CT Letter to the Editor published 5th May

Congratulations to the ACT government
The ACT government is to be congratulated if it introduces land rents for low income residents. It should now consider extending the idea and allow all newly developed land to be rented by anyone for any purpose - anywhere in Canberra. This would encourage businesses to establish employment opportunities outside Civic, the Airport and the parliamentary triangle. It will bring much needed employment to Tuggeranong and Gunghanlin and it will encourage investment in new rental properties rather than investors mainly buying existing houses for rent.

If the government is truly concerned with building an equitable and fair society it should resist the pressure it will come under from the many powerful people and groups in our community who benefit from land inflation. There will be opposition to the scheme because it will help reduce land inflation across the ACT. Elements within the government’s own ranks will oppose the idea because the government will does not receive money immediately from land sales which makes the short term finances look good to the detriment of long term economic viability. The banks will oppose it as it reduces the loans they need to provide for housing.

It is to be hoped that the government will resist the inevitable campaign and criticism against land rents and continue along the path of reversing the 1970’s decision to move away from land rent. It is also hoped that the Rudd government takes notice and does not sell Commonwealth land for housing but instead rents it as this will make housing more affordable and reduce inflation.

Keeping Hold of Your Identity - version 2

Keeping control of your electronic identity

Human culture and society in all its diversity is built upon individuals interacting with other individuals. In a similar way that a termite mound is an emergent property of the sum of individual interactions of thousands of termites, so human culture and all of society’s artefacts are emergent properties of our individual interactions with each other. These interactions and the resulting outcomes are vastly more complex than those of termites’, but the principle still remains. Human culture and society are the result of an evolutionary process built upon multiple, relatively simple one-on-one interactions.

This means that if we change the way interactions happen, we will change culture and society.

As cognitive humans we have the ability to determine how we interact and as a society we have the ability to evolve our social institutions to meet our overall needs. We make choices on how we operate as a society and hence our fate is in our own hands. This is particularly important today because our social structures have created the ability for us to destroy ourselves - be it through nuclear warfare, emergent pandemics, or more likely through changing our physical environment so that the earth becomes uninhabitable for our current physical form.

The move to a networked society is changing the way we interact with each other and we must expect that this will result in societal evolution and changes to our culture. The choices we make in how our networked society transactions operate will determine our resulting society.

An important part of any interaction between people is the concept and operation of identity. Our identities are formed and take meaning in our relationships with each other. In a world where there are no interactions there is no need for the concept of identity. When we talk about identity we are talking about the sum of our relationships with others, making identity a critical part of our interactions and therefore critical to our ability to survive as a species.

Given that the way we handle identity in the networked world will have a bearing on the way society evolves, it is important for us to understand what we are doing with identity and to look for the resulting changes to emergent properties. If, for example, we change our transactions so that the participants involved in every electronic interaction we have is potentially known to anyone then the society that evolves will be different to a society in which all transactions are known but the identity of the participants is unknown.

A society where the identities of participants to a transaction is always known will be a society with less cooperation, less interaction and with widespread avoidance and corruption of such transactions. However, for society to evolve we need interactions and in general the greater the number and quality of transactions the greater the benefit to society in areas such as understanding or wealth generation. In developing electronic transaction systems we want to encourage characteristics of transactions that make it easier for them occur.

There is considerable evidence that systems which remove the need for identification are systems that encourage transactions. The invention of money removed the need for identity in trading transactions. The original form of trade was bartering and for this, identity was important. If we knew who was behind the barter, we could judge for ourselves whether we trusted the value placed on it. Later, money provided a way of measuring value and providing trust. The identity of the other party to the trade was unnecessary as trust was put in the currency. This made trading more efficient and so reduced transaction costs, helping to create an explosion in trade and with it the wealth of societies.

When we examine the behaviour of people in online interactive games, in online auctions and in online forum discussions the most successful systems are those that do not require a person to be identified but still give ways for the interaction to be controlled. To see how this is done, try participating in an online community system such as Contract Bridge, purchase something through EBay or join a virtual world game. These systems are anonymous in the sense that you do not need to know any personal information about the other participants. You need to know the characteristics of people but not their identity. The systems have evolved so that games identification is separate from personal identification.

However, when first introducing online transactions, many organisations simply replicate their hard copy processes electronically. A decade ago company web pages were largely static brochures, that is until organisations grasped the dynamic nature of the medium. Electronic systems that evolve from non-electronic systems still tend to require personal identification rather than “functional” identification. The tax office still wants to know who we are. The online store wants to know who we are. The bank wants to know who we are. This need for personal identification hinders and cripples the implementation of electronic transaction systems and is unnecessary. Unfortunately electronic systems enable more information to be collected cheaply and so rather than less identity information being kept there is a tendency for more to be collected as governments and businesses believe it is better to know more about their clients and customers so they can better control the interactions.

