Taxes, Taxes Everywhere
The New Zealand government has approved a new energy tax to help control greenhouse gas emissions. The tax on vehicle fuel, electricity and natural gas will cost households an average $2.25 per week starting in 2007. The tax will also raise business energy costs by nine percent. New Zealand is expected to ratify the Kyoto Protocol in August.
Several sectors of the economy have been made exempt from the tax, however. High-energy-using export industries will be exempt, but in return for the exemption they will have to take measures to reduce greenhouse gas emissions. The farm sector is also exempt from paying taxes on all agriculture-related emissions, but will be required to invest $6.7 million per year to research methods for reducing agricultural greenhouse gas emissions.
New Zealand business groups have argued that the governments plan would hurt the economy. “The risk for New Zealand is that we will achieve neither the intended climate change outcomes nor encourage others. Its more likely that our economic, trading and export competitiveness will be damaged,” said Simon Carlaw, Business New Zealand Inc.s chief executive (Reuters, April 30, 2002).
Canada is also considering a gasoline tax. It was reported in the National Post on April 19 that the federal government was considering a tax of 10 Canadian cents per liter, but the rate was denied by Canadas Environment Minister David Anderson. He did say, however, that a gas tax is an option (Reuters, April 26, 2002).
Energy taxes in Germany have raised household energy bills by seven percent over the last year. However, energy bills are still lower than they were before Germany liberalized its energy markets (Reuters, April 30, 2002).
In London, the Royal Society has announced that it will look into what further measures are necessary in order for Britain to meet its Kyoto Protocol commitments. A new carbon tax on top of the Climate Change Levy appears to be at the top of the list of likely recommendations (Reuters, April 29, 2002).
Domingo Jimenez-Beltran, the head of the European Environment Agency, told Reuters in an interview published on April 18 that the world needs a global tax on fossil fuels. “Unless you get some global taxation, it will be impossible to tackle the effects of globalization,” Jimenez-Beltran said.
Earlier, Cooler Heads (April 17, 2002) reported that the European Union is planning an EU-wide tax on aviation fuel.
Cap-and-Trade Follies
In a guest commentary for Electricity Daily (April 29, 2002), David Wojick points out some of the serious flaws behind the assumptions underlying cap-and-trade schemes to reduce emissions.
Wojick points out that “emissions allowances” are nothing more than ration coupons that can be bought and sold. The idea of cap-and-trade systems is that all else being equal, “firms with high compliance costs can buy allowances from those with lower costs. If the price is set by the cost of compliance, another big if, the total compliance cost for all firms will be lower than if every firm has to go it alone.”
The assumptions underlying this claim, however, “ignore the complexities of market dynamics in general, and the structure of technology in particular,” said Wojick. The simple equilibrium models used to simulate how a cap-and-trade system might work assume a marginal cost of compliance curve for each facility and add an allowance allocation mechanism. The market clearing price is then calculated and voila, everybody is in compliance at a lower cost.
“But at the facility level,” says Wojick, “the system is hugely lumpy. Existing power plants, plus any new ones, are very large, so emission control systems are also very large, both in cost and in the time it takes to build them. In extreme cases, an emission control system may cost a third as much as the plant itself, and take five years to design, buy, and build. In many cases, there is only one technology option, as far as cost and time are concerned. One either builds or does not.” There is no marginal cost curve for a given facility.
Such a system cannot be optimized even with perfect information, an assumption that makes the models workable, but does not apply in the real world. Limited information about others intentions and future changes in power demand make it impossible for firms to make rational business decisions. “The economic system described above,” says Wojick, “is likely to resemble a commodity system, because both are driven by lumpiness, lack of information, and unpredictability. The dynamics of such systems are shortage glut shortage glut, or glut first, not equilibrium.”
Aussie Power Bills to Include Individual Emissions
In hopes of convincing the households and businesses of Victoria, Australia to change their energy consumption habits, the state government has announced that it will now list individual greenhouse gas emissions on consumers electricity bills. By linking global warming to electricity use, the state believes that it can convince consumers to reduce energy use and switch to renewable energy sources.
According to Victorias Energy and Resources Minister Candy Broad, “Victoria has a large generation from brown coal which makes our electricity very greenhouse-intensive, and thats a very good reason to include this information on the bill to remind people of how they contribute to the states emissions.”