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In Critiquing European Policy, Washington Newspaper Misses The Crux; Gets It Wrong

by nanne Fri Apr 13th, 2007 at 10:56:06 AM EST

Yes, the title is a joke. I hope Steve Mufson didn't come up with this one himself:

Europe's Problems Color U.S. Plans to Curb Carbon Gases


It's a rather long Washington Post piece which makes three points about the "unexpected and costly side-effects" of Europe's Emissions Trading Scheme:

  1. It is distorting competition with foreign companies who do not have to obey similar standards.
  2. European companies are circumvening it by outsourcing/offshoring the most polluting phases of construction
  3. Energy prices have gone up! Energy companies have profited!
(Crossposted from DJ Nozem)

From the diaries ~ whataboutbob

These are the wrong points. Before exploring why, let's just say that it is not easy for a Washington-based reporter to get the right kind of picture of a complicated European policy (although it can't be too much trouble to consult some US based environmental economists). On the other hand, why write about it if you don't know anything about it? Anyway, the following paragraph is rather disgusting:

As U.S. lawmakers work on the details of their greenhouse-gas legislation, they are looking carefully at Europe's experience. Five Senate proposals all use the same basic approach, known as "cap and trade," that Europe has used for the past two years. But what the snappy name "cap and trade" means is that the market will put a price on something that's always been free: the right of a factory to emit carbon gases. That could affect the cost of everything from windowpanes to airline tickets to electricity.
Oh come on!

To start discussion with the 3rd point, it should be noted that rising prices and increased profits for energy companies (and quite a few other companies as well) is exactly what neoclassical economics predict happens under a cap-and-trade system, when tradable emission rights are handed out for free. The companies treat the freely given rights as a 'lump sum' subsidy, that is, they will calculate the 'opportunity costs' of spending the rights rather than selling them. These costs are than added to the price of the product the company is selling, giving it a 'windfall profit'. Far from being undesirable, this prevents the (internal) market from being distorted: it means that in terms of price competition, companies that are handed out rights for free do not get a competitive advantage over firms that have to buy the rights. Companies that are handed out relatively more rights than others also don't get a competitive advantage, in terms of price.

The added cost of a good is determined solely by the price of emission rights on the market for emission rights. That is how the market is supposed to function. The reporter has no idea of this and as a result the piece is replete with error.

If this practice is somehow interfered with by the national government and companies are kept from raising their prices, this is market-distorting behaviour and would be frowned upon (and probably litigated) by DG Competition. What governments can do without distorting the market is taxing the windfall.

A couple of things might be noted here. First, why does the Washington Post hate the free market? Second, this consequence was probably intended and if it was not, was entirely expected and is most certainly not a side-effect.

I have some overview of the literature and Commission documents that were preduced in advance of the ETS, and side-effect #1, the competitive disadvantage, was definitely noted, voiced quite loudly by industry, etcetera (in the mean while, industry is quite optimistic). That leaves European industries offshoring or outsourcing a part of the production chain -the part that pollutes the most- which, if novel to me, is also a result that could have been expected.

However, it is hard to see how you can deal with these two problems as some nations (e.g. the US and Australia) play free rider on climate change and other nations don't have quantitative goals. Some in the EU have offered the idea of a border tax. But this would meet a lot of international resistance (kiss yr Doha round goodbye). A more practicable idea might be to use something like a European 'globalisation adjustment fund' to subsidise the implementation of technologies and processes in industries facing global competition that cut back on energy use and greenhouse gas pollution.

The more important challenges of the ETS are not or barely noted in the piece, and as a result, people reading the WaPo - including, I'd guess, many a policy-maker - get a picture that is doubly wrong. The first challenge, which is addressed only in passing, was/is the lack of scarcity on the market in the first trading period due to overly liberal national 'allocations'. The adequate policy response in the EU and the US: plan for scarcity; make conservative growth estimates; don't allow the (Member) States too much say.

