Sounds crazy #5 | Carbon price forecasts

August 2013 is silly season here in Australia. We have a federal election in just a few weeks time and the inevitable merry-go-round of vacuous media grabs and absence of policy debate is upon us. It is actually rather depressing as the main parties jostle to hog the middle ground to spend money they don’t have whilst no one else can come up with anything better than “vote for me”.

It is also rather absurd. On the rare occasion when media do delve beyond the rhetoric, or for some unknown reason you dig yourself for evidence to help make a voting choice, what emerges are gems like this pre-election outlook from Treasury.  Somehow the economic boffins that work for the ministry have managed to predict that the carbon price that in Australia is currently fixed at $23 will first fall to $6.20 in 2014/15 [fair enough as the start of the flexible price period when the domestic scheme is pegged to the EU market has been brought forward a year] and then rise to $18.90 by 2016/17 reaching $38.0 by 2020.

Now we should remember that this is what is supposed to happen to a carbon price. The whole idea was that to ensure steady emission reduction the carbon market is capped so that supply is squeezed over time causing prices to rise. A rising price on carbon would encourage energy thrift and starts to make clean energy sources economically viable with the net effect of lower emissions. Except that the political will to set, stick to and steadily lower the cap has been conspicuously absent.

Alloporus borrowed a graph of the historical carbon price in the EU published by Point Carbon and appended the Treasury projections.

It looks like this:

CarbonPriceProjections

As regular readers will know Alloporus is no economist, but whilst $20 seems possible, $40 by 2020 is hugely over-optimistic. It would require a significant step change around 2015 to reverse a market that has a t best been steady but mostly fallen. Such a change would need considerable and coordinated global political will to achieve. No single nation would stick their neck out that far [probably why the Australian government linked the domestic scheme to the international market so as to neatly sidestep the pressure to go it alone].

Then consider that by 2020 we will have seen price shocks in oil [and possibly coal too] that, even if temporary, will have the required effect on emission reduction without the need for a separate policy. In other words fluctuations in energy needs in response to inevitable pulses in the global economy will allow the modest emission reduction targets to be met most of the time.

Of course politically it is best if the carbon price is low, but for any cap-and-trade policy to be effective the price needs to rise steadily. Alloporus suspects that the carbon price forecast from Treasury sound like some middle ground plucked from the ether for political expedience.

The craziness here is that a lot of money has been spent and committed to deliver emission reductions — a ‘clean energy future’ as the policy was tagged. Except that the cap-and-trade approach chosen only works if the price of permits [the carbon price] rose steadily over time. And this required that the market was manipulated buy controlling permit and offset credit supply. Now that governments have shied away from that part of the plan, the whole policy falls over and monies spent on free permits for exposed sectors and, in the case of Australia tax threshold adjustments and cash payments to households, turn into welcome handouts that have no impact on emissions at all.

$38.0 by 2020 is what they would like it to be, except wishful thinking cannot make it so. You actually have to implement the policy.

Carbon farming | when to rant and rave

carbon farming farmland

The other day I received an invitation from the Australian government’s Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education to a forum with the Domestic Offsets Integrity Committee (the DOIC). This is the committee that approves carbon accounting methodologies for the Carbon Farming Initiative (CFI) scheme that was touted as providing Australian farmers with the opportunity to earn carbon credits from land management change.

The invite was keen to point out that “there are now 16 methodologies available for farmers and landholders to undertake carbon offsets projects” and that “The CFI is a ground-breaking scheme offering Australian farmers and landholders the opportunity to earn carbon credits while potentially achieving environmental and productivity benefits”.

What to do?

My first rational thought was not to go. Why should I spend my own funds and contribute to greenhouse gas emissions by travelling from Sydney to Melbourne to attend a 2 hour discussion on a policy that so far has delivered nothing that a farmer could actually use. The 16 approvals to date are for methodologies related to capture of landfill gas [that most landfills had the infrastructure to do anyway], various approaches to growing trees that you cannot cut down, and avoided emissions from a few specialist activities such as piggeries. These have nothing to do with the bulk of real-world farming practices.

