Plugging a Carbon Leak

Just as a heads up I’m stuck with effectively no internet for the next week (it took me over an hour to even upload this). Unfortunately this means that I can’t spend all my time looking up cartoons and youtube videos to spice up the content a bit. But don’t worry I’ll double up my efforts as soon as I can.

--------------------------------------------------------------------------------------

In this post I’m going to look at some of the approaches available to counter arbitrage in climate change mitigation.

Firstly I thought it best to point out just how much of an issue this is:

The IPCC defines carbon leakage (a climate change specific type of arbitrage) as “the increase in CO2 emissions outside the countries taking domestic mitigation action divided by the reduction in the emissions of these countries” (IPCC, 2014). Based upon this definition, the IPCC stated that since the Kyoto principle, up to 20% of total emission reductions have leaked into non-participatory countries (IPCC, 2014).

So then, what can we do to prevent this from occurring? Well the most obvious solution is a uniform worldwide carbon price (Carbon Trust, 2010); arbitrage can’t occur where there are no differences to exploit! Proponents of this notion suggest that even though the largest 15 countries produce roughly 80% of total emissions, simply targeting these states will ultimately redistribute rather than reduce emissions around the world (Arroyo-Currás et al. 2015).

The big issue: climate change negotiations have highlighted just how difficult it is to get 180 countries to unite in a simultaneous effort. While fragmented mitigation creates the potential for arbitrage, a globally agreed upon and enforced mitigative strategy doesn't look to be on the horizon (King, 2004). In the Carbon Trust’s 2010 report on Carbon Leakage they therefore concluded that we need other methods to deal with the leakage issue.

And it just so happens that there are approaches available:

Compensation Measures

This approach involves states compensating their domestic industries for loss of competitiveness resulting from mitigation schemes. In fact the EU allows its member states to do just this as a part of the Emission Trading Scheme (ETS). This is known as leveling down, where States lower other taxes to compensate for a higher emissions tax.

The issue I (and turn out others) have with this approach is that it only really passes on the problem. In the EU, for example, the ETS is a Top-down EU-wide program whereas compensation is dealt with at the level of the member state. It has been criticised for fragmenting the internal market and creating internal competition (Marcu et al., 2013). It seems like in an effort to avoid leakage, the approach reduces the internal stability of the ETS itself.

Support Measures

Funding can be provided to sectors especially at risk to leakage (generally emission intensive industries), to aid in the transition into low-carbon emissions. In Kumar et al. 2003’s assessment of the potential to reduce emissions in the electricity sector, they concluded that although technologies are available their dissemination is restricted by high sunk costs and limited technological sharing between companies. State investment into low-carbon R&D, as well as the technologies themselves, can help support the transition necessary to remain competitive under higher carbon costs.

This approach seems reasonable to me. Technology sharing is extremely effective at promoting innovation in other sectors (The IT sector is probably the best example). Novel energy related technologies, by comparison, only become industry standards slowly (Kumar etal., 2003). There is certainly room for state support to help promote awareness of new technologies as well as supporting the cost of transition itself.

So then, in an ideal world we would avoid the issue of Carbon Leakage by simply standardising carbon costs. However, unless something amazing happens in the 2015 Climate Change Conference (in which case I will happily accept I was wrong), this doesn't look like a realistic possibility in the near future (Dröge et al., 2009). Luckily there are options available to help reduce carbon leakage in a fragmented mitigative future and that’s certainly good to know!

Reindeer to go extinct due to climate change!

Just thought I'd leave a post to say Merry Christmas! I was looking for someway to think this post back to climate change, but to be honest I think we all need a break from the doom and gloom. So take my advice and make this the last post you click on about how we will never see a white Christmas again, or how reindeer are going extinct (at least until the boxing day that is!)

Carbon Arbitrage

Well I'm back, time to delve into the intriguing world of arbitrage! 

