Tuesday, 25 November 2014

The economics of carbon pricing 101: The carbon price and your electricity bill

The electricity market is a complex beast; people spend their entire careers examining and analysing its inner workings. For most of us, our only interaction with the market is through our electricity provider. We get the monthly bill, try to pay it on time to get the prompt payment discount, and receive a letter almost every year telling us that prices are, surprise surprise, going up. We may occasionally ask ourselves “what’s happened this time to make prices go up?” Usually the price increase is blamed on the transmission companies, but since 2011 electricity prices have been influenced by a new price – the price of carbon.

But just how does the price of carbon affect the price you pay for the electricity you use? Two issues immediately come to mind when thinking about the impact of the carbon price on residential electricity prices: the ‘peakiness’ of residential electricity demand, and uncertainty about the future carbon price.

Monday, 10 November 2014

"Hot Air": Searching for the winds of climate policy change

By Catherine Leining, Policy Fellow, Motu Economic and Public Policy Research

On 2 November 2014, the Intergovernmental Panel on Climate Change released its Synthesis Report 2014 with the headline "Climate change threatens irreversible and dangerous impacts, but options exist to limit its effects." The report is a strong reminder that limiting temperature increases below 2° Celsius relative to pre-industrial levels could entail reducing emissions by 40-70 percent of 2010 levels by 2050, and bringing net emissions near or below zero by 2100.  It emphasises the clear benefits of near-term action given the inertia of economic and climate systems.

A White House report issued in July 2014 also highlights the global costs of delaying action to reduce emissions.  Two key findings were:
  • Based on a leading aggregate damage estimate in the climate economics literature, a delay that results in warming of 3° Celsius above preindustrial levels, instead of 2°, could increase economic damages by approximately 0.9 percent of global output… The incremental cost of an additional degree of warming beyond 3° Celsius would be even greater. Moreover, these costs are not one-time, but are rather incurred year after year because of the permanent damage caused by increased climate change resulting from the delay.
  • An analysis of research on the cost of delay for hitting a specified climate target (typically, a given concentration of greenhouse gases) suggests that net mitigation costs increase, on average, by approximately 40 percent for each decade of delay. These costs are higher for more aggressive climate goals: each year of delay means more CO2 emissions, so it becomes increasingly difficult, or even infeasible, to hit a climate target that is likely to yield only moderate temperature increases.
The global case for near-term action is clear.  What about the case for near-term action in New Zealand?