My instinct, however, was to attend and at some point in the proceedings stand up and bellow at the top of my lungs a string of obscenities to vent my frustration at what has been a slow and hugely inefficient process of bureaucratic numbness — not to mention the unnecessary reinvention of a wheel already fashioned by international carbon offset schemes.

Unfortunately such actions would only give me temporary relief and would be be swiftly followed by long-term personal damage. Even writing down my thoughts in this post is probably not very smart.

So instead of the rage filled rant, I will reply to the invitation politely saying, “unfortunately I am unable to attend”.

It is worth looking more closely at my frustration [and maybe at my copout].

The frustration

I have never been wholly convinced by the global approach to climate change policy.

I accept that 7 billion humans plus 10,000 years of agriculture and 200 years of global commerce have had an impact on the climate system and I know that we need to take some action.

What has always troubled me is the premise of the chosen policy that we can actually fix the damage we have caused simply by reversing our actions. As I have blogged before, King Canute really had a better chance.  That we can take an engineering solution as naive as emission reduction to a problem of this magnitude seems to be a scandalous inflation of our capability.

Does it also mean we going to fix Milankovich cycles by tweaking the tilt of the planet or take on the variation in the solar wind [both major climate drivers]? Craziness.

That said, emission reduction is prudent for two key reasons: 1) it will help economies transition away from fossil fuel energy sources to sources that are cleaner and less likely to run out and 2) in the short run will help make business more efficient. Both of these are important outcomes that have little to do with the climate.

What is missing from the policy is an understanding of the need to adapt to climate change particularly in the way we manage landscapes. Yes indeed, the very landscapes that supply almost all the food and water for all those people.

So for the CFI not to have methodologies that give farmers an opportunity to sequester carbon into soil, to rehabilitate vegetation in grazing lands, and to obtain co-benefits from more sustainable land management practices is a huge failing of the policy. And not least because these actions will also deliver adaptation as the climate changes.

So carbon, and by extension the CFI, is really about creating more sustainable and resilient landscapes and helping farmers leave behind unproductive practices  – and by the way, there is the potential for around 100,000,000 tCO2e per annum on the positive side of the national carbon account.

What is more, should carbon permit price track the international markets and come in below $10 tCO2e, land management practices that deliver carbon sequestration into vegetation and soil as well as avoiding emissions may still be cost-effective. Most land management activities sit towards the left of most cost-abatement curves and so are cheaper per ton of abatement than many of the engineering solutions.

The cop out

So why did I choose not to accept the invitation when it provided a great opportunity to scream and shout?

There is an element of shooting the messenger. Public servants are there to deliver the policy frame not necessarily to create it. It is likely that there are higher political forces that have chosen to slow down policy delivery and to steer away from the farming sector, higher than those charged with delivery.

Attending only to have a shout at the wrong people makes no sense.

There is also a feeling that attending would both validate a process that I do not agree and have little impact, particularly as providing feedback seems to have had little effect in the past. The system is still slow, lacks focus, and technical clarity.

An example from the many challenges faced by methodology developers is that the positive list cannot actually be a list of activities to take care of additionality if each methodology has to prove the validity of an activity already on the list. That negates the whole concept of a positive list approach [one tried and rejected by other schemes] seems to fall on deaf ears.

Ultimately though, I have folded and chosen not to point out the faults but to stay silent.

This does not make me feel any better.

Postscript

Whilst I was drafting this post I received n update from one of the major laws firms with an interest in the carbon market. Their take on the status of the CFI is quite contrary to mine — it seems that everything is dandy. In fact they must be drinking out of a glass so half full it’s overflowing.

If only I still had the energy to talk it up.

97% said their cats prefer it

Its official, 97% of peer-reviewed science papers, that expressed a preference, agree that climate change is caused by human activity.

Academics have surveyed nearly 12,000 academic papers penned by 29,000 scientists. There were 4,000-plus papers that took a position on the causes of climate change and less than 100 of these disputed the scientific consensus that climate change is the result of human activity.

