tag:blogger.com,1999:blog-4900303239154048192.post3407550884530420124..comments2024-03-06T06:34:42.881-05:00Comments on EconoSpeak: Krugman Misses the Point on Waxman-MarkeyUnknownnoreply@blogger.comBlogger9125tag:blogger.com,1999:blog-4900303239154048192.post-61888487173200811162009-05-19T14:57:00.000-04:002009-05-19T14:57:00.000-04:00>The assumption is that only the auctioned perm...>The assumption is that only the auctioned permits trade; the giveaways don't. <br /><br />No the assumption is only that SOME Giveaways don't trade. If 100% of permits given away trade then it makes no difference to volatility. But surly some will be kept. Power companies, for example, are not going to sell all their permits in the early years. Half of U.S. power comes from coal. Much of the rest comes from natural gas. A trickle (in really exceptional circumstances) still comes from oil. Certainly not every bit of that fossil fuel power will be phased out overnight. So when the electric company is given a bunch of free permits, sure they will make some inexpensive reductions and sell some of the permits. But they will kepp some of them. <br />And what my long post argues is that even holding to a small percentage of the permits given away increase volatility. For exampl, WM gives away 80% of permits. It is not unreasonable to think that less than a third of that 80% (amounting to 25% of all permits) will be kept and not resold. And that is enough to affect volatility. <br /><br />And Peter the point about it affect volatility but not emissions is formally true but practically wrong if the cap is a tightening one. All the caps in the world don't do any good if not enforced. A widely disobeyed cap is more likely to be modified than enforced. Extreme volatility especially volatility that encourages price dips, discourages capital investment in the first phase. Low capital investment in the first phase makes it likely that when a second phase kicks and in and the cap tightens, that it won't be compled with and be modified in response. <br /><br />This is exactly what happened in the RECLAIM disaster in Southern California. Giveaways led to volatility and extreme price dips during the first phase. No one made capital investments. Everyone assumed that in the second phase they could buy credits at a price higher than the current price but sill not high. In short, everbody assumed everyone else would save emissions on their behalf.<br /><br />When the cap tightened it turned out out that no one could comply. New command & control regs were put in place, companies were given an extension to comply. So volatility can have real consequences.Gar W. Lipownoreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-5593907555618840002009-05-19T10:37:00.000-04:002009-05-19T10:37:00.000-04:00Peter,
I am more open to your idea than I was bef...Peter,<br /><br />I am more open to your idea than I was before. May be easier to monitor. Also, agree that the cap and trade should be across sectors, not a bunch of divvied up sectoral markets. What a mess.<br /><br />However, I do not think there is any reason to believe that given away permits are not tradeable. Were not the permits given away at the beginning of the relatively successful SO2 system? They have certainly been traded since.<br /><br />BTW, hi Gar, long time no hear, :-)rosserjb@jmu.eduhttps://www.blogger.com/profile/09300046915843554101noreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-29119514917621513482009-05-19T07:39:00.000-04:002009-05-19T07:39:00.000-04:00Does it make any difference what ice cream flavors...Does it make any difference what ice cream flavors are offered?Shag from Brooklinehttps://www.blogger.com/profile/07312591102812315460noreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-31910999048399623112009-05-19T01:32:00.000-04:002009-05-19T01:32:00.000-04:00Aha, now I get it. The assumption is that only th...Aha, now I get it. The assumption is that only the auctioned permits trade; the giveaways don't. So you end up with a thinner, more volatile market. (No need to assume any behavior differences between those who bid and those who just get.) The usual assumption in these things is the opposite, however, that there will be a robust secondary market in permits, so the initial giveaways will not affect volatility. I don't know how much secondary trading there is in the ETS; this is an empirical question.<br /><br />This issue affects only price volatility and not emissions, since emissions are capped -- assuming perfect enforcement, no offsets, etc.Peter Dormanhttps://www.blogger.com/profile/00093399591393648071noreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-6452537159867161852009-05-19T00:38:00.000-04:002009-05-19T00:38:00.000-04:00OK, how large giveaways contribute to volatility.