The second challenge is the short time horizon of the trading periods: companies can only really plan their reduction strategies when they have a 20-30 year time horizon. The second period of the ETS runs from 2008 until 2012. The EU has now alleviated much of this problem by committing unilaterally to a 20% reduction of greenhouse gases by 2020 (compared to 1990 levels) and offering more if others join in. The policy response in the US should be the same: couple an emission trading scheme to a strong long-term greenhouse gas reduction commitment to give companies an adequate planning horizon.

Personally I don't see why we would take seriously anything printed in a newspaper which gets things so spectacularly wrong and for such a long time now.

Without contrition.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Thu Apr 12th, 2007 at 10:40:20 AM EST
The mistakes made by the WaPo in these piece are illustrative of various points, which was why I thought it worth picking at. Other than that, the WaPo is not worth much in terms of foreign affairs and its editorial line blows, but I had the notion that its reporting on the Washington beat tends to be rather good.
by nanne (zwaerdenmaecker@gmail.com) on Thu Apr 12th, 2007 at 11:29:05 AM EST
[ Parent ]
I agree, it's good to keep picking at it. I know that's what many do all the time, pick up ideological biases in anglo-american news organs and present them. Not sure what good it will do when I see stuff like this:

It's too much for me, though. I can't read the garbage, no time, no heart for it either. Rather read the crap when I've the morale for outrage, the good stuff straight away when I do not

Which, in terms of conventional organs (in print media as well as audio-visual) isn't, typically, in English.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Thu Apr 12th, 2007 at 11:43:34 AM EST
[ Parent ]
is pretty uneven, especially in the print edition. I agree though that it's worth reading just to know what the Beltway conventional wisdom is.
by Matt in NYC on Thu Apr 12th, 2007 at 01:47:14 PM EST
[ Parent ]
Sadly, the Post's value tends to increase with increased ignorance. The more we know of a subject, the greater our frustration all too often.

Re "local" ... well, where was the Washington Post re corruption in Congress under Republican rule? For example ...

The Post has some tremendous reporters ... and can do tremendous reporting ... but there have been far too many reasons for far too much frustration with it ...

Blogging regularly at Get Energy Smart. NOW!!!

by a siegel (siegeadATgmailIGNORETHISdotPLEASEcom) on Sun Apr 15th, 2007 at 12:00:23 AM EST
[ Parent ]
The problem is less black and white than that. There has been some great reporting in the big newspapers. It was the WaPo that first broke the torture story way back when in 2002 - page 1, made it clear it was official policy.... 'the gloves are off'.... and nobody paid attention. They later did more great work on torture and detainees - that Pulitzer Prize was well deserved, as was Anthony Shahid's for Iraq. What is maddening is the mix of crap shilling with real reporting even though even many of the shills are extremely capable journalists. In that I think Tom Ricks is the best example - his newspaper reporting from Iraq was mixed with a strong bias towards Pentagon PR, but occasionally showing signs of what made Fiasco such a great book on Iraq. (The WaPo's reporters have written three great books on Iraq - Fiasco, Shahid's Night Draws Near and Rajiv Chandrasekaran's Imperial Life in the Emerald City. They're all worth reading.) If you don't read the big papers you're missing a lot of important stuff, but unfortunately it comes with plenty of crap. Interestingly, the WaPo has IMO been better on the reporting side than the NYT, even though its editorial page is full bore neo-con, while the NYT's has been by far the most left wing and rational one of the MSM outlets (e.g. at the same time as Judy Miller was a front page fixture, the editorials were repeatedly saying that the WMD evidence is very shaky and that there are no reasons for war)
by MarekNYC on Sat Apr 14th, 2007 at 12:29:26 AM EST
[ Parent ]
Even a broken clock is correct two times a day.

The ETS is thoroughly silly and stupid. It's the bastard child of market fanaticism and goodhearted but goobrained greenie-ism.

It should have been scrapped yesterday and replaced with simple and effective regulation which does not hurt industry and consumers.

Yes, you know what I am saying here...

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Apr 13th, 2007 at 11:51:10 AM EST
Cap and trade emissions trading has worked perfectly fine (even spectacularly well) in the US context, where it has been used for reducing Sulphur Dioxide. I don't see why it wouldn't function in the European context except, as should be noted, that the Acid Rain Program had a 20-year time horizon, whereas the ETS only runs for 7 years.

