A short video which explains the ETS. Useful for externalities (Unit 3) of the CIE AS Economics course.
With the recent dramatic fall in the price of carbon credits in New Zealand there are more dairy farm conversions and less pine trees being planted. With the New Zealand market being flooded with cheap carbon credits from overseas the price has dropped from $25 per tonne to $3. Therefore it is not economical for farmers/landowners to plant forests as a price of around $15 is required to make it worthwhile.
In 1990 about 500,000 hectares of forests were planted and they are due for harvesting in 2020. There is a need to sustain the industry and for ongoing plantings but under the current Emissions Trading Scheme in New Zealand it is hard to see anything happening. With the Global Financial Crisis there has been a surplus of carbon credits especially in Europe and with an over supply and weak demand the price has been downwards.
One of the major reasons for this low price in New Zealand is that no other country in the world allows 100% of low quality carbon units into their emissions trading scheme. Australia, China, USA, the European Union, Japan and Korea either ban these low quality units or permit them in very low numbers. As a result of this there is little faith in planting. 20,000 hectares of new tree planting is required each year to meet New Zealand’s emissions targets and to counter the harvest of mature trees.
Last week saw Chinese officials indicating that Chinese airlines will not buy European airplanes as long as the EU insists on including foreign airlines in its emission trading system. Orders of 35 Airbus A330 planes have been cancelled and another 10 A380’s were in danger of being cancelled because of the ETS. The Chinese argument is that it is not reasonable to charge Chinese airlines taxes at the same time that the plane is made in Europe. China currently buys more than 1 in 5 Airbus planes being produced and the total of Chinese orders amounts to US$9bn. Therefore one could say that the future of Airbus hinges on the ETS. This raises the question of climate change and what are the options that countries face.
Climate Change as Prisoner’s Dilemma
The initial impression from the discussions over climate change is that of a typical Prisoner’s Dilemma and some of the data provided in the Stern Review (2006) can be used to populate the payoff table.
–The cost of tackling climate change is approximately 1% of annual per capita GDP. However, if nothing is done about the issue the cost is estimated to be between 5% to 20% of GDP. So that defines what happens at the extreme of cooperative or non-cooperative behaviour. From the table above, a country that refuses to act, whilst the other cooperates, will experience a free-rider benefit – enjoying the advantage of limited climate change without the cost. On the flip side, any country that imposes limits, when its competitors do not, incurs not just the cost of limiting its own emissions, but also a further cost in terms of reduced competitiveness – estimated here at an additional 3.0%. From the table it seems predictable that countries should prefer to be self-interested: the best national policy, if others reduce emissions, is to defect; likewise, if other countries are not taking action, then it is pointless to be the only sucker to take action, and one should again defect.
Repeated Prisoner’s Dilemma and Cooperation
The dynamics of the prisoner’s dilemma do change if participants know that they will be playing the game more than once. In 1984 an American political scientist at the University of Michigan, Robert Axelrod, argued that if you play the game repeatedly you are likely to see emerging is cooperative rather than defective actions. He identified four elements to a successful strategy which is this case can be applied to climate negotiations:
1. Be Nice – sign up to unilateral cuts in emissions, as deep as your economy and financing capacity allows.
2. Be Retaliatory – single out countries that have not commenced action and, in collaboration, find ways of pressurising them until they do so.
3. Be Forgiving– when non-compliant countries come onboard give them generous applause; signal that good behaviour will be rewarded with even deeper cuts in your own emissions.
4. Be Clear – let everyone know in advance exactly how you are going to behave – that you will work with them if they take action on emissions, and that you will retaliate if they do not.
It is the belief of Michael Liebreich that this research by Axelrod should be put into practice by the world’s climate negotiators. As treaties on climate change are on-going and therefore become part of the game.
Living at a rural delievery address in NZ you get numerous free farming publications in your letterbox. Last week in the “Straight Furrow” publication there was a interesting article on how New Zealand farmers are much worse off than their Aussies counterparts reagrding carbon emissions. The ETS Review Panel have estimated that the Emissions Trading Scheme will cut New Zealand farm incomes by 11% in 2015 but tried to suggest that Aussies farmers are being subjected to the Carbon Farming Initiative (CFI). When you look at what the CFI actually entails the Aussies farmers are so much better off.
ETS – New Zealand farmers will pay for livestock emissions of nitrous oxide and methane
CFI – Australian farmers do not pay for any of their livestock emissions but they can be paid for reducing them.
It really is a carrot and stick situation. The CFI pays farmers to reduce or avoid emissions and as there is money to be made farmers will tend to do it. However the NZ ETS offers farmers no incentive to reduce livestock emissions. Farmers in Australia can also sequester carbon by planting trees or by increasing soil carbon and receive payments for this. Farmers in New Zealand have the same opportunity with regard to tress but not soil carbon. Furthermore Australian farmers will be paid for any activity which avoids an emission – eg. not felling an existing stand of trees.
The truth of the matter is that when NZ needs to buy carbon credits it is likely that they will be buying them off their Aussie counterparts.