Arbitrage is a financial term used to describe the exploitation of differences between markets. The example I gave last week was British Columbian drivers crossing the border to refuel their cars in an attempt to avoid a state carbon tax (Elgie and McClay, 2013). This also represents a really important hurdle in implementing carbon taxes on a global scale (Withagen and Halsema., 2013)

Scaling the issue up, unless there is strong cooperation between states, competitive taxation can lead to a similar result as observed in British Columbia. In the globalised economies we live in today, capital is extremely mobile and able to exploit advantageous taxations schemes across the globe, at the detriment to less competitive nations (Drezner, 2002). This reasoning is often used by nations to justify their opposition to a carbon tax, making such a scheme difficult to implement. Take for example the USA. 

In August 2013, the House of Representatives passed an amendment requiring 'the administration to receiveapproval from Congress before implementing a carbon tax'. From my rather basic understanding of US politics (correct me if this is wrong), this effectively translates into a blocking of any attempt by Obama to implement such as scheme. So what was the justification? This is from a press release by representative Scalise:

“President Obama’s plan to impose a tax on carbon would cause household electricity rates to skyrocket while destroying millions of American jobs. … The House sent a strong bipartisan message to President Obama that a tax on carbon would devastate our economy and he needs to drop any idea of imposing this kind of radical regulation"

If this is the case with market leaders like the USA, what about emerging economies where competitiveness is even more important to their economies. Both India and China have refuted the notion of a strict Carbon Tax (Oster, 2010): arguing that the loss competitiveness would cripple the development of their economies.

Underlying this stance on Carbon Taxation is the ‘race to the bottom principle’ (Drezner, 2002). This is the socio-economic phenomena where competition between states in an increasingly globalised world results in a trend towards increased deregulation to remain attractive.

Simply, Carbon taxation schemes come at a cost to economic competitiveness. 

Australia : a recent example of a failed Carbon Tax

Australia was one of the first non-EU countries to adopt a Carbon Pricing strategy. First proposed in 2007 and implemented in 2011, the tax was repealed in June this year. Amongst the issues created during this period, a loss of industry competitiveness was pivotal to the tax repeal (Splashand Lo, 2012). In 2013, J.P Morgan estimated that the tax had reduced the trading value of major Australian Employers BHP and Rio Tino PLC by 6% (Taylor and Hoyle, 2014), losses that translated into growing unemployment rates.

Source

The short-term  costs of carbon taxes therefore can be substantial for states that try and implement them in isolation. And ultimately it is often short-term economic changes that translate into policy, as seen in Australia.

The issue of arbitrage also limits the actual value of carbon taxes as a means to reduce emissions. Carbon leakage refers to the spill-over of emissions to countries with less strict emission regulations (IPCC, 2007). Carbon taxes may provide an effective means to reduce an individual nation’s emissions, but arbitrage simply allows this reduction to spill-over into increased emissions elsewhere.

So then Arbitrage is clearly a substantial hurdle in the way of effective carbon tax implementation. In my next post I’m going to talk about some of the approaches we can take to meet this challenge.

Solution Aversion : motivated disbelief

So I just came across this new study in the Journal of Personality and Social Psychology (I'm starting to think I did the wrong undergraduate degree...) :

Solution aversion: On the relation between ideology and motivated disbelief. Campbell, Troy H.; Kay, Aaron C

The goal of the study was to examine whether the attractiveness of the solution offered alters the willingness to believe in the problem itself (focusing on environmental problems) (Campbell et al., 2014)

It makes sense if you think about it. Say you were diagnosed with serious illness. If on one hand you were advised to go through an intensive recovery program over a long period, odds are you would get a second opinion and question the diagnosis. On the other hand, if all you were advised to do was take a single pill you'd probably accept both the diagnosis and the solution without question (OK if you are a hypochondriac this analogy doesn't really work, sorry).

Well this study formally tested this behavioral trait in the context of climate change denial and found evidence of its existence. One of the questions they wanted to answer was why statistically more Republicans deny climate change than Democrats in the USA.


