Thomas McDermott on Climate Bill

A guest post by Thomas McDermott
Climate change is a real and significant threat to human welfare, particularly in the poorest parts of the world. While an effective ‘solution’ to this threat will require global cooperation over a sustained period of time, this is no excuse for not acting now to begin the process of reducing our dependence on carbon-intensive activities.
Ireland has a great record of leading the world in initiatives aimed at reducing global poverty. This work should be complemented and reinforced by action on climate change. Ireland could take the lead in demonstrating to other rich countries (and the rapidly developing ’emerging economies’) that reducing carbon emissions can be achieved without jeopardising economic or social welfare. In fact, these goals can be enhanced by such initiatives. This is not only the morally right thing to do, it is also in our interests. Such leadership would help to restore Ireland’s image internationally, which has been so tarnished by the excesses, greed and corruption of our recent economic boom and bust. At the same time, intelligent climate legislation could provide an additional source of revenue for government, while potentially improving our competitiveness over the long-term.
Unfortunately, the proposed Climate Change Bill produced by The Oireachtas Joint Committee on Climate Change and Energy Security (and due to be debated in the Dail today, Thursday), will not achieve any of these worthy goals. The proposed bill would legislate for ambitious emissions reduction targets, with the Taoiseach responsible for ensuring that these targets are achieved. The Taoiseach would also indicate what levels of emissions he/she expects each year. How is the Taoiseach to predict annual emissions levels or to enforce any such medium to long-term targets? This is equivalent to imposing legislation that requires the Taoiseach to predict levels of economic growth each year, or somehow to enforce medium to long-term economic targets.
Unless this legislation envisages an entirely new, centrally-planned economic system in this country, I do not see how its objectives can be achieved.
Legislation of this nature will do two things:

1) It provides a convenient sound-bite for politicians to hide behind. It is relatively easy to say “we have proposed/introduced legislation that will force emissions to fall by x% by 2050” etc. without actually specifying how such targets will be achieved (i.e. without having to stand up to various interest groups who may stand to lose from specific climate-related legislation).
2) Such a law obliges the presiding government to make various interventions to attempt to reduce greenhouse gas emissions. Crucially, however, it leaves the choice of specific interventions as a purely political decision. How will the government of the day decide how and where to reduce emissions? On what basis? We surely should be sufficiently well chastened in this country by recent experience of political interventions in the property sector (in the form of tax breaks etc.) to understand what a dangerous scenario this type of legislation will create.

We should not allow politicians the convenience of meaningless targets to hide behind, or the opportunity to use climate change legislation as a means of making themselves and their friends better off in the next round of crony-political-economy.

Setting ambitious long-term targets might sound good, but in reality this does not provide any greater certainty to businesses, investors, or consumers, simply because such targets are purely aspirational and are not credible without specific measures to achieve them.

The optimal climate change policy from both an equity and an efficiency perspective is to place a tax on carbon emissions, and allow people to choose the best way for them of reducing carbon dependency. This would obviously have revenue raising potential – revenue that is so desperately needed right now – while any potential threat to vulnerable people could be mitigated by using part of the revenue raised to provide reimbursements to those on low-incomes. Taxes are never popular, but the people of Ireland are acutely aware right now that taxes must rise. In every crisis there lies opportunity. If only we had the courage to embrace this one.

Gillian Tett on Ireland

Gillian Tett (who was in Dublin this week) writes on the Irish situation: Ireland has shown grit but must find a magic formula

Report on Macroeconomic Policy and Effective Fiscal and Economic Governance

The Joint Oireachtas Committee on Finance and the Public Service’s report on a new fiscal framework is now available.   It can be downloaded here (MS Word file).   Unfortunately, Philip Lane’s background report for the Committee does not appear to be available for download at this time.

Update (from Philip): The full report (including the background paper that I prepared) is now available in PDF here.

Shorter-Term Bond Yields

There is a lot of focus every day on this site and in the media on the ten-year bond rate rate and Bloomberg’s web page showing the yield on this bond is regularly linked to. However, the movements in the ten-year bond only tell part of the story of the past couple of weeks. There have also been dramatic movements in the shorter-term bond yields.

Here‘s the Bloomberg page for the two-year bond yield and here‘s the page for the four-year bond yield. Also, here‘s NTMA’s daily bond report.

The four-year bond yield, which had been about 3% in early June, reached 5% in late October and, as I write, stands at 8.34%, not so far short of the 8.92% prevailing on the ten-year bond. This suggests that the market is pricing in a debt restructuring in the next few years. (See this earlier post for a discussion of the relationship between bond yields and default probabilities.)

Even more disturbing have been the movements in the two-year bond. The yield on this bond had been about 2% as recently as June. It started November at 4% and, as I write, has now soared to 6.66%. Given that pessimists are likely to be assuming that Ireland will be borrowing from the EFSF in two years time, the implicit pricing in of a high probability of a debt default\restructuring as early as 2012 strikes me as unwarranted. But it illustrates the scale of the current negative sentiment towards Ireland in the bond market.

As of yet, the government has not been able to turn this sentiment around. An optimist might argue that passing the budget, resolving the political uncertainty via a general election and the emergence of solid evidence of a return to sustained growth might, together, achieve the required improvement in sentiment. A pessimist would argue that it’s too late.

Whoever’s right, the government needs to at least play it’s role in providing the first step in attempting to make the optimistic scenario come about by passing the upcoming tough budget.  If it could achieve that goal, then after that point, there’s a strong argument that the best thing the government can do is deal with the second element of the optimistic scenario by resolving the political uncertainty as early as possible with a January general election. As to whether the third element of the optimistic scenario—the emergence of growth—occurs, one could argue that this is largely out of the government’s hands at this point

Air quality

The EPA has released the latest of its annual reports on air quality. Its a technical report, and the media highlight different things. The Examiner reports that Irish air is best. The Times reports that some of Dublin’s air exceeds the NO2 limit. Both are true.

The Independent reports that smoky coal may soon be banned. That is speculation. The EPA report concludes that the ban on smoky coal has improved urban air quality; and argues that a nation-wide ban would be good for environment and health. The current ban is peculiar: It is a ban on selling smoky coal in cities — rather than on burning. The Solid Fuel Trade Group, who sell smoky coal, argue that a nationwide ban would not be effective, because people would smuggle coal from the North. As Dubliners do not smuggle large amounts of smoky coal from Meath into Dublin, chances are that cross-border smuggling would be limited too.