The mainstream acceptance of both the scientific consensus on global warming and the need for a globally binding cap on carbon emissions does not by itself indicate that we are close to reaching a satisfactory solution to climate change. The optimal policy response is still subject to massive uncertainty from three sources: risk around our central forecast of climate change costs, uncertainty about the cost of reducing emissions, and uncertainty about how we should share the cost burden.
Last week my colleague Gareth Kiernan discussed the importance of what economists call allocative efficiency – ensuring that the nation’s resources can flow into those activities where they are most valued. A pre-requisite to achieving such an outcome is clear and consistent price signals. An area where pricing is rapidly becoming neither clear nor consistent is carbon pricing.
As speculated some weeks ago, the government has decided to introduce a price on carbon emissions in the form of an emissions trading system (ETS), rather than via a carbon tax. Whilst involving higher transactions costs than a tax, especially with some industries receiving free allocations of emission rights (the right to emit greenhouse gases for free), the ETS does at least involve all industries in the economy – eventually.
Like it or not, New Zealand has ratified the Kyoto Protocol,which means that we need to either reduce our net emissions of greenhouse gases(primarily carbon dioxide, methane and nitrous oxides) back to 1990 levels, orpurchase emission permits from another country under an international emissionstrading scheme. It seems likely that the latter scenario will eventuate.