Here is what the lead author had to say about the survey

Call me a cynic but all I could think about was the “8 out of 10 owners who expressed a preference said their cats preferred it” Whiskers ad and how I didn’t believe that either.

And later I imagined what it was like back in the day when every intellectual believed that the earth was flat until some crazy dude decided to sail all the way around it.

And later still I decided that it really is missing the point because it does not matter what the cause is, it is the effects we have to worry about.

 

Climate change | Google Trends #1

You have to hand it to Google. They are just all over business development. They have found something that everyone needs, perfected it quickly and delivered it so effectively that nobody else can hope to compete.

Then whilst they continue to improve the core offering they find a great way to make money without most of their customers even realizing it.

Not resting on this success they invest in both the core offering and start to add bells and whistles. At some point along the way they get big enough and powerful enough from unprecedented popularity to start changing and then setting the rules [it used to be that a Panda was just an endangered species].

One of the many bells is Google Trends, a neat tool that spits out data on search behavior for a key word from 2004 to present.

Here is a graphic of what Google trends says about the keyword ‘climate change’

 

GTClimateChange

 

The numbers here are all proportional to the peak of search activity over the period — in this case the peak searching occurred in December 2009. So low numbers represent less interest in the term relative to the peak and trends in the data show if the term is growing or waning in popularity. It is also possible to pick seasonality or specific events that trigger a spike or trend in search activity.

What can we say about climate change?

On the graphic I have added a few select events, particularly the various UNFCCC Conference of the Parties (COP) that have been an end of year staple for a few years now

We didn’t really bother too much about it until An Inconvenient Truth tweaked our curiosity in 2006. Then we got really excited around the time of the COP in Copenhagen when then Australian Prime Minister Kevin Rudd was calling climate change ‘the greatest moral challenge of our age’.

And what has happened since those heady days? Well, we have had three more COPs in Cancun, Durban and Doha with progressively more pathetic efforts at tackling the greatest moral challenge, accompanied by a downward trend towards pre-Al Gore levels of interest in the topic.

In a few more years we will have forgotten about it altogether.

Trends also suggests that regional interest in the topic now comes exclusively from the developing world with 8 of the top 10 countries by search volume from Africa. Only these are the places with the least resources to do anything about it.

Stats can also be a hoot. You’ll notice that after each COP there is a trough in search volume as everyone in the northern hemisphere tucks into their Christmas turkey and a regular annual dip in traffic in the northern hemisphere summer when its warmest!

No doubt that many equally critical challenges await and will trend upwards to their moment in the spotlight only to fall away again. Such is that nature of our attention span. It would just be nice if things went away because they were fixed.

On the upside, thanks Google for what will be endless hours of statistical fun.

Have we lost the plot?

This week Colin Barnett, the premier of Western Australia, was quoted in the Australian from a speech at a business leaders forum in Perth as saying that “We’ve lost the plot as to what we are trying to do here” implying there were other ways to reduce emissions than imposing a carbon tax.

“Why would we have a carbon price of $23 when the only somewhat credible trading market in Europe has a market price of $10?” he said.

This is the sort of thing you might expect a premier from the contrary political code to the Federal government to say. More so when it is the colossal revenues from mining that has been the engine of the WA economy for decades. The last thing a Liberal government wants is to dampen that particular fire.

At the same forum and quoted in the same article, the head of Westfarmers, who own a big chunk of Australia’s retail sector, described the carbon tax as “unnecessarily complex” and that “you have to be a rocket scientist to understand this stuff.”

Oh well, you could say, it’s just a couple of browns in a brown newspaper having a go at what they see as a constraint on the golden goose of capitalism. It’s to be expected.

And that would be a big mistake.

What everyone has forgotten to explain is why such a cost is necessary.

A few years ago we knew it was the “biggest moral issue of our time” at least according to Kevin07. Unless we took action global warming would consume us. And the majority believed that action was necessary.