Governments in particular are attempting to get more personal information about people. The Anti Money Laundering and Terrorism legislation requires businesses to “know their customers”. The main purpose of the Access Card is to bring together all the information about a person so that the relationship between the government and the citizen can be better controlled from the point of view of the government.

However, these attempts are expensive, hinder the vast majority of legitimate transactions, and will not deliver the desired results. The current approach is for governments to require that organisations know who they deal with so that the government can collate information across organisations and build up evidence against those who are acting outside the rules.

There is another approach to the problem that is simpler and does not compromise privacy. It is based on the idea of a person knowing everything electronic about themselves and being able to supply it when or if necessary. Another way of putting it is for me to control and know about all electronic data about myself.

This approach is remarkably simple, inexpensive to implement and will resolve most privacy concerns. What we do is change the bottom-level transaction rules. Rather than the government requiring organisations to keep track of who I am, I keep track of who I am and all my characteristics and relationships with others and give the information if needed to the government.

In the same way that the invention of money enabled a purchaser to remain anonymous (because the person receiving money could trust the currency) so the invention of a way for me to supply information about myself and satisfy the transaction rules without identifying myself gives a generic, powerful way of conducting transactions that is more efficient and less costly. It reduces the amount of information about me scattered in various databases and paradoxically, it will supply more useful information for decision making.

How the system works

Just as I have one physical presence let us imagine that I have an electronic presence. This electronic presence can conduct transactions on my behalf under my instructions. As with my physical body there can only be one electronic “me” and it is biometrically linked to the physical me.

This electronic me can form relationships with other electronic presences and in particular, with electronic representations of organisations. For example, I decide to get a driver’s license. I use my electronic presence to register that I want to get a driver’s license with the licensing authority. It, in turn, registers that I have applied and acknowledges me by allocating a number. My electronic presence supplies the other information required for me to take a test: that I am over 18; in good health; can see; have not been banned from driving etc. I then take the test and prove that the physical person arriving for the test is the same person as represented by the number. If I pass the test and pay my fee, the issuing authority now says that I have a license and marks my electronic presence as having a valid license. It keeps my number and the fact that I have a validated license in its database.

My electronic presence can now - under my instructions - tell other people that I have a valid license by getting this information from the issuing authority (which keeps the status of the license in its database). My electronic presence does not keep the authoritative data in its database - only a link to where the status can be obtained. Thus information about my license is kept in one place and one place only. When it is necessary for me to prove I have a license I can do so by using my electronic presence to provide the information that I have a valid license (but not provide my license number).

Over time I build up many similar relationships with others. At any time I can sever relationships, providing the rules of the relationship allow this. For example when I buy something from a store I might not want my relationship to last, so it could be cancelled if I wished. Other relationships like traffic offences in a police database might last for 10 years after which time the relationship might end.

Isn’t this just an electronic Australia Card?

The system offers much of the desired functionality of an Australia Card but operates in an entirely different way. The individual retains control of all their relationships, knows what information is kept about them in any registered electronic database and chooses whether or not to release information to others. In other words, information about me is kept in disparate databases whose only connection is through the electronic me, my electronic identity. Under this system I keep track of my relationships, not the government.

Integrity of the system

It is to the advantage of an individual to have all connections in the one place and connected biometrically to themselves as it makes it very, very difficult for someone else to steal their identity. The only way for an electronic identity to be stolen is to physically kidnap or take control of the person.

Fraud through the attempted creation of multiple identities would not be possible as it would almost certainly be detected by biometric security procedures and by an individual’s behaviour.

Audit procedures and independent checks of organisations looking after connections (the links between relationships) would further protect the integrity of such a system.

Does it need government legislation to come into existence?

A system as described here does not require any special legislation to become operational; in fact we have already built a system with these characteristics. It can be viewed at http://www.edentiti.com. This system can cooperate with other systems built in the same way and it is expected that over time many different Edentiti-type systems will interoperate. Individual organisations use the system for registration of customers who can prove who they are. As it reduces the cost of transactions, it is expected that such systems will ultimately prevail in the marketplace for identification.

Conclusion

The advantages of people retaining control of their own electronic identity information are great in terms of reduced costs, increased privacy and more open and secure transactions, making it an approach that is likely to prevail. By adjusting the way we handle individual transactions we can attain our system goals of increased security and reduced costs while still having a free and open society.

A Market approach to Reducing Global Emissions

A framework to avoid the Tragedy of the Commons.

