there are a proliferation of other market failures at work.
Take CFLs – there is already a powerful market signal to switch from CFLs to incandescent bulbs. The investment pays itself off in the first year and CFLs last 8 – 15 times as long as incandescent, and there would be innumerable positive externlities if this was done on a wide scale. And yet people don’t switch for a wide variety of reasons, probably mostly incomplete information in this case. Carbon tax will not change this.
You assume that the HESs scheme is an emissions reduction strategy. It was never proposed as an emissions reduction strategy and it is simplistic to isolate this reason. That would be like saying we can’t build this railway because the emissions savings over the lifetime of the project cannot justify it. HESs has many many benefits: emissions reductions, energy savings, employment creation, support of emerging infant industry, provision of accurate data on costs-benifits of measures, fuel poverty alleviation etc
Note however that I agree with transferring responsibility for appropriate scheme to the energy companies over time as you suggest.
The McKinsey studies on MAC curves provide a reliable income to the consultants.
The original, global study was never published in a peer-reviewed journal. The underlying model and data are hidden. I happened to be at one of the rare meetings where one was allowed to ask probing questions, and the project leader could not answer even the most basic ones.
The Irish MAC curve derives from the same data and model. Some of the data are specific to Ireland, other data are from other countries, and some data are wild guesses. The “model” is a collection of simple equations, typically ignoring partial equilibrium effects let alone interactions between sectors. “Consistency” is imposed by using the same parameter values (e.g., discount rate) across sectors, even in cases where parameters are known to vary.
Policy makers in Ireland often lamented the lack of bottom up information on emission reduction, so McKinsey was hired to produce something that looks like the output of a bottom-up analysis.
The 30 €/tCO2 is straight from the department. See http://www.irisheconomy.ie/index.php/2009/02/16/national-insulation-for-economic-recovery-as-second-best-as-it-gets/
Reading through some of the posts in this very itneresting discussion, am I right in feeling justt a niggling concern that already we may be sowing the policy seeds of a ‘green bubble’ in just a few years time?
Indeed. Green energy is attracting heaps of venture capital, and it will only be profitable if technological progress accelerates to 2-3 times its historical maximum or if the electorate discovers a sudden and sustained appetite for huge carbon taxes. Fingers will get burned.
That said, the scale of the current investment is not enough to drag down the entire economy in 2015. Investment is being scaled up though.
Call me thick but I can’t see any reference to €30 per tonne of CO2 in that thread. Seriously, where did you get that figure? I think they use a shadow price of about €20 in the dept, but that will rise for sure.
I was not involved in the drafting of the report, but the IIEA will be hosting a debate on the report with the Irish team who I am sure would be interested to debate your concerns (I will post invitation here for anyone is interested for anyone who is interested). I had some insight with what happened in the agriculture section and while I disagree with the findings, everything that went in was backed up by peer reviewed research.
You also never answered my question about your models and power gen? Efficiency is clearly the cheapest thing going. Can you think of any MAC study that disputes this?
True. I found a €400/tCO2 value there. I guess the €30/tCO2 is somebody else’s estimate then.
Thanks a lot. You are probably right that the Greens would not be in favor of socialising the losses from the other side of the fence. Would like to see bond holders taking a hit, but that would entail its own risks.
Disagree that only ethical thing is to vote against PFG and find your statement fairly insulting to my intelligence, my integrity and to the bona fides of the party leadership, most of whom I know personally. The other political parties have destroyed this country and I believe that the Greens can make profound change. If I see that total reform of political process, inc local government, planning and dail, are on the table, no way would I walk away from that. I would also be of the opinion that political instability and back to drawing board is last thing this country needs right now.
For me it’s pretty simple: Greg’s 1&2 above make NAMA acceptable and I have yet to hear a good reason why this couldn’t work. Perhaps the argument is that banks would hedge against potential future losses by building reserves and would therefore not increase money available for credit……would then defeat purpose of the whole thing??
oops wrong thread
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Green is the only way to go. Whether its sooner or later. Appreciate the article