Southerly by David Haywood

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Southerly: A Tale of Two Iceblocks: Part 2 (Or A Hopefully Helpful Pointer For Politicians & Policy Makers Who Wish to Reduce Greenhouse Gas Emissions)

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  • Moz, in reply to David Haywood,

    carbon tax when applied to dirty energy in New Zealand is that it would increase greenhouse gas emissions for the world as a whole

    Yes, as would your system... without the border tariffs that also fix the carbon tax. So the question to answer is: would we be better applying that fix to the existing system, or should we throw it all away and start the process again with the PGST? That's where the "-100 points" thing comes from.

    The idea of doing both seems silly to me, but I fear that exporters would be forced to or their would be taxed twice on exports (which may happen anyway, since the point at which tax is applied is different).

    Sydney, West Island • Since Nov 2006 • 1177 posts Report Reply

  • David Haywood, in reply to Moz,

    Yes, as would your system… without the border tariffs that also fix the carbon tax. So the question to answer is: would we be better applying that fix to the existing system, or should we throw it all away and start the process again with the PGST?

    Wow, I must suck at explaining this stuff. The border issues are the whole point that I’ve been trying to make! To quote my post:

    An approach to discouraging dirty energy in New Zealand must satisfy three criteria:

    - Any disincentive must be applied to the embodied dirty energy for goods and services imported into New Zealand.

    - Any disincentive must also be applied to goods and services within New Zealand.

    - Any disincentive must be removed from goods and services exported from New Zealand.

    In my demonstration proposal of PGST (which is simply a carbon tax that replaces GST, and is applied on embodied emissions as well as direct emissions in NZ):

    1. PGST is applied as goods and services are imported across the border.

    2. PGST is applied within New Zealand.

    3. PGST is refunded when goods and services are exported across the border.

    I’ve often come across the reaction that this would be impossible to do–or that we don’t need any more taxes. My entire reason for today’s post was to demonstrate that it can be done in principle, and to show ballpark calculations demonstrating that it would collect an equivalent to GST (and could therefore be used to replace it) and wouldn’t excessively increase the cost of high dirty energy goods & services.

    The suggestion of PGST was a proof-of concept example. I’m not wedded to any particular system (if anyone has a better idea–and I’m sure someone will–then I’m all for it!).

    EDIT: Just realized that your comment could be read another way, Moz, i.e. with the first “fix” meaning repair rather than “set”. In that case, I suck at explaining in an entirely different way! My response would be that: (1) My demonstration proposal of PGST is exactly a carbon tax (though at the more comprehensive end of the versions proposed) that also takes into account embodied energy (2) although I’m suggesting that it shouldn’t be implemented as an additional tax, but rather as a replacement for one of our current taxes (GST). The existing system in NZ is a very complicated (and essentially non-functional) ETS, which is what makes your comment a bit ambiguous.

    Dunsandel • Since Nov 2006 • 1156 posts Report Reply

  • andin, in reply to David Haywood,

    . Embodied emissions on imports aren’t even considered on other schemes I’ve seen proposed for New Zealand.

    Hate to sound snarky but I could guess why at that and be in the ball park.
    But dont let me sidetrack you.
    You have a great idea, will it reach a wider audience? which it obviously should, no idea. Sorry.
    Know you probably prefer discussion on the subject, well, the missed step (part 1) just took my breathe away. Its a global problem its needs a global solution as you say. And we better start … oh well its a bit late… but there’s always, never. Perish the thought.
    Just a thought you sell yourself short on your explanation skills, teh technical stuff loses me more, even tho you tried to keep it simple. IYKWIM

    raglan • Since Mar 2007 • 1878 posts Report Reply

  • David Haywood, in reply to andin,

    the missed step (part 1) just took my breathe away.

    It does mine, too!

    I should emphasize that this wasn’t an original observation on my part or anything. It’s extremely well-known in energy engineering circles (and elsewhere), but the knowledge doesn’t seem able to make its way to policy makers and policy analysts. I wrote these two pieces at the urging of a colleague in an attempt to ‘throw the information over the wall’ to the policy people. (I’m imagining the wall as the sort of thing that might be built on the Mexican border).