I think that the 2nd phase of the ETS will work out much better than the first, as the Commission has gotter more serious about making sure that there will be scarcity and has now outlined clear long-term goals.

I'd guess your solution would be a massive state subsidy programme for nuclear power?

by nanne (zwaerdenmaecker@gmail.com) on Fri Apr 13th, 2007 at 12:27:52 PM EST
[ Parent ]
Well, not necessarily, though I'd like to see that too.

But a simple CO2 tax, combined with a total ban on construction of new fossil-fired heating and power (though of course not transportation) systems would be well enough in it's own right.

After all, nuclear power is the likely result of both ETS and my idea, except that my idea will do it alot more simply and with much smaller transaction costs. The tax in itself would be enough really.

(It's true that cap and trade has worked wonders for sulfur, but so would taxes, and sulfur does not in the slightest bit permeate our society like CO2 does. There are much fewer sources and regulation is much simpler with S than with CO2, and on top of that S is a regional problem and not a global so the efforts can be much more limited in scope.)

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Apr 13th, 2007 at 01:38:39 PM EST
[ Parent ]
I actually agree with your prescription. Practically, a fuel tax and a simple ban on new fossil fuel plants would be clearer and more effective. The problem is that it was/is not politically possible.

In the EU you'd need unanimity to agree a common fuel tax and unanimity for any measure 'significantly affecting' the choice between different energy sources. A fuel tax was tried in the 90s but got stuck. The ETS could sneak through the restrictions on EU environment policy and could be decided by majority voting.

With regard to sulfur: the objective of the US program was to cut back on acid rain, which was not seen as a regional problem but as a problem where the total amount of emissions was decisive. This is precisely what made a cap-and-trade system desirable -- it would be worth much less if the problem was primarily regional because the scope of trading would be much smaller.

by nanne (zwaerdenmaecker@gmail.com) on Fri Apr 13th, 2007 at 06:10:10 PM EST
[ Parent ]
Dear Steven Mufson,

In a recent article (April 9th) on emission trading, you blame the rise of energy prices in Europe on its emissions trading scheme. The piece ignores two key points.

The first is that the rise in energy prices in Europe is mainly due to the conjoint causes of privatisation of the energy market and rising natural gas prices. In a liberalised energy market, the most expensive plant producing electricity at any time sets the actual price for electricity. This price is usually set by gas-fired plants which can be turned online and offline more rapidly, whereas 'base load' power is provided by cheaper coal and old nuclear plants. Natural gas prices that are coupled to oil prices have risen a lot in recent years, causing electricity prices to go up. Emissions trading is a distant third factor.

The second point is that companies are supposed to pass on the full value of emission rights to customers according to (neoclassical) economic theory. To go further: this is what prevents the market to be distorted by companies gaining a price advantage over other firms when they get relatively more rights, or get free rights whereas the others pay for (part of) them. By getting rights handed out for free (grandfathering), a company incurs an opportunity cost on the rights it decides to use rather than sell. This opportunity cost is factored into the price of its product or service. The profit that a company makes by this practice can be described as a 'windfall profit'. However, it should be noted that attempts to restrict this method of pricing will restrict the free market; the only thing that could be done without much distortionary effect would be to tax a part of the windfall.

For the first point see this issue paper:
http://www.epc.eu/TEWN/pdf/230603739_EPC%20Issue%20Paper%2051%20-%20Rising%20to%20the%20energy%20cha llenge.pdf

And this article:
http://www.ft.com/cms/s/014ff2a8-b167-11db-b901-0000779e2340,Authorised=false.html?_i_location=http% 3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F014ff2a8-b167-11db-b901-0000779e2340.html&_i_referer=http%3A%2F%2 Fwww.eurotrib.com%2Fstory%2F2007%2F1%2F31%2F163656%2F489

For the second point see this free paper (can't be cited):

I would suggest consulting with some relevant experts and economists next time you write on the topic.

Kind regards (etc. etc.)

by nanne (zwaerdenmaecker@gmail.com) on Sat Apr 14th, 2007 at 04:13:57 AM EST

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