Then the government prevaricated, forgot whose behviour they needed to change and introduced complex legislation that was more about plugging leaks than achieving a result.

It is emission reduction. Remember?

We thought that if we reduced greenhouse gas emissions then there would be fewer of the molecules that can trap long wavelength back radiation in the atmosphere than under business as usual and, if we managed reasonable reductions, we might slow global warming.

And then there is the real and far more critical reason. In a relatively short time we will run out of oil. If we haven’t at least begun the transition away from our dependence on oil for transport and fertilizers then we risk economic collapse everywhere. This is a huge deal, easily as important to the global economy as spiraling sovereign debt. Emission reduction might seem a bit left field as a means to transition away from oil but it starts the process of introducing and incentivizing alternative fuels and it starts to set the price signal that will come in a hurry when supply cannot meet demand.

Australian politicians must know this. They are well-educated, can interpret a graph and have a day job that puts this sort of issue front and centre.

Only they come up with a clunky policy that they have chosen not to explain to any of the people who really matter.

Maybe they think that because we have seemingly endless coal reserves, and now natural gas too, all will be well.

Or they just cannot bring themselves to explain the details behind the necessary pain of a transition – even though we already know that transitions are painful.

Perhaps they can’t explain something that they do not understand themselves.

Whatever the reason no one in the government has stood up to calmly, and with clarity, tell us why.

Then again, perhaps they really have just “lost the plot.”

Can REDD projects address wildlife poaching?

This question came in a forum on REDD, Reduced Emissions from Deforestation and Degradation, the somewhat controversial mechanism to tackle global warming. The idea is that because greenhouse gas emissions from clearing of land for agriculture makes up around a fifth of anthropogenic emissions, it makes sense to reduce clearing especially in tropical forests that are high on carbon and overall environmental value.

One typical pattern is that forests are first logged for commercial timber. This opens up the forest, makes access and further clearing easier. People move in to grow cash and subsistence crops.

REDD projects aim to substitute the financial returns from clearing with the sale of carbon credits that come about from the avoided emissions when forests are protected. In short local people receive payments for keeping their trees and their forest intact.

When it works there are less anthropogenic emissions, forests are protected, funds become available to help people create local economic development. Neat idea.

Since there are a few REDD projects that seem to be working pretty well in Africa, the question in the forum was about extending the concept to address wildlife poaching as well?

A successful REDD project would also protect wildlife because the financial incentive is to retain the integrity of the forest. Local communities are paid to be custodians of the resource.

A collective will would be enough to significantly reduce poaching so long as three key things happen:

local engagement is real

sufficient financial returns from the sale of carbon credits go to the local communities and

there is some long-term certainty in those financial returns

These are the key success criteria for any REDD project and, if met, then local protection of all the natural resources should follow. At least this is my experience talking to landholders in rainforests of Asia.

People everywhere prefer to live where the environment is healthy, the air is clean, the trees are green, and the wildlife free to roam. Only we need to live. Our priority is for a good life for ourselves and our families that is free from strain, risk and uncertainty. Meet this priority and any amount of environmental protection is possible.

What we have to remember is that throughout human history the forests have been cleared to meet these basic needs. So we are asking a lot to forego the route to development taken just about everywhere.

There has to be enough money in the system to meet the needs over the long haul.

The real challenge is that financial returns on REDD projects are neither certain nor comparable with the usual alternatives. Exactly why is another, long story. But I am sure you can guess the message. If we want to save trees or wildlife we have to pay a reasonable market price.

 

Preparation for change

Solar panels, BavariaThere were times during the recent debate in the Australian parliament on the clean energy futures legislation when leader of the opposition Tony Abbot was sounding forth his hip pocket rhetoric to an empty lower house. The green leather on the government benches was unmoved.

“This is a toxic tax,” he kept saying, “that on the governments own figures will cost the average Australian a years salary by 2020.”

As the benches were unable to respond, his words echoed round the chamber and into the television cameras.