    Usually the proposed solution involves a document chain that tracks the embodied energy for any good or service (giving you something like the nutritional breakdown information that comes with food). This approach has always seemed like it had a few problems to me when just enacted in New Zealand.

    I like the idea of taxing the dirty energy (direct or embodied) at the point of production or importation and then letting the money do the tracking of the emissions for you (as I have attempted to demonstrate here). There may be another way of doing this, but I haven’t come across it yet.

    you sell yourself short on your explanation skills

    Possibly you missed me trying to explain the Laws of Thermodynamics to Kathryn Ryan on the National Programme. She’s an extremely clever person, but my explanation was not successful. Like one of those multi-car pile-ups they have on the autobahn during fog… I’m still having flash-backs.

    Dunsandel • Since Nov 2006 • 1156 posts Report Reply

  • linger,

    Could be worse. If you listen to the current series of David Baddiel Tries to Understand… (specifically, at the 7 minute mark in the episode on “The Cloud”), you’ll hear one of the nominated “experts” helpfully using the wrong multiplier to explain petabytes

    Tokyo • Since Apr 2007 • 1885 posts Report Reply

  • Lilith __, in reply to David Haywood,

    the knowledge doesn’t seem able to make its way to policy makers and policy analysts. I wrote these two pieces at the urging of a colleague in an attempt to ‘throw the information over the wall’ to the policy people

    It's very interesting David, but to this non-engineer it seems very complicated! Not the overall clean iceblock/dirty iceblock idea, but all the many components in calculating whose fault the greenhouse gases are.

    Dunedin • Since Jul 2010 • 3887 posts Report Reply

  • David Haywood, in reply to Lilith __,

    It’s very interesting David, but to this non-engineer it seems very complicated! Not the overall clean iceblock/dirty iceblock idea, but all the many components in calculating whose fault the greenhouse gases are.

    Fair enough! Yes, it is conceptually a bit complicated (though our existing ETS seems worse to me — and as far as I can see it doesn’t actually have a cap as implemented). Also the existing ETS is an added cost and layer of complexity in addition to all our existing regulations and taxes.

    I wouldn’t disagree with anyone who said that a straight carbon tax on fossil fuels burnt in New Zealand would be much simpler. But, as I keep banging on, such a system would actually increase global greenhouse gas emissions in all probability (as with the existing ETS).

    It’s a complicated issue and – as far as I can see – has to have a somewhat complicated solution. Of course, a binding global agreement would in many ways make everything so much more straightforward!

    Addendum: it’s possible that a PGST could actually simplify the tax system overall. The current system of duties and GST do make a lot of complications for a lot of people. A PGST would transfer the workload to a very much smaller group: energy producers, importers, and exporters.

    Dunsandel • Since Nov 2006 • 1156 posts Report Reply

  • Lilith __, in reply to David Haywood,

    It’s a complicated issue and – as far as I can see – has to have a somewhat complicated solution. Of course, a binding global agreement would in many ways make everything so much more straightforward!

    I didn’t mean that as a criticism (of your explanation, or of the concept of a PGST) at all. It seems totally clear to me that we need it. It just reminds me of when I sat down with the IRD Guide to Depreciation. For those of us not used to thinking in these terms, it's hard. :-)

    Dunedin • Since Jul 2010 • 3887 posts Report Reply

  • David Haywood, in reply to linger,

    Could be worse. If you listen to the current series of David Baddiel Tries to Understand… (specifically, at the 7 minute mark in the episode on “The Cloud”), you’ll hear one of the nominated “experts” helpfully using the wrong multiplier to explain petabytes …

    It's odd what you can say accidentally on the radio. I had an embarrassing moment after being interviewed by Kathryn Ryan (on another occasion) when someone emailed to complain that I'd said "locust-eaters" instead of "lotus-eaters".