The problem of reducing emissions is a classic “Tragedy of the Commons” problem. Each of us know that reducing our emissions is good for us all but it only works if everyone does it.

This blog gives a way of solving the “Tragedy of the Commons” through a market in technologies to reduce greenhouse gases.

There are three related areas with respect to reducing greenhouse gases:

1. developing infrastructure to generate energy without producing greenhouse gases;

2. developing strategies and infrastructure to save energy consumption; and

3. developing carbon sinks.

The problem of global warming can be resolved through investing money with these goals in mind. The issue – at both international and national levels – is in finding the most efficient, yet fair way to allocate resources to infrastructure to reduce greenhouse emissions.

We know that the best way to allocate resources is through fair and free markets. Reducing emissions is an investment problem not a pricing problem. If we spend money wisely we will solve the problem. How we collect the money to spend on infrastructure is relatively unimportant. That is if we can devise a method that is seen to be a fair and reasonable expenditure of money it will get wide acceptance and adoption.

A Market Place for infrastructure to reduce emissions

We already have a market place in infrastructure to reduce emissions. You can invest in wind farms, solar farms, insulation, hybrid cars etc. The problem is that it is not economically sensible for an individual to do so. That is we have sellers but we do not have buyers.

Let us collect money somehow. A tax on all polluting energy is a good way to do this as it makes polluting energy more expensive.

Let us now distribute this money in inverse proportion to the amount of energy each individual consumes in their household. Let us call this money Rewards for Frugality. Rewards however, must be spent in the infrastructure market place.

That is Rewards must be spent on any approved infrastructure project that will reduce greenhouse gases. It could be used for solar hot water heaters, to buy new shares in a geothermal company (not buy existing shares), to purchase a bicycle etc. Implementation of this strategy requires a communications infrastructure such as a mobile phone network and a mobile phone network could classify as an infrastructure project under the international fund. See Edentiti Rewards for ideas on how a market place can be implemented.

How might it work?

The infrastructure market is established by paying people Rewards in inverse proportion to the amount of energy they consume. Individuals are not required to receive Rewards and if they cannot think of a way to spend their Rewards they can sell them to others. Participants who break the rules of the market are excluded from the system for a period of time.

The Rewards must be spent on infrastructure that reduces greenhouse gases. This approach will work because it is seen as a “fair trade” and like all good trades both sides win. It is important to note that the market is in infrastructure not in carbon, nor in emission permits, nor in energy. It is a direct way of addressing investment - not an indirect way.

The system is easy to understand - If I use less energy then I am rewarded but I must spend my Rewards to reduce emissions. This solves the Tragedy of the Commons as the funds I receive is spent on infrastructure that benefits the whole community as well as myself.

The system is easy to implement but the details will depend on the communications infrastructure available in the country. Systems can be implemented with mobile phones but more complex systems can be implemented if there is a widely available broadband Internet.

The cost of implementation is low and running costs are expected to be less than a percentage point of investment dollars spent.

The system leads to stability in prices and is guaranteed to work. Emissions targets can be set and can be achieved for a known amount of investment which is determined by the size of surcharge on energy.

How much money do we need to invest?

The following calculations are indicative but with ongoing development in renewable energy technologies the figures are conservative.

Each Australian, on average, consumes for all reasons about 75,000 kwhs per year of energy. It costs $3,000 to build a solar powered or geothermal power source capable of generating 1 kw continuously for a year (or about 9,000 kwhs). Thus an investment of $25,000 will produce all the energy needed for an Australian to be greenhouse neutral. This equates to a total of $500 billion for the entire population at current prices. If this amount is spread over 10 years, it becomes an investment of $2,500 per person annually. The running costs (excluding financial costs) of renewable energy sources are about 1 cent per kwh or half the running costs of coal fired stations. The capital cost of coal fired stations is about $1,000 so the capital on greenhouse free energy investment is repaid in 22 years with today’s prices. At the end of 22 years the nation has an energy source fully paid for and generating energy at 1 cent per kilowatt hour.

System problems with Emissions Permits Trading

Systematic problems with Emissions Permits Trading and other forms of carbon trading

At present the cost of energy from renewable sources is higher than the cost of energy from burning fossil fuels. Emissions Permits Trading puts a price on emissions so that the cost of energy from burning fossil fuel will rise to be the same or greater than the cost of energy from renewables. This is then meant to spur investment in renewable energy sources which will replace fossil burning energy sources.