...OK, how large giveaways contribute to volatility.<br />You can find details at:<br />http://www.grist.org/article/cap-and-trade-permit-giveaway-hurt-waxman-markey-effectiveness<br /><br /><br />However briefly:<br /><br />Your local icecream stand has only two customers, one who buys 1 ice cream daily, another who buys daily a random number of ice creams between 1 and 3. Remove that steady customer from your (failing) business, and reduce the ice cream stand's order by one icecream a day. The remaining business will be more volatile. Even though you cut the supply of ice cream by an amount equal to demand reduction, volatility has increased. <br /><br /><br />With steady customer and volatile customer<br /><br />1+1=2,1+2=3,1+3=4<br /><br />Same order from volatile custome with no stead customer 1,2,3<br /><br />So 2,3,4 high Ratio of high to low demand=2 to 1<br /><br />Or 1,2,3<br />Ratio of high to low demand =3 to 1.<br /><br />And minimu demand was 2, now minimum demand is 1<br /><br />Removing the steady customer increases volatility, and also ensure a lower bottom to the market.Gar Lipowhttp://www.nohairshirts.comnoreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-1218827519058972982009-05-19T00:23:15.883-04:002009-05-19T00:23:15.883-04:00I guess the combination of giveaways with upstream...I guess the combination of giveaways with upstream capping would take place as follows: fossil fuel company needs permit. Electric utility has permit. So Utility buys fuel with combination of money and permit thus saving fossil fuel company from having to buy permit, and letting them charage a lower price.<br /><br />OK, but then it becomes very obvious what you are doing. The whole point of giveways is to provide subsidies without it being obvious that this is what you are doing. It may be something you can model, but politics of giveways pretty much require the real large permit giveaways go to someone who would otherwise have to buy permits. In other words giving away permits is always a political decision. The same politics that motivate giving permits rather than auctioning and then providing a cash subsidy of equal value, also require assigning caps in such a way that those getting the free permits also need permits to continue doing business. <br /><br />I'll do a second comment on the effect of giveaways on demand.Gar Lipowhttp://www.nohairshirts.comnoreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-79914114289286512402009-05-18T22:46:00.000-04:002009-05-18T22:46:00.000-04:00Gar, I'm still missing your argument about giveawa...Gar, I'm still missing your argument about giveaways and demand, although I agree that there is a synergistic negative impact of having both downstream capping and giveaways. (You could have giveaways with upstream capping by handing permits to, say, electrical utilities that they could use to purchase fuel inputs at lower cost.)<br /><br />You are right that the offsets are another horror of W-M, although in principle they too are on a continuum, and you could ramp them down. There is no ramping down the wrong choice of where to require permits in the first place.Peter Dormanhttps://www.blogger.com/profile/00093399591393648071noreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-704989729191010272009-05-18T21:02:00.000-04:002009-05-18T21:02:00.000-04:00I think you are too tolerant of giveaways vs. auct...I think you are too tolerant of giveaways vs. auction.<br /><br />1) Not in practice seperable from the downstream sectorial caps you lament. How can you target your giveaways unless your caps are downstream? If the permits were required upstream, then the only sector you could give large amounts to would be the fossil fuel producers and importers. (With maybe secondary giveaways to industry for F5 and Portland cement.).<br /><br />2) Giving away a large percentage of permits increases volatility by removing a percent of steady demand from the market. (That it removes equal supply does not prevent remaining ratio of demand to supply from being more volatile than if everything was auctioned.) <br /><br />Also one other problem - the huge amounts of offsets. And for various reasons, in spite the language about them being varifiable, additional and permanent, the types of offsets in two cases cannot meet those requirements, and in the third are politically unlikely to do so. So the offsets further reduce any emissions reductions from this bill.Gar Lipowhttp://www.nohairshirts.comnoreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-7429812259855192742009-05-18T19:17:00.000-04:002009-05-18T19:17:00.000-04:00The lack of political Tom Foolery is exactly why i...The lack of political Tom Foolery is exactly why it will not be done in the more straight forward manner you propose. The effort of educating the public to the economics and the fairness, elegance, and effectiveness of an "excise tax" approach (you can dress it up in carbon permits all you will and it is still an excise (punitive) tax) is only a small part of the problem. Because even if the voters are educated and understand the ramifications, the payola system of government will still prevail. Campaign funds are a very big part of what keeps the Congressional people and their respective parties in their seats of power. The dynamic duo will always find some "hot button" issues of distraction on which to pin the outcome of elections. All the real issues will be a raft of scientific counterclaims or just ignored while we focus on Gay Marriage, gun control, and bank bailouts.TheTruckerhttps://www.blogger.com/profile/10346127768102862741noreply@blogger.com