    I was -- as you can imagine -- highly indignant. But before firing off an angry reply (critical of the complainant's cloth ears), I had a quick listen to the interview on the website. Oh dear, yes I had.

    Dunsandel • Since Nov 2006 • 1156 posts Report Reply

  • David Haywood, in reply to Lilith __,

    I didn’t mean that as a criticism (of your explanation, or of the concept of a PGST) at all. It seems totally clear to me that we need it.

    It's okay to criticize (though I realize that you weren't)! I'm hoping that someone will suggest a better solution...

    Dunsandel • Since Nov 2006 • 1156 posts Report Reply

  • Michael Homer,

    How is a local exporter that doesn't have a differently-polluting competitor affected by this? It seems that provided that 1) all outputs are exported, and 2) there is no competing exporter in the same category with a lower CO2-equivalent to unbalance the rebate, there is no net impact on the exporter. Is that correct?

    If this good substitutes (overseas) for a lower-emission net-payer in a different category, does that have the same impact of incentivising an increase in total emissions?

    Wellington • Since Nov 2006 • 82 posts Report Reply

  • David Haywood, in reply to Michael Homer,

    How is a local exporter that doesn’t have a differently-polluting competitor affected by this? It seems that provided that 1) all outputs are exported, and 2) there is no competing exporter in the same category with a lower CO2-equivalent to unbalance the rebate, there is no net impact on the exporter. Is that correct?

    Yes, that is correct. In fact, if my demonstration proposal were enacted, I'd expect all exporters in a given sector to very rapidly match their emissions to one another (by reducing them to an economic minimum) so that there would effectively be no impact of PGST on any of them.

    If this good substitutes (overseas) for a lower-emission net-payer in a different category, does that have the same impact of incentivising an increase in total emissions?

    No, I wouldn't say so. By having the PGST refunded to exporters (as with GST now) then the PGST can have neither an incentive nor disincentive effect. My view is that we should neither subsidize clean energy in exports or punish dirty energy in exports because we don't have control beyond our borders, and can't anticipate the effect that the modified price signals would have in terms of encouraging/discouraging greenhouse gas emissions elsewhere.

    Put another way, it's up to the country in which the embodied dirty energy is 'consumed' to make the call about their own emissions in terms of their own domestic policies and international agreements. This is simply the reality of having different sovereign nations in the world (and no binding international emissions agreement)!

    I'd actually see the definition of industry categories as being the greatest difficulty with my demonstration proposal. There would have to be some tricky issues resolved in terms of 'co-operative' exporters (who represent a co-operative of different producers, e.g. Fonterra, etc.) who in some cases may have no competitors in a particular industry sector.

    Dunsandel • Since Nov 2006 • 1156 posts Report Reply

  • David Haywood,

    To respond publicly about a question that I receieved via email, RE: this section of my blog:

    In theory, the refund of PGST on exports could be calculated via a system of documentation that shows the accumulated dirty energy for any good or service (in the long term this may well be the approach taken internationally). However this would impose a considerable administrative burden on New Zealand businesses.

    I absolutely agree that such a method of tracking actual emissions would be a better scheme than estimating them for imports and exports as in my demonstration proposal.

    My difficulty with this approach -- when applied solely to New Zealand -- is that it would be very difficult to get this to happen in a trustable manner for all our imported goods (the incentive for the producers of the imports would be to understate the emissions on their products since our tax would be applied at the end of their production process).

    It's quite true that such a system to calculate export refunds would be much less problematic. Since the tax on emissions is applied at the point of production then the incentive for producers of goods and services would be to accurately track the emissions in order to maximize their PGST refund. This is admittedly no more complicated than 'tracking' GST in the current system. But it requires a tracking system to be implemented right through the entire economy just to calculate export refunds.

    Since many of our producers export almost all their production (e.g. the agriculture sector exports more than 80 per cent of its production) then we are introducing a lot of complexity to (admittedly very accurately) calculate a tax only to give most of it back again.

    Hence I attempted to show in my demonstration proposal that there was (potentially) a simpler way of doing this -- which also could be used to economically minimize emissions within any given industry sector.