Scenario 1

Let us assume trading in permits works in encouraging investment in renewables. If it works then we will construct many renewable energy systems and due to technological advances the cost of renewables will go down. This means the price of emissions permits will go down. What business person will buy emissions permits today knowing that the price is likely to be lower tomorrow? If everyone thinks the same then we will see wide fluctuations in the price of emission permits with a corresponding instability in energy prices which leads to economic inefficiencies.

Scenario 2

Let us assume that the system gets going and existing energy producers purchase just enough permits to meet their current production. As the number of permits is reduced so the price of permits will rise well above the price needed to encourage renewables. This means that the price of all energy will rise to be just below the price of energy produced with high costing permits. This means that existing permit holders will get super profits and will not sell their permits but rather reduce their production which will in turn increase their profits because of the higher prices of all energy. This means it is in the interests of existing permit holders to make the cost of permits high and the best way of doing that is not to invest in renewables but to put the excess profits elsewhere.

Scenario 3

If the market in emissions permits works as in theory it is likely to be very volatile. Other financial markets such as exchange rates show a great range in prices for currencies even though we would expect that the relative values of currencies should be slow moving. As soon as the cost of energy rises well above the cost of renewables there will be political pressure to either increase the number of permits, ignore the permits or fiddle with the market in permits so that the price remains low. This will then defeat the idea of having a market in permits because the market will no longer be free.

Scenario 4

For emissions trading to work the cost of fossil fuel burning energy should rise to be greater than the cost of renewables. Assuming all the extra money collected from emission permits goes towards building renewable energy sources the cost of building enough renewable energy sources for a given reduction in emissions must be greater using this approach than a more gradual slower investment approach. This is because more money is spent earlier than later with permits because we know that the technology of renewables will become cheaper due to economies of scale and from learning how to better build plants. That is, emissions permits trading MUST be more expensive for a given reduction in emissions than a slower more gradual investment approach.

Discussion

The above may or may not happen as suggested - or they all may happen to some level. Whatever the future of trading holds we can be assured it will not work the way predicted by computer models because trading involves decisions by many people many of whom can influence and change the rules. What we do know is that the system will be modified to try to keep it to its objectives of reducing emissions and not distorting the economy. The real problem with emissions permits trading is that we are not sure it will work at all. The evidence of other attempts at imposing global economic changes are not good. The ozone hole started to reduce but now appears to be increasing in size. The early attempts at European carbon trading failed. In Australia the attempts at carbon trading have failed. We can all postulate in retrospect why the systems failed but the most likely reason is that the underlying assumptions are flawed. The probability is high that any carbon trading system will fail. We cannot afford the time to experiment with systems that may or may not stop global warming.

A guaranteed solution to the problem

There is a guaranteed solution to the problem available to us. It is very simple and is built on existing systems that we know will work. The system operates as follows.

1. Put a flat tax on all carbon emissions.
2. Use the money from the tax to build renewable energy sources or to invest in energy saving methods or in ways to absorb carbon.

The argument against this approach is that governments are not good at spending taxes and we need markets to decide the best way to invest. This argument is a good one. The solution to the problem is to create a market to spend the taxes.

One way to do this is to give the tax money back to the people from whom it was collected but require them to spend the money on infrastructure that will reduce greenhouse gas emissions. We can make this even more effective if we give the money collected to those whose lifestyles produce few greenhouse gases . This means the distribution of money will have a secondary benefit of encouraging behaviour changes and of rewarding people whose lifestyles produce few greenhouse gases. As these people are often the poor the system is socially equitable.

This approach does not require ANY new economic systems. It only requires a system to keep track of the redistributed money and ensure it is spent in reducing emissions as agreed when it was given.

As the system involves a redistribution of money it makes no difference to the GDP of the country. What it does do is to force investment in renewable energy systems and in other ways of reducing greenhouse gas emissions and diverts money from other consumption.

It does this through a market in sustainable technologies so solving the issue of governments directing expenditure. Instead it allows the market to direct expenditure.

Emissions Permits Trading inferior to…

This blog entry has been submitted to the Garnaut global warming review.

Emissions Permits Trading versus Direct Investment

Recommendation 1: The Australian government develop a plan to introduce a nation-wide surcharge on the retail cost of all energy with the money collected to be redistributed to those whose lifestyles generate few greenhouse gas emissions.

Recommendation 2: The Australian government immediately trial the system in the ACT by funding a surcharge on electricity to be distributed back to frugal consumers of electricity.

Claim: A direct investment market-based approach to reducing greenhouse emissions will cost less to produce a given reduction in emissions than will any form of carbon or emissions permits trading.

Reasoning

To reduce greenhouse gas emissions we require investment in ways to generate emissions-free energy.