Here is how the Study worked:

• Two groups of Republicans and Democrats were formed (between 120-188 participants in each)

• Each Participant was shown this statement

• "The Intergovernmental Panel on Climate Change (IPCC) reported that there would be an increase of 3.2 degrees Fahrenheit in worldwide temperatures in the 21st century and that humans are responsible for global climate change patterns." Campbell et al., 2014

• They were next asked to evaluate one of two policy solutions:

• A tax on Carbon emissions and government regulation

• Innovation into green technology

In reality the participants were actually being examined on their willingness to accept the IPCC statement.
And here is what the study found:

• When the solution offered was based upon regulation, only 17% of Republicans stated their belief that temperatures would reach the projections of the IPCC statement

• And guess what; when the solution involved profiting from being green technology market leaders, this figure rose to 64% (this strategy fits with a republican free market ideology)

What is interesting is that for Democrats the solutions solution made no real difference to belief in the statement. Neither strategy was designed to oppose their ideology in that case.

So what can we take from this: 

Well the way I see it, this really emphasizes the need to have a solution based approach to climate change mitigation. It is important to realise that targets, no matter how robust they are, are often only as believable as the solutions being offered to meet them. To combat mitigative inertia it is important to place a greater emphasis on developing solutions and examining why those those available at the present are not motivating change. 

Anyway, let me know what you think. Can you think of any examples of solution aversion in your life?

"I like to pay taxes. With them I buy civilization"

As much as I like a good tragedy story, I think we can all agree that they are best left to fiction. So then, let's talk about avoiding Hardin's tragedy from an emissions perspective. 

As I discussed in the previous post, the problem is pretty much caused by a shared damage and privatised profits scenario. This creates the Free Rider problem; individuals are encouraged to pollute as much as possible and take as little responsibility as possible for the shared environmental degradation (Hardin,1968). Solving this issue then requires the privatisation of the costs of environmental degradation to better reflect the environmental cost of consumption (Elkins and Baker, 2001).

How can this be done?

A Pigouvian Tax - "I like to pay taxes. With them I buy civilization"  Oliver Wendell Holmes

If you've ever studied economics at any level you will have seen this diagram, time to put it to use! A piguvian tax is essentially an attempt to incorporate the negative externalities (negative social costs) of consumption into the price of consumption itself. In this context, carbon taxes can be used to increase the cost of burning fossil fuels to reflect the environmental damage they cause. Given that demand for anything generally decreases with increasing price, the market equilibrium point where demand=supply is shifted to a lower consumption value and emissions are reduced (Q2). 

So then, what are the benefits of this approach:

Well one of the greatest advantages is that it is tried and tested. The welfare state is fundamentally built upon taxation and revenue recycling, it simply needs to be applied in an environmental context. The revenue recycling process itself is also vital. Funds are needed to subsidise less cost-effective energy sources, and promote adaptation to changing climate. Taxes can be used to not only privatise the costs of carbon emmission, and also lower the cost of cleaner energy sources (Roughgarden and Schneider, 1999).

British Columbia: a revenue-neutral carbon-tax case study -An Environmental (and Economic) Success Story (Elgie and McClay, 2013)

In 2008 BC implemented a tax which not only increased the cost of emissions, but also brought value to climate emission reduction itself. 100% of the revenue gained from taxation is returned directly to consumers through reduced income taxes. The results have so far been impressive:




Summarised, the data exhibits that Carbon Taxes can help reduce emissions, without an economic cost. 

Too good to be true?

Well I'm a sceptical person so I like to dig a little deeper when presented with information like this. An interesting criticism of the British Columbia tax is that there is evidence of arbitrage within the system. 

Take a look at this link: Tax gap has B.C.ers driving south for gas: watchdog

While this is just a small flaw in an otherwise successful system, it raises a key issue when attempting to tax carbon on a larger scale. How do you prevent cheating within an individual taxation system, and avoid taxation competition between states? These are key questions I will answer in my next blog so stay tuned! 

Secret Link

Selling Climate to Save It

Unless you've been living under a rock, I'm sure you've heard of eco-tourism; perhaps you've even been on a holiday specifically because it was classified as 'eco'.

