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

By Adolf Stroombergen and Corey Allan

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.

"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?

How irrationality can help climate: Economic perspectives on climate change part III

Post by Judd Ormsby

In the first post in this series I described climate change as a classic free-rider problem and I described the standard solution of government to these problems. Recognising how difficult this solution can be at a global level I then delved into some of the empirical literature on cooperation. In this post I want to discuss some insights from behavioural economics. I’ve got three topics in mind: energy-cost myopia, nudges, and defaults.

From fact to act: Shifting individual behaviour on climate change

By Scott White and Catherine Leining, Motu Economic and Public Policy Research

Individuals can make a difference on climate change through their actions as citizens, consumers, organisational members and activists. In New Zealand’s context, how can we motivate more people to take the more effective types of mitigation actions? Why are some people willing to mitigate beyond their self-interest, while others fail to mitigate even when that should be in their self-interest? We will be exploring these issues in a series of posts on shifting New Zealanders’ behaviour to lower emissions.

The story of New Zealand’s increasing greenhouse gas emissions since 1990 is not just about increasing exports and population growth. According to one international study, from 1990 to 2010, New Zealanders’ personal consumption emissions per capita increased 21%, from 7.6 to 9.2 tonnes of carbon dioxide equivalent (t CO2e) per year. This has occurred despite substantial increases in both the evidence base for human-induced climate change and media coverage of climate change science and impacts. Among individuals we can observe two clear disconnections that create significant barriers to effective action.

The role of anthropogenic climate change in the 2013 North Island drought

By Luke Harrington

A report released September 29^th 2014 by the Bulletin of the American Meteorological Society has addressed the causes of sixteen individual extreme weather events which occurred around the world in 2013, and specifically examined the role of anthropogenic (human-induced) climate change in each case. The report, “Explaining Extreme Events of 2013 from a Climate Perspective”, was compiled by 92 scientists worldwide and found a mixture of results when detecting a ‘climate change signal’ in an extreme event. The Guardian provides a good summary of the results here.

I was the lead author on an article within the report which focused on the North Island drought from the summer of 2013. The New Zealand Treasury estimates the drought cost the economy at least NZ$1.5 billion, with associated impacts expected for at least two years following the event. The role of our analysis was to understand how the likelihood of this type of event has changed as a direct result of anthropogenic changes to the climate system – this includes both greenhouse gas emissions and, because of our Southern Hemisphere location, ozone depletion.

The Climate CoLab

Blog post by Judd Ormsby

Crowdsourcing is cool. The internet is cool. Contests are fun. Why not set up an online contest that uses crowdsourcing to find solutions to climate change problems? Climate CoLab at the MIT Center for Collective Intelligence does exactly that.

The Role of Technology Policy in Addressing Climate Change

By Adam Jaffe, Director, Motu Economic and Public Policy Research

This article is a condensed version of “Technology Policy and Climate Change,” Climate Change Economics, 3(4) 2012. This version has also appeared in the December 2013 Motu Research Update. If you are interested in staying up to date with Motu's research please sign up to our newsletter.

Like most economists, I believe that the primary policy response to the climate change challenge must be to raise the price associated with the emission of greenhouse gases (GHGs), in order to create the appropriate economic incentives to align economic activities—production, consumption, and investment of all kinds—with the social objective.  Despite the current political controversies surrounding such policies, and the low prices currently imposed on GHGs in several jurisdictions that have implemented emissions trading systems, I believe we will eventually see significant effective prices on GHG emissions in many countries.  In this article, I argue that the implementation of such policies is necessary but not sufficient as a global response to the climate challenge.  Emissions policy should be complemented by “technology policy,” i.e. a set of actions designed to foster the creation, improvement and diffusion of new low-GHG technologies.