Trading in emissions permits or carbon credits are indirect means of encouraging investment in ways to reduce greenhouse emissions. The systems work by increasing the cost of emissions-producing energy so that it is priced higher than energy generated without emissions. Once the price rises high enough organisations will find it profitable to produce emissions-free energy and so the market will encourage investment in emissions-free energy to replace the emissions producing energy generation.

An alternative approach is to encourage the existing market in emissions-reducing technologies to flourish by supplying potential buyers with money to invest in the market. This direct approach will cost less to reduce emissions – by any amount – than would the indirect permits or credits system.

The reasons for this are twofold:

1. For an emissions permit system to work effectively requires an increase in the cost of emissions, enough to make emissions-free energy competitive with energy created by burning fossil fuels. If the price of all energy is not the same as emissions-free energy then investment is unlikely to happen on the scale needed to make a significant difference.

2. In the main, fossil fuel burning technologies are mature, while renewable technologies are still emerging. We know that the cost of renewable energy production is likely to drop as it is introduced. This also means that in the future the value of emissions permits will drop as less incentive is needed to encourage investment.

With a direct investment approach to emissions reduction, the cost of investment required to achieve a given level of reduction can be estimated and investment can proceed over many years at a lower average cost. Modelling shows that to achieve the same level of emissions indirect investment, through emission permits trading, is at least 20% more costly than direct investment and is likely to be twice as expensive.

The other advantage of direct investment is that it is certain to work. We know how to produce emissions-free energy - it is only a matter of funding.

The argument against a carbon tax is that it stifles market development, because the government has the money and governments are not good at picking the best places to invest.

Implementation

In the past the solution would have been for a government to impose a carbon tax and to build emissions-free power plants, such as occurred with the Snowy Mountains scheme. Economic orthodoxy says that this approach leads to an inefficient allocation of resources, not withstanding the fact that the existing fossil fuel burning energy industry was established this way. Economic orthodoxy says that markets are needed to allocate resources efficiently and there is much evidence to show that when markets operate fairly, this is true.

There is good evidence to suggest that the most efficient allocation of funds will occur in a market place where there are many buyers who can freely choose from many sellers of the same product. This same result will occur even when the market place is disturbed by external events such as the introduction of a completely new technology.

Given this, if we distribute the money collected by a carbon tax so that it is spent in the market place of energy-saving infrastructure or to generate emissions-free energy, we will have the least cost method of achieving any level of emissions in any time frame.

Energy Rewards is one way to create a market place with many buyers with money to spend.

It is a fair system where a surcharge (not a tax) is put on all fossil fuel energy. This surcharge is redistributed back as Rewards to those consumers whose lifestyles generate few emissions. Amongst the people whose life styles generate few emissions are those whose per head household consumption of mains electricity is below average. Rewards must be spent in the market place of green infrastructure. As the money is a redistribution (and not an expenditure item) there is no change to the GDP of any country adopting this system - just a redirection of investment away from consumption to renewable energy infrastructure.

Existing sellers of appropriate infrastructure will flourish because there will be many buyers wishing to buy. New technologies will develop because there are potential buyers of these technologies.

Conclusion

It is estimated that Australia could have zero net emissions within ten years with a 30% surcharge on the retail cost of energy redistributed as Energy Rewards.

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Policy Implementation through Market …

Topic: The future of Australian governance

Policy Implementation through Market and Choice Mechanisms

The 2020 summit could be extended to bring choice and “a market place of ideas” into policy formulation, selection and implementation.

2020 is a way to obtain ideas. The conference is meant to sort through the submissions and give the government a set of ideas worth considering. The next step as we understand it, is for the government bureaucracy to develop the ideas selected and decide on those worth implementing. The final step will be for the government to either implement the policies themselves or to tender the implementation of the policies to other organisations.

The problem with this process is that it is a one-off, and that choice and variety is reduced as the process continues. What is needed is a continuing market place for ideas, evaluation and for implementation.

Rather than the government evaluating the ideas or appointing a commission or study and selecting those worth considering, why not put the evaluation process up for tender? Let the government appoint three groups from the bidders and make their evaluations available for public scrutiny and comment. The government could then select the recommended bidder and ask that it prepare a tender for implementation. The selection process could be extended to involve interested groups who could give their input and their selection. The government and the group that prepared the tender then selects the most appropriate organisation - which could be an internal government body - to implement the system.

Every step – from submission of ideas to evaluation and implementation – could be developed into a continuous and ongoing process. It could be tried immediately on itself with the task of formulating policy on how to make the best use of the ideas from 2020.

Ken Henry letter on water pricing

Ken Henry (CT March 5th) puts the case for a realistic price for water. Most would agree with his article.

