Daily Archives: November 27, 2009

China’s carbon statement – a good economic and political decision.

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From the Australian:

China will cut the intensity of carbon dioxide emissions per unit of gross domestic product in 2020 by 40 to 45 per cent from 2005 levels, said a statement from the State Council, or cabinet.

“This is a voluntary action taken by the Chinese government based on its own national conditions and is a major contribution to the global effort in tackling climate change,” the statement said.

The announcement marks the first time China has put specific numbers on a September pledge by President Hu Jintao to reduce the intensity of its carbon emissions as a percentage of economic growth by 2020.

This is a fantastic economic decision. Cleverly China is talking about voluntary decrease of carbon intensity and not any specific carbon emission reduction. If I was running China, I would do the same. It is a economic decision to save energy, be more efficient and conserve energy in a world where it’s getting expensive.

Secondly, it is a great political statement. Before the Copenhagen meet it has shown commitment in a way it does not hurt the economy but actually helps China to be more productive.  India needs to do something similar.

What makes a nation rich?

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From MIT economist Daron Acemoglu:

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And yet while Sachs and Diamond offer good insight into certain aspects of poverty, they share something in common with Montesquieu and others who followed: They ignore incentives. People need incentives to invest and prosper; they need to know that if they work hard, they can make money and actually keep that money. And the key to ensuring those incentives is sound institutions — the rule of law and security and a governing system that offers opportunities to achieve and innovate. That’s what determines the haves from the have-nots — not geography or weather or technology or disease or ethnicity.

Put simply: Fix incentives and you will fix poverty. And if you wish to fix institutions, you have to fix governments.

How do we know that institutions are so central to the wealth and poverty of nations? Start in Nogales, a city cut in half by the Mexican-American border fence. There is no difference in geography between the two halves of Nogales. The weather is the same. The winds are the same, as are the soils. The types of diseases prevalent in the area given its geography and climate are the same, as is the ethnic, cultural, and linguistic background of the residents. By logic, both sides of the city should be identical economically.

And yet they are far from the same.

(from Greg Mankiw)

Australian ETS = Carbon Tax + Consumer Welfare

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I have been rooting for the ETS for a while now but with better understanding of the legislation (thanks a lot to the commentary on BusinessSpectator.com.au) I have learned that the ETS in its current form is not going to solve Australia’s problems at all. With ability to pacify any group that the government seems fit and the issue of carbon offsets there are not guarantees on how on the scheme will work.

The latest comes from Robert Gottliebsen who explains how the money from the ETS will be used as a welfare card by the labour government to stay in power.

Over the period from 2011 to 2020 the government expects to raise a staggering $114 billion from industry based on a carbon price of above $20 a tonne.

Where will that money go? John Howard retained office via the so called ‘Howard battlers’. Rudd learned from Howard so that’s where the money goes.

About $54 billion, or just under half, goes to lower and middle income people. Around 90 per cent of all low income households – or some 2.6 million households – will receive assistance equal to around 120 per cent of the overall cost increases they face.

Around 50 per cent of middle income households – about 1.7 million – will be fully compensated for overall cost increases flowing from the carbon trading legislation. And it gets better. Once the scheme starts, assistance will continue in perpetuity because these assistance payments are indexed to CPI and upfront assistance will automatically increase in line with the increasing carbon price as it affects household cost.

Think about it, if we provide people with 120% of the increase in costs; so more than what the costs have increased; then there is no hope in changing behaviour which is the goal.

Earlier I quoted Greg Mankiw on the fundamental theorem of the ETS:

Cap-and-trade = Carbon tax + Corporate welfare.

Well Greg, we have changed that in Australia. It should now read,


Cap-and-trade = Carbon tax + Consumer welfare + Corporate welfare.