Why would anyone vote for losing 5% of his or her salary? There has to be a good reason. So what is it? Why should there be a surcharge on a gas that is plant food?

As John Mathews puts it in an online article

“The $25 billion charge on the major carbon polluters is really no more than a signal that they represent the old, brown economy, and will have to start to upgrade their activities if they wish to join the green future. The rest of the world, notably China, Japan, Germany, Spain are all putting huge investments into such a green future. It is long overdue that Australia joins them.”

There it is. The answer is that there will be a green future.

In fact it will not be called green, but normal. Future goods and services will be made possible from what are currently alternative fuels, resource conservation will be the norm, and production efficiency will be an industry mantra because consumers will demand it. The Marks & Spencer Plan A will be copied by everyone.

The chatter about the clean energy futures legislation is about the cost of the tax and the slugging of industry with an emissions obligation but the real guts of the policy is preparation for change that is as inevitable as the weather but not about the weather. It is preparation for an economy  that runs without fossil fuels.

Again quoting Mathews,

Everyone knows that what goes into the atmosphere over the next 20 years will be the result of investment decisions taken in Beijing and New Delhi, not in Canberra.”

But also the decisions made in the US, Europe, and yes Australia too, on the speed of the transition away from our fossil fuel dependency. Remember folks, this is really what it is all about.

So it was a great shame that those leather benches weren’t warmed by government MPs countering the toxic tax rhetoric with passionate explanation of how this legislation is a historic step on the road to changing the way things are done… to avoid being left behind.

Maybe they just didn’t believe it.

Size of the task

Opera House, Sydney HarbourIt is desirable to reduce greenhouse gas emissions so that the greenhouse effect doesn’t get out of hand and warm the world by amounts not seen for millions of years.

And should this warming happen too fast for our production systems to adjust, then desire must become an imperative.

Fair enough.

Now let’s consider the size of the task.

If we convert the current global energy use into oil equivalents – that is combine all the coal, oil, gas, hydroelectricity, nuclear and alternative sources and convert the energy we gain from them into the energy we get from a barrel of oil – we use the equivalent of 10 million barrels of oil an hour.

Or, if you prefer, 1,590 million litres an hour.

That’s enough to liquid to fill over 15,000 Olympic sized swimming pools every 24 hours or in less than two weeks fill Sydney Harbour, onE of the largest natural harbours in the world.

Plus this number is, believe it or not, getting larger by the day thanks to more people and rapid growth in demand from emerging economies.

10 million barrels an hour is colossal demand. No wonder superannuation funds invest in fossil fuel energy.

Perhaps the next time you lounge with a G&T by a swimming pool, imagine the pool, and a few thousand more, full of oil, and you may glimpse the size of the task.

Our energy demand is simply vast. And thanks to availability, some legacy issues and economics, most of this demand comes from fossil fuels. Partly because of the volume and locked in infrastructure for generation and delivery energy generation is a tough thing to shift, requiring huge investment in alternative sources, a clunky transition period, and unbridled commitment to change.

And because it will take time, any shift will require great tenacity.

It is a big ask and very unlikely that we will take on this transition voluntarily. It will be both difficult and costly. The engineering task alone is staggering: reworking energy grids, distributed generation, engine conversions and replacement. Even the decision to keep the grid or move to a distributed model is a big one.

Then there is the economics. New monies must be found to develop alternatives at scale and monies found to support uptake of what will initially be more expensive energy sources. Then those who have already invested heavily in fossil fuel power risk lost dividends, losing out to new investors. And more of us have invested than we might realize. Superannuation funds that will pay out for many a retirement, like the low risk of traditional energy investments.

The US and Europe are oil and coal dependent because their entrepreneurs and investors backed fossil fuels. New wealth in China, India and South America can be more flexible. They will invest for the far side of the transition, in the new technologies, not the status quo. In 100 years time it is unlikely that the old west will hold the purse strings, which is actually ok, if a little scary for those who have already invested.

Sydney Harbour

So the size of the task is huge, not just because we gobble 10 million barrels an hour, but also because we are not nimble enough economically to act swiftly.

