Post Kyoto

Andrew Leach discusses the mechanics of Canada's withdrawal from Kyoto. In short, if Canada gives notice of Kyoto withdrawal before year-end, it suffers no penalties from current non-compliance. To become compliant, Canada would need to spend perhaps $19 billion on international carbon credits. But the only penalty for non-compliance relevant to Canada, even if they stay in, is a harsher target in a second period regime from which they're abstaining anyway.

Meanwhile, we're getting set to sign on for the second Kyoto period, if any deal goes forward, though Tim Groser seems less keen on any deal that doesn't include the US or major developing-country emitters.

I've noted before that NZ's excess emissions are only a cost on the public purse if we choose for them so to be; if there's no second Kyoto period, there may be no point in buying up credits for first-period non-compliance.

But there's one consideration here relevant that isn't for Canada: non-compliance also keeps us out of the international market for selling carbon credits. And that would hit forestry guys selling credits abroad. And so there could be distributional issues domestically if New Zealand were to be non-compliant.

Disclaimer, as always: I reckon buying insurance against bad case global warming worth the investment. But I'm not convinced that New Zealand's ETS is at all worthwhile unless it's part of a global agreement for emission abatement. Absent that, I still reckon we do better by making higher variance plays on technology development.

Post-Kyoto

Extending the date for various industries' entry into the New Zealand Emissions Trading System costs the public purse only to the extent that the government is required to buy carbon credits on the international market to make up for any failure to reach aggregate pollution reduction targets.

I've argued that there is only such cost if the government wishes for there to be such cost: Kyoto is not binding, and it's hard to point to other countries willing to impose very large fiscal costs on themselves to meet the targets by buying credits. Some are spending relatively small amounts of money. But nothing like the amounts that agriculture is held to be costing the country through delayed implementation.

And now we find that most folks are banking on there being no binding second stage post-Kyoto. Here's the Science Media Centre; here's a Nature commentary piece.

If there is no binding second stage, then there is no penalty for non-compliance in the first stage. Recall that the penalty for first stage non-compliance is tougher second-period targets. If the second period doesn't bind, then the first period doesn't bind. And we're, again, kinda nuts if we're going to spend measurable fractions of GDP buying international carbon credits to make up for a delayed accession of agriculture to the ETS.

I could be missing something, but here's what I'd expect this means:

• New Zealand still should be doing its best to do its part to reduce global warming. I think this is better done by biotech research into low-methane pastoral systems that's then released under free licence to anybody who wants to use it, but it's more than plausible that keeping the ETS is second-best given its existence and given lots of folks' investments having been made on expectation of its continuation. And, in the longer term when everybody's moved to ETS or tax regimes, we'd want to be there too anyway.


• New Zealand should not expect to be on the hook for big national costs if it winds up making more sense to delay any sector's accession to the system. Agriculture will fail to earn carbon credits for any reduction in emissions, but if implementation is delayed because they can't abate in the very short term, that's no real loss.

Weitzman!

Martin Weitzman is presenting here at Canterbury, tomorrow afternoon, on the economics of climate change.

I'm really looking forward to his talk; I hope to see a lot of local Offsetting readers there too. RSVP now if you haven't already!

Weitzman argues that a fat downside tail in the distribution of potential outcomes make the case for strong action to combat global warming - it's insurance that's well worth the premium.

It's a pretty reasonable argument. And, I broadly accept it: it's worth spending a bit on insurance. My general problem with it is that there are all kinds of potential fat tailed risks with deep structural uncertainty. So I have the same problem with Weitzman's argument as I have with Posner's "Catastrophe": there are a non-trivial number of potential states of the world in which all human life is extinguished. It's not immediately clear how we ought to expend resources in insuring against all of the different risks.

At the margin, I'd strongly favour transferring money from general spending to these kinds of insurance expenditures. But how much can or should we spend in total? And how to allocate across risks? I wouldn't be averse to transferring some money from global warming abatement to asteroid abatement: if NASA or somebody else discovers an asteroid that's on track to hit us in a decade, it's remarkably unclear whether there's anything we can do about it. I don't think the decade-long end-game would be particularly fun. There's also the potential emergence of all kinds of different superbugs. The risk of bad global warming outcomes in the medium term is perhaps on par with the risk of emergent superbugs, and much higher than the risk of asteroid (although the costs of asteroid approach infinity). From there we move to less and less likely events - all the way down to Shoe Event Horizons and Grand Collapsing Hrung Disasters. We need some mechanism to help us allocate resources correctly between global warming and other plausible (and, on an insurance argument, even implausible) potential disasters. And if Cost-Benefit analysis fails us when facing issues of deep structural uncertainty, on what basis ought we make decisions?

I hope to get the chance to ask Weitzman at tomorrow's lecture. And I hope to see you there.