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.

Submission to Professor Ross Garnaut study

A Submission to Garnaut Climate Change Review – Financial Services and Managing Risk

Trading in Greenhouse Reducing Infrastructure to avoid “The Tragedy of the Commons”

prepared by Edentiti

401 Clunies Ross St

Acton ACT 2601
ABN 67111307361

Reducing Australia’s Greenhouse Gas Emissions

A framework to avoid the Tragedy of the Commons.

In Professor Garnaut’s recent speech http://www.henrythornton.com/article.asp?article_id=4937 he discusses the issue of mitigating greenhouse gases as a global “Tragedy of the Commons” problem.

This submission argues that a solution to the problem of global warming lies in creating a trading system to trade infrastructure technologies in such a way to overcome the “Tragedy of the Commons”. Note the trading system is not in energy or emissions or carbon but is trade 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 and this submission concentrates primarily on developing markets in greenhouse-reducing infrastructure rather than on the question of collecting money. An approach that results in a fair and reasonable expenditure of money will get wide acceptance and adoption. The following outlines an answer to the question of resource allocation (expenditure of money) with a proposed international infrastructure marketplace between nations. It also outlines how greenhouse reducing infrastructure market places can be established within nations. The details of how the internal market place can be established and run are available on request. The approach is an example of a cooperative economic system as mooted in http://www.ted.com/index.php/talks/view/id/216

An International Market Place for Greenhouse Reducing Technologies

Money to be used in the international market place for infrastructure comes from nations according to their current net per head greenhouse emissions. Large per head emitters supply more money than low per head emitters. Each country who signs up is required to supply a minimum “deposit” but can supply more if it wishes. Each country also retains ownership and control of the money they provide while it is in the global fund.

All money from this fund must be used for investment in greenhouse-mitigating measures or infrastructure. The money is deposited with the UN and interest on the money, while it is not used, accumulates in the fund and is distributed in inverse proportion to the per head emissions of each country for use on greenhouse-mitigating measures.

Any country can propose projects to use the money within their own country. The proposing country sets out the conditions of the project such as how the project is developed and what happens to the profits generated from the investment.

For example, India might propose a thermal solar farm in the Indian desert to generate base load power for the Indian grid. It could also propose that a percentage of the income from the generated energy be returned to the supplier of money. Countries with money in the fund now bid, with the fund monies they have deposited, for the right to build and profit from the thermal solar farm.

There are some additional rules with this market. It requires an independent group to determine if projects are allowed in the market place. There is a rule that each year every country is allocated a certain amount that may be invested in their country through the fund. If in any year the money is not spent then the amount accumulates. Thus a country with very low per head emissions and with a large population will have a large allocation in terms of investment. A country with high emissions and a small population will have a small allocation. Another rule is that a country cannot invest in a project in a country with higher per head net emissions. The purpose of this rule is to stop countries colluding along the lines of - you invest in mine and I will invest in yours - and to influence investments towards the countries that have the greatest need for investment in energy sources.

Because the market is open and competitive it will be seen as fair. In terms of reducing greenhouse gases it does not matter where money is invested but investment in energy infrastructure does offer extra benefits to the country in which it is built. In addition, the countries contributing funds will receive a return on their investment.

All buyers and sellers have a choice in which projects to propose and which projects to support. All countries will see advantage in reducing their own net per head greenhouse emissions as this will determine the amount of money to be invested and contributed.

The market is completely voluntary, with each country deciding for itself whether to join or not. Those that do must obey the rules of the market. Those that do not join are not permitted to propose projects or to contribute money to any other fund-approved greenhouse reducing projects.

A National Market Place

Countries that join agree to set up an internal, national market place in greenhouse reducing technologies within the country. The rules of this market place are as follows.

There could be a Pigovian tax imposed on the emissions of greenhouse gases, or the money could be raised from the sale of emission permits or it could be obtained from carbon credits. A proportion of the money collected is distributed to individuals in inverse proportion to the amount of greenhouse producing energy they consume. The money received has to 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 national market place can be implemented.

The national infrastructure system will encourage individuals to reduce their carbon footprint because they will pay more for greenhouse-generating energy, receive money for reducing their consumption and are required to invest the money received for reducing their carbon footprint in technologies to reduce greenhouse gases.

Will the approach work at the international level?

This approach does not require any global agreement. Countries can join of their own free will and there is no penalty for not participating. If countries break the rules then they are simply excluded as donors or as recipients for a period.

The system can be implemented immediately and is relatively simple to administer.

It is a system whereby each country wins. Countries contributing to the fund have the opportunity to earn money through investing and they can propose technologies developed in their own countries. This encourages them to invest wisely and to get a greater return on their own home grown technologies.

Countries receiving money benefit from new infrastructure that will help supply the energy needs of their own country. They will also be encouraged to keep their rain forests and other carbon sinks as these help reduce their greenhouse balance sheet and increase the amount invested.

By making it advantageous to both donor and recipient countries to join we escape the prisoner’s dilemma and solve the Tragedy of the Commons. By using a market for allocation of resources we get the best return on our investments in both greenhouse reductions and in wealth derived from the investment.

The system does not preclude or interfere with any global emission targets, carbon trading schemes, or other measures. It stands on its own.

Will the approach work at the local level?

The local level infrastructure market is established by paying people Rewards in inverse proportion to the amount of greenhouse gases their lifestyle generates. 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 the problem - not an indirect way.

The system is easy to understand - If I generate less emissions 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 the Pigovian tax.

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.

Summary

As stated at the beginning it is not the focus of this submission to suggest how the money for such a fund is raised. However, numerous solutions have been canvassed in recent years, including Pigovian taxes, selling emission permits or through generating carbon credits. This proposal supplements rather than replaces these suggestions. It addresses the problem of spending the money through a market in sustainable infrastructure rather than through the energy market itself.

The problem of global warming is not ultimately one of funding. On such a critical issue the money can be found when needed. The question is making it worthwhile for countries to agree to participate and then allocating the resources efficiently so that we do not waste time or dollars in addressing the problem. Creating an international market place in infrastructure projects supplemented by more efficient local resource allocation through Energy Rewards will achieve this.

Letter to Editor CT 10th Feb Transferring between banks

While Mr Swan is making it easier for us to change banks he should not forget to ensure the banks transfer the money instantly when we change banks. Have you ever wondered why you do an electronic transfer on Friday, the money is taken from your account immediately, but it does not appear in the other account until Monday? In this day of electronic banking do all the computers take the weekend off? There is no technical, operational or risk reason for money transfers to be delayed. Money transfers can be made instantly between accounts. The banks do it because they make money while the funds are being transferred (they get the interest while the money is in limbo) and more importantly because it restricts competition. If instant transfer of money was available then other organisations would give us more efficient methods of paying our bills and we would find account keeping and transaction fees and ATM fees would all drop.