Unfortunately it will not happen in the ACT because ACT Treasury supported by all political parties are not willing to give up the taxes that come from being a monopoly water supplier. The arguments against a free market in water are that it is efficient to have a single supplier, restrictions are socially equitable and that the extra money we get from the scarcity value of water is spent on socially desirable services like hospitals and schools. ACT water restrictions can be removed tomorrow if we increased the price of water to high consumers, give all the extra money collected to low water users and require the money they receive to be spent on water supply infrastructure as a surrogate market for water. This would be socially equitable, would get wide spread support, is simple and cheap to introduce. It does not happen because all political parties are unwilling to give up monopoly taxes. In a true market the money collected from the scarcity value of water would go to increasing the supply of water but the ACT Treasury calls this hypothecation and does not let it happen. So Ken Henry’s call for a market based water supply system will remain just a call while his State Colleagues continue to believe taxing water is better government policy than a free market in water or the surrogate water infrastructure market.

The idea of emissions trading has a c…

Emission permits trading is said to offer a solution to greenhouse gas emissions. Under such a scheme an organisation will require a special permit before releasing green house gases. Permits are allocated, sold to or traded between organisations whose activities cause greenhouse gases. The effect is to increase the price of goods whose production causes the emissions of greenhouse gases. Other ways of producing the same goods with less gases will naturally arise because they will become price competitive. At first sight this line of reasoning appears to offer a sound solution to the problem of reducing greenhouse gas emissions.

I recently asked a number of experts why it is going to take until 2010 to set up an Australian emissions trading system. This seems a long time to wait given the immediacy of the problem. I was told the reason for the delay is that setting up an emissions permits system is difficult, with the major problems including defining the property rights associated with permits; how to issue permits; what to do with the money raised from permits; enforcing the property rights; and understanding the effect of the system on the economy. This is going to take at least two years and we are still unsure whether, at the end of that time, it will achieve a reduction in greenhouse gases.

As someone who builds information systems for a living I know that any information system (and an emission permits system is an information system) that takes two years to define is not going to work as expected. An emissions trading system is complex. We know that it is best to build complex information systems incrementally. We start with the simplest possible system that will achieve the minimum usable objective, we build it and see what happens. We learn from our mistakes, make incremental changes and allow the system to evolve as we add increasing complexity.

I then asked how the system was going to be tested. I was told that this was done by modelling the system on a computer. Economic computer modelling is carried out by building a theoretical model on how an economy works. Unfortunately the record of computer models of economic systems is problematic when they are asked to include human behaviour. It means we are testing how emissions trading will work with simple computer models not with humans. This is almost guaranteed to give results that will be difficult to trust because human systems are not static computer models. People invent new rules and continually change the systems they use.

This then set me thinking about the objective of emissions trading and to think of a better way to achieve the objective of reducing greenhouse gas emissions through an incremental adjustment of existing economic systems rather than creating a whole new regime of property rights.

The underlying purpose of emissions trading is to direct investment to ways of producing goods without greenhouse gas emissions (like energy).

A solution to this starts by putting a price (any price) on carbon and to use the money raised to invest in ways to produce goods (like energy) without creating greenhouse gases.

This is a well known and standard approach to the problem of reducing greenhouse gases. The argument against this is that it is not market-driven. This is a problem because markets are acknowledged as the best way to efficiently allocate resources. The market for the goods produced already exists, as does a market in greenhouse-reducing infrastructure, so there is no need to invent any new market to distribute resources on infrastructure to reduce greenhouse gases.

What we don’t have are buyers for greenhouse-reducing infrastructure because it is not economically sensible to purchase goods that involve lower greenhouse emissions. At present such goods cost more than competitive products created using emissions-producing technologies.

So the problem is not the money, not the sellers but the buyers. We need buyers who want to, or are required to spend in the market place of greenhouse-reducing infrastructure.

Why not create some money that has to be spent in the market place of greenhouse-reducing infrastructure? Secondly why not give the money collected from a carbon levy to those people whose lifestyles produce few greenhouse gases on the proviso that they use the money to invest in greenhouse-reducing infrastructure. That is, the buyers will have money but they have to invest in geosequestration facilities, solar thermal energy farms, insulation for houses, windmill energy generators and so forth.

If we do this we will still pay more for goods that generate greenhouse gases, but we will give the money collected to those whose lifestyles consume few greenhouse gases. These frugal people will invest in further ways to reduce greenhouse gases. We have created a positive feedback loop where saving greenhouse gases generates more savings. This is guaranteed to reduce greenhouse gases because it solves the missing part of the market-driven equation. It creates a group of buyers, with money, ready to spend.
We can quickly and easily set up an experimental system to test if the approach works. We already have the information systems to support the infrastructure market and the distribution of money is a well known problem. We can start experimentation immediately.

