Wednesday, December 09, 2009

Climate change and policies that work

In case you haven't worked it out by now, I like public policies that actually work. Sounds dumb I know, but I do.

One of the key difficulties that policy makers always face is the need to avoid unforseen side effects. One of the reasons that I have been keen to see discussions on different options for reducing green house gas emissions is a feeling that there were likely to be a range of such side effects. I also felt that a major problem of this type needed to be addressed in a variety of ways.

This is not a comment on any emissions trading scheme, by the way. It is a broader comment.

Interesting story on ABC television last night that illustrates my point.

The core story is simple enough.

The Australian Government has created a market for renewable energy certificates, representing one megawatt hour of electricity. They're in demand because the Federal Government has said 20 per cent of all Australia's electricity has to be renewable by the year 2020.

To encourage certain activities, the Government has included a lot of extraneous systems under the accreditation in the renewable energy target: solar hot water; electric heat pump hot water; residential renewable electricity. So far so good.

So many certficates have been issued that the spot price for the certificates has fallen from $50 to $30. The problem is that the fall in price has adversely affected the viability of wind and biofuel projects actually creating green power. This includes two new major facilities in Northern NSW using waste from the growing of sugar cane to generate electricity sufficient to power 60,000 homes.

No doubt the whole thing seemed a good idea to policy makers at the time. We can further encourage solar hot water at no cost to the tax payer. However, nobody seems to have analysed the operations of the renewable energy certificates market as a market.

Neil has been running some material on mitigation options, but has given up on the project of reviewing the various measures, partly because this has already been done.

I plan to run some posts myself looking at options because I simply do not understand. I hate not understanding.

In saying that I do not understand, I am not talking about the ETS or the alternative carbon tax, although there are elements there that I do not understand. Bluntly, both are mechanistic relying on market forces and price signals. This doesn't make them wrong, but it does increase the chances of unexpected side-effects given industry and market structures. 

Rather, it seems to me that there are a large number of alternatives and that our present responses to those alternatives strike me as simplistic.

In talking about options I am conscious that I have no special expertise. I am bound to make errors, even gross errors. But if I at least set them out, others who are more expert may be able to correct me.


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