So when the debate on a carbon price uses hip pocket rhetoric, remember the size of the task and know that change to something this big it is not going to be cheap

.

It finally happened

After back stabbing, vacuous argument and dithering for long enough for us to have been in and out of the next ice age, and despite (or perhaps because of) a hung parliament, yesterday Australian politicians passed a carbon pricing bill through the lower house by a couple of votes.

Champagne all round for the warmers, gnashing of teeth for the deniers and plenty of “why did they do that?” from the majority of the populace more concerned with their own stuff.

And a wry smile from the historians, for this is truly a moment for them to record.

It is the point at which a conservative country in a remote corner of the western world, bound to a colonial past that created significant wealth by exploiting natural resources, made a tentative, but hugely symbolic step towards accounting for externalities.

A brown economy allowed its politicians to introduce a policy that starts to capture the hidden environmental costs of doing business. Those costs that never make it onto the company accounts, the externalities, or what the policy people prefer to call spillover effects.

On the balance sheets of 500 companies and organisations with the largest greenhouse gas emissions there will now be a line item that will show they have made payments for an environmental impact. Not from a point of pollution into the creek that runs by their factory, or for installing mufflers to counteract machine noise, or the filters and scrubbers to remove particulates from the smoke stack, but for an invisible and diffuse environmental effect.

Truly this is historic.

And what history will record is that on 12th October 2011 Australia made its move down the road of major economic reform. It started the process of converting from a fossil fuel based economy with centralized energy infrastructure built with entrenched investment structures; to a fluid, entrepreneurial, environment friendly era of economic development.

And this happened because it realized that even though a capitalist system fits the human psyche like a glove, capitalism is not sustainable unless profit is real. It cannot be profit declared by hiding costs in the environment. For, in the end, the environment stops absorbing those costs and closes down, cutting off production.

There will, of course, be u-turns and moments of doubt about this historic decision. There will also be kick back from the old ways that claim emissions are just hot air. And those claims may turn out to be true.

Only this path is as inevitable as peak oil, because even if it’s not about emissions, it is about knowing and accounting the true environmental costs of doing business.

Only then we can live well and live within our means.

Who’s behaviour are we trying to change?

The Australian government has just released its clean energy future legislation, a long awaited climate change policy framework.

In line with other jurisdictions the focus is emission reduction by putting a price on carbon to change behaviours away from dirty, fossil fuel based energy and industry to a cleaner, more efficient economic system. Clean energy futures is an elaborate, and in many ways clever, market based system for the commercial exchange of what amount to licenses to pollute, is transitioned in through a tax on the 500 heaviest emitters.

Hit commercial entities with a cost and, on the assumption that the hit hurts, they will do their upmost to avoid it. They are expected to be rational after all. Some will cop the cost and simply pass it on to their customers. But this will benefit their competitors who choose to become more efficient and change to less carbon intensive activities. So the market will sift the options and favour the cleaner ones. Exactly what is wanted.

In this case $25 billion over 5 years is the hit – evened out it is $1 million a year per entity – and that sounds like it should hurt enough to prompt a change. Some entities will become more efficient, trade to get the best price for what they must pay for and, eventually, transition to clean practices.

So we have a system to change the behaviour of… the 500 heaviest emitters.

Only why do these companies emit? For the majority it is because they supply energy or goods to the market at a profit. In other words they have customers, ultimately us.

In the formulation of the clean energy future policy, the $25 billion raised from emitters will go back to consumers through raising the tax threshold at a cost $15 billion and another $10 billion to support exposed jobs. This is so that should the emitters pass the cost of their permits on to the consumer or cut costs in the form of jobs, it is not too painful for those on the receiving end. Us again.

No collective hurt there. And so no change in behaviour.

Propping up the consumer also eases the pain on the emitters and reduces the incentive to change.

At some point it will be necessary to try and change our behaviours too; or even the most intricate of policy formulations will be a waste of effort and opportunity.