Save Energy?

Should we bother trying to save energy?.

Not according to the Australia Institute who today came out with a press release on the insulation package, arguing that with the Carbon Pollution Reduction Scheme, it won’t reduce emissions.The Government says the scheme will help households save energy and cut carbon emissions by up to 49 million tonnes by 2020.

But the Australia Institute’s executive director Richard Denniss says the Government’s carbon pollution reduction scheme will just reallocate those emissions.

“The way the Emissions Trading Scheme is designed, every kilogram of emissions saved by a household frees up an extra permit for a big polluter,” he said.

This is something John Quiggin noted the other day. And strictly speaking, it is true for a public policy of this kind. So for the 2 tonnes in CO2 saved for each household per year or around 4 million in total, that is an equivalent amount of permits that can be used for something else.

So while that looks like reallocation of permits, it is actually focusing on the wrong thing. What it means is that the demand curve for permits will shift to the left by 4 million units. Depending upon its elasticity, that will translate into some reduction in permit prices. Is that a bad thing? Think about it. The environment is no worse off but the cost to the economy is reduced. And as that is the biggest constraint on stricter emissions targets that solves a policy impediment too.

Does this mean we should value the social return above the energy costs to insulation at the expected carbon price times 4 million per annum? Probably not. But it could be a much larger amount or a smaller amount. Regardless there is some benefit there.

Actually, if the Australia Institute were really wanting to go at this, it is better to think about the fact that the costs of producing the insulation will be borne this side of the ETS. That means that any pollution that production process gives rise to, especially given the extreme concentration of capacity (and hopefully not a big investment in it) at a relatively short period of time, will not be priced and so there will be no incentive to economise on emissions. But then again, this argument gets preciously close to being happy about the recession because it is good for the environment. Hmm, a slippery slope but I guess, to be honest, I can’t rule it out as a theoretical possibility.