The system is socially equitable, will not change the GDP because the money used on greenhouse gases is merely a transfer from other expenditure, not a reduction in expenditure. The system can be introduced incrementally and refined through use. We can start it tomorrow. Best of all it is guaranteed to work. We know it will achieve a reduction in greenhouse gases. We do not know the rate but through experimentation we can soon discover how much we need to spend to achieve any particular emissions target.

Letter to Editor CT 22 Feb on Garnaut Report

While the preliminary report from Professor Garnaut is sobering reading there is hope. The CSIRO CT page 5 of the 22nd February reports that a mere 35 square kilometres of land could supply enough solar thermal electricity for Australia. The trick is how to fund the investment. Garnaut puts his faith in emissions permits and trading to supply the funds. This will supply the funds but it may not give the most efficient method to allocate the funds. The most efficient method of allocating resources is through markets where many buyers make choices between many sellers. If we distributed the funds raised from emissions permits to many buyers and permitted them to make choices on what renewable technology to invest in then we would have a market in infrastructure for reducing greenhouse gases. If we gave funds to those in the community whose lifestyles generated fewer emissions but we required them to spend the money on infrastructure to reduce emissions then we will magnify the utility of emissions permits. This approach would mean that we could have zero net emissions within 10 years and as a nation be richer at the end of the period than if we continue on our current course. The addition to Garnaut’s approach is to distribute funds from emissions permits by paying people not to consume rather than giving the money to governments to allocate.

FeedIn Tariff Proposal

FeedIn Tariff (FIT) Proposal Submission

Kevin Cox
22 Yirawala St
Ngunnawal ACT 2913

This submission supports the concept of a feed in tariff but recommends it as part of a broader approach. The broader approach overcomes issues of social equity and uses a market to allow the system to adjust to changing technologies and so obtain the greatest reduction in greenhouse gases for a given expenditure. This submission recommends

1. Give Monetary Rewards to those whose lifestyle and home technologies produces less greenhouse gases.
2. Require the Rewards they obtain to be spent on infrastructure for devices eligible for the Feed In Tariff or other greenhouse reducing technologies.

The proposed system can be implemented for no cost to the government.

Difficulties with FIT

The concept of a FIT that gives a fair price for renewable energy input into the grid is a good one. However, setting a fixed price does not encourage the most efficient and effective investment in ways to reduce greenhouse gases for the following reasons:

Pricing Energy at a proportion of Market Rates

A feedin price aligned more closely to the instant wholesale price of energy, rather than a fixed price, would be a more effective approach and will lead to better allocation of resources. For example it will encourage systems that store energy and release it into the system at times of peak loads. The ability for prices to vary according to demand creates systems that lead to efficient resource allocation. The feed in price can be higher than the market rate but it is likely to have the most benefit if it reflects the underlying price of other sources of energy.

Reduction Incentives should be Technology Agnostic

Setting a price that is above the cost of producing renewable energy from other renewable energy systems will divert resources away from other effective renewable methods of reducing greenhouse consumption. For example a feed in tariff above the cost of green energy from the grid will divert people from subscribing to green choices and will divert resources from installing solar hot water systems. Energy saving investment can be viewed as the same as generating renewable energy in terms of reducing green house gases and a fixed high feedin price will divert resources from more effective (in terms of greenhouse gases saved) forms of investment such as insulation.

Any Proposal should be socially equitable

A feed in tariff that subsidises those who can afford the capital to purchase an energy generating system will divert money from the poorer members of society to the richer. A high feedin tariff is ultimately paid by other consumers who do not have an energy generating system. While auxiliary schemes can be invented to help overcome these inequities it is better to have systems that do not need auxiliary schemes to overcome inequities as these auxiliary schemes themselves can be problematic.

Any Proposal should result in genuine reductions in greenhouse gases

A fixed feed in tariff on the generation of electricity does not encourage people to reduce their consumption of energy. In a perverse way it may even increase the total consumption of energy. The psychology of a feedin system for some people - particularly the rich - is that because they have a feedin system they feel entitled to consume more energy. Thus they consume the energy they generate and continue to consume the same amount of non renewable energy. While this does not apply to all people there will be enough to make the system less effective.

A Socially Equitable FeedIn Tariff Approach

The following proposal gives a financial benefit from the FeedIn Tariff but returns the most benefit from the reduction of greenhouse gases saved by the installer. A principle for any socially equitable system with respect to greenhouse gas reduction is that those consumers who cause the least damage to the environment should pay the least and, if possible, should be rewarded for their constraint. In the case of electricity this can be achieved by diverting money from those who pollute to those who generate less pollution. Thus as well as increasing the price of feedin renewable energy above a market price, in addition, we can Reward people who install such systems through their reduction in polluting energy consumption.

