Saturday, October 12, 2013

Whatever You do, don't copy Germany

results of naive energy policy

We have already gone a dangerous step into German territory by having super long agreements on price-fixing of feed-in tarriffs for a large enough chunk of electricity to distort the market. Reading the linked article, the embarrassing thing is that Germany still has a large carbon footprint and a much higher carbon intensity than neighbouring France. A negative price for a commodity is not a sign of achievement, it is a sign of a dysfunctional market structure. There is a perverse incentive to keep fossil fuel powered stations going because of the market necessity of the utilities to not go broke keeping a reasonably steady power supply.

If you want to understand my seemingly contrarian views on feed-in tariffs, read the link in its entirity. For a functional market, wholesale cost of a commodity needs to asymptote to the marginal cost of production. Thus solar electricity needs to be set up that - sure, generate your electricity for your own use first, saving you the retail price, but your excess needs to go to the grid for free. If that doesn't pay back the cost of investment quick enough, subsidies should be to reduce the capital investment, not to artificially increase the return for eternity.


11 comments:

Chris Fellows said...

Hmm, you said before on Twitter that you thought a carbon tax was a good idea, even though AGW is bollocks. Is this just because it gives a competitive tax advantage to labour-intensive industries such as yours vis-a-vis the energy-intensive industries that dominate our economy? Or do you have some more obscure reason for supporting this cumbersome, regulatory complex, and easily gameable form of legal extortion?

Marco said...

My approval of the carbon tax is more about the energy industry and the smooth transition to more renewables. It is also about plucking the goose. Governments have to raise taxes, and I think you are taking all the hissing as evidence of your very dubious assertions that it is cumbersome, regulatory complex, easily gameable or legal extortion.

It is also about pride that our energy market will not be disfunctional like Europe's. The costs of the carbon tax vs other taxes are imaginary. The costs of other taxes and subsidies are hidden in layers of resultant inefficient allocation of resources, see Europe.

Marco said...

The energy market is quite inelastic in the short term. It is hard to quickly build your own power station to take advantage of a price differential. In the long term, if there is a clear, consistent price signal, it is very easy and cheap to move your operations to a renewable source.
There has been a strong global price signal against solar panels. This was based on artificial markets. Once the artificial market matures and evolves the price signal has changed dramatically. Now the remaining tail of artificial markets look downright stupid.

Chris Fellows said...

I don't get it. The compliance and opportunity costs of measuring and assessing a hard-to-measure quantity that has no direct relevance to anything of economic, social or environmental importance, instead of just hiking the rate of corporate tax or the GST, are ridiculous. I haven't paid attention to the hissing, just attended a few (but too many) seminars on the complexities of measuring and trading carbon credits.

At the risk of channeling the unquiet spirit of Ayn Rand, the market will achieve a smooth transition to more renewables when and if it is worthwhile. If the government wants to intervene, it should try to lower costs through R&D tax breaks. Otherwise it should bugger off.

Extortion is taking money from people by the threat of force, rather than in exchange for goods or services. All taxation is legalised extortion by definition. I don't mean a carbon tax is worse than any other.

Marco said...

Who said anything about carbon credits? I hate carbon credits with avengance. A carbon tax calculated the way it is in Australia is a doddle compared to virtually *every* other tax. The whole point is that it is limited to certain companies and certain commodities which are being measured anyway - much easier to calculate and harder to game than the GST, because there is such a wide variety and large number of entities involved with the GST. The beauty of *our* carbon tax is that everybody gets exposed to the price signal, while only a relatively few large companies have to administer it. Consider it not a carbon credits scheme, but a rough and ready taxation on fossil fuels in rough proportion to their carbon content, a little like the alcohol tax, which is also relatively easy to administer, except for the multitudinous wineries.
R&D tax breaks are a pet hate of mine. They favour large companies beaurocracies instead of minor advances over thousands of small improvements by small companies responding to the price signal without having to demonstrate how clever they are to the government. The reward for smart R&D is built in by avoiding the price signal attached to the tax.
When extortion is taking money from people like Clive Palmer in spite of the fact that they pass the price signal on to the consumer is exactly the point. I think if Clive Palmer is complaining about it, we're on to something good.

Chris Fellows said...

What do you see as the difference between a 'credit' and a 'tradeable permit', then?

Why do you want to single out certain commodities in which we have a competitive advantage for a punitive tax?

No amount of SMEs will ever come up with a Bell Labs. Breakthrough innovations for economic renewable energy will come from intelligently directing and stimulating research funding, not sending artificial price/tax signals.

You know what one of my pet hates is? T-shirts. We should all go around with programmable smart polymer tattoos on our torsos, instead. /jk

Agree with you about Clive Palmer. I felt our electoral system was vindicated big time when he started whinging about it.

Marco said...

What do you see as the difference between a 'credit' and a 'tradeable permit', then?

Neither of them are like a tax, in the sense that the Government sets the price for a tax, and tradeable permits/credits are set by the market.

Why do you want to single out certain commodities in which we have a competitive advantage for a punitive tax?

Because, like smoking and alcohol, the general public sees them as more immoral. There are plenty of similar lower carbon alternatives which we also have a competitive advantage.

No amount of SMEs will ever come up with a Bell Labs. Breakthrough innovations for economic renewable energy will come from intelligently directing and stimulating research funding, not sending artificial price/tax signals.
I respectfully disagree on both counts, that similar labs need government R&D, nor that similar breakthrough innovations don't come from SME's and similar. Government money is best used for infrastructure.
I really think the Carbon tax is eating into big industrials' cash cows - reducing their ability to avoid tax, while reducing the demand for what the cash cows are producing. The overall economy is not suffering, with as many winners as losers.

Marco said...

BTW, It is the high retail electricity prices that has made our new investment of 35KW solar have a solid return. A mandatory reduction in retail electricity prices next year will hurt return on investment times. I think the electricity retailers are the ones most at risk of bankruptcy. They are being squeezed, and I think the best results for the country is that they go bankrupt in a couple of years, as it is the only way to get them out of their unfair 20+ year feed in contracts. Free from these, and with a strong carbon price signal, the new utilities will be more profitable and greener.

Dr Clam said...

Ahem, you have not answered my question:

What do you see as the difference between a 'credit' and a 'tradeable permit', then?

Neither of them are like a tax, in the sense that the Government sets the price for a tax, and tradeable permits/credits are set by the market.

Our 'carbon tax' involves tradeable permits. Why do you think they are good, while hating credits with a vengeance?

Marco said...

There is no important difference between them, and I realise that I haven't made myself clear. The Australian "Carbon Tax" is like a tradeable permit in some ways. What makes it something that I like, rather than something that I hate is how the *price* is set. This is a very important point with the gameability of the system. A fixed price over the medium term also allows large industrials to plan ahead.
I do not like the idea of switching to a price set by the market.

Marco Parigi said...

collinsville conversion
A carbon price has been the most effective way to convince operators of coal powered stations to convert/upgrade to solar power, or shut down more often because it makes economic sense to do so.