What you may not know, is that eco-tourism is just one little part of something much, much bigger. 

Over the past few decades 'green capitalism' become prevalent at all levels of society. It emerged around the same time as neoliberal economic policy in the 1970s and 80s and was built upon the same market principles.

The key idea underlying green capitalism is that environmental degradation is a result of the undervaluation of the environment itself within traditional markets (Castree, 2010). The reasons for this can be summarized under the principles of the tragedy of the commons:

The Tragedy of the Commons:

Hardin's (1968) economic theory essentially discusses a common piece of land that can be analogous for the environment as a whole. The land is shared between members of a community for the grazing of each individual's livestock. The dilemma he proposes is that since the animals are all individually owned, the benefits reaped from grazing are reaped by individuals. However, the damage done to the common by each individual's cows are shared among the community as a whole. Since the individual benefits of grazing far outweigh the shared cost to the land, it is economically rational in the short-run for farmers to graze as much as possible. The issue: in the long run, the common becomes entirely barren and the farmers are left with nothing to feed their cattle. What makes this scenario a tragedy it occurs even when individuals are aware of what their actions will lead to in the future; there is an incentive to use the remaining resources before other individuals deplete them (Paavola, 2011). Individually rational actions, do not always produce a collectively rational outcome (Coleman, 1990)

Despite constantly being criticised for its actual applicability to real life (this seems like a pretty common thing for economic theory and Elinor Ostrom actually won a nobel prize for her critical take on the theory), an area in which is seems to apply quite nicely is climate change.

Climate Change: Climate change: the ultimate ‘tragedy of the commons’? (Paavola, 2011)

So then, how does this work. Well proponents of neo-liberal strategies argue that the atmosphere can be thought of as a common, we all need it in our carbon driven economies, but it is not individually owned by anyone. It is essentially a sink for GHG emissions resulting from consumption and production of goods. Climate change can then be thought of as an ultimate tragedy of the commons since it is in each individual’s interests to profit from exploiting the shared resource of the atmospheric carbon sink, yet the responsibility for maintaining it at a sustainable level (whatever this level may be) is a global burden.

This really falls into behavioral ideas of myopia again; as humans we tend to prioritise what is immediately in front of us over the bigger picture and more distant issues. This can specifically be thought of as selfish-actor myopia as exhibited by this quotation from Hardin himself:

‘Each man is locked into a system that compels him to increase his herd without limit--in a world that is limited. Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons. Freedom in a commons brings ruin to all’ (Hardin, 1968 p.248). 

This reminds me a bit of the opening monologue to the fellowship of the ring, I wouldn’t be surprised in Hardin took some inspiration from JRR Tolkien.

Selling Climate to Save It:

If we are therefore going to believe this idea, then the answer to climate change (as a form of environmental degradation) needs to come from a correction of this market issue.

In my next post I’m going to talk about the privatisation of the ‘commons’, focusing on exactly how a shared resource like the atmosphere can be allocated to individuals.

Secret Link for LOTR fans

Carbon Cowboys

To set the scene for my next few posts I thought I'd bring up something I came across a few years ago:



Watching this report reminds me of a book I read in my first year of University:

Changes in the Land : Indians, Colonists and the Ecology of New England  by William Cronon

(Don't judge this book by its cover, some of the stuff that happened during this era is so ridiculous it almost reads likes fiction)

John Nilsson is a figurehead of carbon trading's weaknesses. Just as Native Americans were offered coral beads in exchange for their land centuries ago, Nilsson offers exploitative contracts to indigenous Amazonian people in exchange for their (now valuable) property. To make matters worse, he has even been caught admitting to plans to fell the old forest and replace it with more profitable palm oil plantations. 

It is an extreme example, and there is even an arrest warrant signed on  Nilsson in Peru, but it exemplifies the dangers of what McAfee (1998) termed 'selling nature to save it'. 

Anyway, segway over; next carbon trading! 

