The Copenhagen Accord

The ultimate aim of science is to predict, preferably something that can be falsified. In 1994, using tools that were much older, Scott Barrett predicted that an international treaty on the provision of a global environmental good (say, greenhouse gas emission reduction) would be either narrow (that is, ratified by a few countries only) or shallow (that is, have lenient targets). That prediction was not entirely correct. The Kyoto Protocol was both narrow and shallow: Western Europe signed up to targets that will be met by virtue of lacklustre economic growth.

Since 1994, game theorists have shown that while meaningful global treaties are unlikely, regional treaties may well be feasible and effective. That prediction seems to be accurate. In Copenhagen, five nations (Brazil, China, India, South Africa, USA) came together in something of a deal. (The other 188 agreed to take note.)

The EU had put all of its cards on the table well before the meeting, and was thus sidelined from the negotiations.

As an academic, one should be happy if predictions stand up to observations. As a taxpaying citizen, one may have a different opinion. Why did 45,000 people travel to Copenhagen for a meeting that was widely predicted to fail, and indeed did?

The short answer is: bad policy advice. The debate on climate policy is not open. Group think dominates, and people who have a slightly different opinion are ignored or smeared. Policy advise is often manipulated, and decisions are regularly made in complete ignorance of the consequences. The Intergovernmental Panel on Climate Change, which is supposed to synthesize the academic literature to inform decision makers, has deliberately ignored or downplayed politically inconvenient parts of the literature such the large body of game theory.

The literature on the provision of global public goods has two straigthforward recommendations:

1. Forget about legally binding targets. Use pledge and review instead. International law is weak, and countries are reluctant to sign away part of their sovereignty.  Treaties with legally binding targets tend to codify what signatories plan to do anyway. Discussion about binding targets and sanctions tend to be acrimonious, as some countries feel threatened and “binding” has different meanings in different jurisdictions. So, countries should meet every so often to discuss their domestic plans.

Such an information exchange is important because climate policy inevitably raises the price of energy. Dearer energy implies a loss in competitiveness. A country would therefore be more inclined to unilaterally raises its energy prices if it knew its trade and investment partners would do the same.

2. Focus on policy instruments. Emission reduction is much cheaper in some places than in others. So there needs to be a mechanism through which a country can purchase emission reduction in another country. The simplest way to do this is by linking up domestic markets for emission permits. (Permits are licences, rather than commodities, so international trade is not automatic.) An international treaty should regulate international trade only. (Current attempts seek to micro-regulate both international and domestic policies.)

One could hope that the failure in Copenhagen will lead to a fundamental re-think of international climate policy. I’ve hoped that for over 15 years now, and I’m not holding my breath this time.

Energy Prices In Ireland

The Irish Academy of Engineering has released a new study of energy price competitiveness: you can read it here.

Investing in Electricity Infrastructure and Renewables in Ireland

With three colleagues Seán Diffney, Seán Lyons and Laura Malaguzzi Valeri, we have recently published a series of papers on the economics of the electricity industry in Ireland. The conclusions are summarised in a Research Bulletin published today. There is also an article in today’s Irish Times.

The original papers are:

DIFFNEY, S., J. FITZ GERALD, S. LYONS and L. MALAGUZZI VALERI, 2009. “Investment in Electricity Infrastructure in a Small Isolated Market: the Case of Ireland,” Oxford Review of Economic Policy, Vol. 25, No. 3, pp. 469-487. Available here. We will release a working paper with additional results on this topic in the next few days.

MALAGUZZI VALERI, L., 2009. “Welfare and Competition Effects of Electricity Interconnection Between Great Britain and Ireland”, Energy Policy, Vol. 37, pp. 4679-4688. available here. An earlier version is available as a working paper.

Climate policy after the budget

The budget introduced a carbon tax, with immediate effect on transport fuels, after the winter on some heating fuels, and after due deliberation on other heating fuels. I’ve long argued for a carbon tax. I would have set the carbon tax 67 cents lower at €14.33/tCO2. Like the government, I would have ignored the advice of the Commission on Taxation and levy the tax at the point of retail.

I would not have exempted coal and peat. I do not think that direct imports from the North would be substantial. Coal and peat emit more carbon dioxide, per unit of heat, than any other fuel. Coal and peat should be taxed most, not least.

At the same time, the government has increased the budget of its energy programmes by 13% to €105 mln. The SEI has yet to release its long-finished evaluation of the performance of these programmes in the past. With a carbon tax in place, there now is double regulation. The carbon tax induces people to invest in emission reduction, and they will get a government subsidy on top if they use the government-favoured technology. The Climate Bill is rumoured to put a domestic cap-and-trade system on top.

People who have had their homes insulated at the taxpayers’ expense will continue to be entitled to a fuel allowance (which may well go up).

The carbon budget had some bad news. According to the provisional estimates of the EPA, emissions in 2008 fell by 1% compared to 2007. The ESRI forecast for 2008 is -4%. The EPA has not released their estimates, so I am not sure what is going on. If emissions do not fall in the middle of a recession, that must mean that energy use is sticky downwards (unlike wages). This will make emission reduction even harder than we thought.

Despite that, the Climate Bill is rumoured to extent the target of a 3% annual emission reduction from 2012 to 2020, and to have an 80% emission reduction by 2050. A future government can of course pick a new target.

Returning to the budget, energy research will see its funding increase by 176%.

Stimulating a Green Recovery

The new issue of Finance & Development carries several articles on this topical issue: you can find the articles here.