This can be achieved in the following way.

1. Calculate the net greenhouse emissions for each person for domestic electricity consumption.

2. Price FeedIn renewable energy as a percentage of the price of non renewable energy.

3. Put a surcharge on all energy in proportion to the greenhouse emissions generated when the energy is produced.

4. Distribute the money collected from the surcharge as Rewards to all consumers in inverse proportion to their net greenhouse emissions as calculated in (1)

5. Require Rewards to be spent on approved ways to reduce greenhouse emissions. Existing installations of renewable energy systems can qualify as an approved way.

A person whose feedin results in a net low greenhouse emissions will receive more Rewards and receive money from the market price adjusted feedin power they generate. The approach is equitable because it rewards those who have already installed systems, it rewards those who consume less energy who are often the less well off members of society and it rewards people who invest in ways to reduce greenhouse emissions in whatever way they deem appropriate for their situation.

This approach addresses the issues raised from a straight fixed Feedin approach. The approach can be tuned by the government to achieve any desired reduction of emissions through changes to surcharge amounts and to the formula for distribution of Rewards.

It can be implemented efficiently with the system for efficient delivery of Rebates called Edentiti Rebates. The system can be implement for NO COST to the government as the running costs come from the Rewards recipients and merchants using the system. A government can obtain any level of greenhouse emission reduction desired from household electricity consumption through this approach by simply varying the surcharge added to electricity prices of non green energy..

Answers to Questions Raised in Discussion Paper

The following specific questions have been asked in the discussion paper. In the following these questions are answered if the above proposal of a variable FIT and Energy Rewards is implemented.

Is there a need to limit the size of systems that are entitled to receive the FiT?

There is no need to limit the size of the system. The system can be applied to both residential, community and commercial systems as it gives a market based pricing structure for payment. The payments could be based on the instantaneous wholesale price of electricity from other sources or some other demand calculation..

Is it appropriate to set a maximum net investment in a PV system?

No

Is a ten year payback period appropriate?

The payback period depends on the Rewards or carbon emissions saved rather than the amount of energy generated. The payback period is likely to be shorter than ten years for those people whose lifestyles consume little polluting energy.

Is an annual review sufficient/excessive?

An annual review should be made of the surcharge and of the rates at which Rewards are paid. However, changes will be made on the basis of whether the community rate of reduction in greenhouse gas emissions is “satisfactory” or not. If the rate is too low then the surcharge can be increased and Rewards also increased.

What options are available to ensure that there is no unacceptable impact on those less able to pay or install network connected renewable energy systems?

A system that Rewards people for generating less greenhouse gases will be socially equitable. Because the Rewards system is technologically agnostic with respect to method of reducing greenhouse gases then people who cannot pay to install systems can achieve reductions in other ways. Most people for whom an installation is not an option will obtain Rewards. As Rewards are transferable people who cannot use them can sell them - at a discount - to people who can use them. Others may choose to donate their Rewards to community groups who may install systems on community facilities like schools or churches.

Is a FiT a cost effective and/or efficient method of reducing greenhouse gas emissions?

A FIT combined with Rewards will be cost effective and efficient because people will have a choice on how they decide to invest or change their behaviour to reduce greenhouse emissions. That is Feed In Installations will compete in a market place of greenhouse gas reducing alternatives and we know that market based resource allocation systems is the most efficient way to allocate money for a particular purpose.

Is the FiT a cost-effective way of increasing solar energy use?

It can be if it competes with other greenhouse reduction technologies.

Are there any other options could be used instead of, or to complement a FiT?

The proposal of Energy Rewards as part of the FIT proposal complements FIT.

By reducing the upfront costs associated with installation, are direct subsidies a more attractive option to encourage the adoption of renewable energy technologies?

Direct Rebates are likely to be less efficient because the upfront subsidy will almost certainly cause market distortions - However, the Rewards approach permits direct subsidies through giving some people more Rewards.

Summary

The objective of the FIT is to reduce greenhouse emissions not promote a particular technology. Relating the subsidy directly to the reduction in emissions regardless of the technology or behavioural changes will lead to more efficient expenditure because it brings choice and allows the market in renewable energy production and energy savings to operate efficiently. The introduction of Rewards for low emissions will encourage the adoption of a plethora of renewable energy technologies including PV solar panels. Rewards is socially equitable and favours the frugal over the high consumers. It can be introduced for NO COST to the government and will be seen as fair and reasonable by most of the population.