Beyond the target: a bottom-up approach

Looking back on my first ever post, I spent quite a bit of time justifying my position on climate stabilistation. I wanted to make clear that while my blog was meant to be quite critical, it should also be pragmatic, There is no point in questioning just for the sake of questioning, and we have already reached a point where action needs to be taken to combat the momentum of climate change.

With that in mind I think its about time I start talking solutions to the main issue I've talked about so far:

How can we hope to stablilise climate without a clear target to aim at?

From my reading I've come across one key idea:

A bottom-up approach to climate change mitigation 

If you've read my last few post, you will hopefully agree that meta-targets over simply the complex and subjective issue of climate change impacts. They often are more political than they are scientific, can create geopolitical tension and prove ineffective in motivating those who's values are underrepresented in the target formulation process.

Not surprisingly then there have been a number of calls to abandon meta-targets all together and instead focus on motivating climate change mitigation from the bottom-up.

How to eat and Elephant: a bottom-up approach to climate policy - (Rayner, 2011)

Rayner has been one of the most vocal critics of meta-targets. In his 2011 paper, he explores the shortcomings of a 'faulty UNFCCC architecture' built upon a 'targets and timetables' as I have done in my past few posts (he focuses much more on Kyoto principles than I have chosen to do though, so don't feel bad about also reading it as well).

But I've talked enough about problems with the past, so i'll just focus on the solutions he offers.

In stark contrast to the 'hyperbolic multilaeralism' of the past (Prins et al., 2010), Rayner proposes that policy should be both 'designed and implemented at the lowest feasible level of organisation' (Rayner, 2011).

My first thought when I heard that was again highly sceptical. Whenever  hear bottom-up approaches I can't help but think about neoliberal economics; a lot of theory with limited practical relevance (any economists out there are more than welcome to challenge me on that statement). However, Rayner puts a lot of effort into practically exhibiting what he means by this statement. 

He proposes a flexible approach to climate change mitigation. 

"A bottom-up approach to mitigation abandons the idea that climate change policy requires universal framework"

The proposed bottom-up approach recognizes that climate change mitigation is ultimately a 'multilevel governance problem' and should be treated as one (Rayner, 2011).. He emphasizes that climate change mitigation will benefit from complimentary capabilities and interests being brought to the table. For example, separate climate change discussions for the big emitters, and the developing world.

And to me at least this makes some sense. Global emission targets have always been constrained by ethical dilemmas over who has the right to pollute. By separating the targets of the big emitters in the developed world, we are more likely to see progress being made in the 20 countries responsible for around 80% of total global emissions (Prins and Rayner, 2007).

There remains a need for a global cohesion in our efforts to combat climate change, but Rayner proposes that this cohesion must emerge from lower scale efforts. As an example, his paper talks about global carbon markets needing to be cap and trade orientated, allowing them to vary at different scales and in different regional contexts. In his vision, cities can become the hubs of mitigation, and through their connectivity can form regional and ultimately global trading schemes.

If there was perhaps one key point to take from Rayner's proposition, it is probably this:

"Rather than loading more and more issues onto the climate mitigation agenda, we should, as

far as possible, divide climate into a series of more tractable problems, which local or sectional

actors have a strong incentive to solve for themselves in efficient ways and at the same time take

a bite out of the larger problem." (Rayner, 2011)

And this really is the challenge posed by climate change mitigation; tackling the issue on a practical and efficient scale, while keeping in mind how the local feeds into a global effort.

Summing it all up

Climate change mitigation targets are about as problematic as it gets. They are theoretically vital to creating a environment that encourages top-down policy implementation. But in reality, they prove too disputable to be successful in this way. Not only that, but they can discourage efficient mitigative action on practical scales. As Rayners (2011) points out, ' grandiose emissions targets without any plausible technological pathway for achieving them' does very little to motivate change.

So then, counter intuitively perhaps the best thing we can do to stabilise climate change is to not really think about stabilising climate change; instead eat the elephant one bite at a time.

Am I entirely convinced? Well not yet, but at least this paper has got me heading in the right direction; in the next section of my posts I'm going to look into carbon trading and have a think about whether Rayner's vision is really a possibility.

Secret Link