    Dunsandel • Since Nov 2006 • 1156 posts Report Reply

  • Ian Dalziel, in reply to David Haywood,

    Attachment

    the lottery of lobsters and lotophagi…

    I’d said “locust-eaters” instead of “lotus-eaters”.

    the shorter ’locus eaters’ would be more apt in the current discussion…
    (the plural of course being that famously misspelt Norse trickster – loci!!)

    They eat locusts in Dunedin now, ya know!

    Christchurch • Since Dec 2006 • 7881 posts Report Reply

  • Moz, in reply to David Haywood,

    Wow, I must suck at explaining this stuff. The border issues are the whole point that I’ve been trying to make

    Yes, but that doesn't make your system any different from the existing carbon taxes - it's widely accepted that at some point tariffs will have to be applied to bridge the gap between economies that tax carbon vs ones that don't.

    This reply focuses on the technical side:

    I was mislead, then, by all the stuff about it being inherently different from a carbon tax because it operates on a scale of centuries rather than financial years or electoral cycles. Which simplifies things, at the cost of making it less effective.

    I'm still confused by the apparently important difference between the PGST and a carbon tax when it comes to the point of sale tax calculations. I thought you were taxing inputs directly as a way of avoiding the complex carbon tax calculations at the point of retail sale, which is a strawman argument but I was trying to avoid derailing into that. When a "feature" of your scheme is that it works differently in theory but the same in practice, that's not really worth discussing. But it seems to be important to you.

    But if you're happy to summarise your approach as: a carbon tax with border tariffs, then I agree. We should have one.

    Sydney, West Island • Since Nov 2006 • 1177 posts Report Reply

  • Moz, in reply to Moz,

    Which leads me to: the political problem.

    The reason we exclude farming and a whole pile of other emissions is not technical, it's political. Our government wants not to tax certain parts of the economy, and we can't make them.

    Politically the problem with "a carbon tax with tariffs" is that "new tariff" is philosophically unacceptable to most of the powerful international trade and financial institutions, as well as many of the hard right neo-liberal governments in power around the worlld (arguably including NZ). Regardless, NZ may find that part of imposing those tariffs is withdrawing from trade treaties, or compensating every single company that exports to NZ for the cost of the tariff. Or being dragged through ISDS procedures, then paying compensation.

    At a broader level, NZ will find itself facing up against global industries when it comes to expanding the carbon tax. Like the problem we have taxing Google or Uber, but with more powerful industries. If you want to tax oil, or airlines, or Chinese exports, you are up against it. We could easily find ourselves like Australia in 1975, or Chile in 1973.

    Even at a purely democratic level, climate change has been shown to be an issue people care about, but won't change their vote on. People may even be passionate about the issue, rate it as "most important", but in the privacy of the ballot box they overwhelmingly vote on other issues (to be charitable - the other interpretation is that 80% or 90% of them vote for more climate change). I'm reminded of some vox pops I saw of merkins, asking about their cops murdering black men. The pops agreed that that was bad to terrible, then when asked if they'd vote for change they said nope, no way, those candidates are nutters. Same here - Labour, National, in Oz the Liberals, say "we are sensible people who will do nothing to avoid the climate emergency"... people vote for them anyway. I liken it to Chamberlain before WWII - he sold a comforting message to people who wanted to believe him.

    Those are the real obstacles to your tax proposal, any technical issues are so minor they're almost irrelevant.

    Sydney, West Island • Since Nov 2006 • 1177 posts Report Reply

  • David Haywood,

    Responding to another question by email:

    What’s wrong with a revenue neutral carbon-tax on selected emissions?

    Yes, that seems like one of the few workable alternatives in New Zealand (if properly done) that wouldn’t tend to increase world greenhouse gas emissions. Essentially you’d be putting things like industrial emissions and agricultural emissions into the too-hard basket, and focussing on changing the energy behaviour of private individuals.

    The idea is often suggested for reducing transport emissions from private motor vehicles. The tax is only applied to non-business use (businesses either aren’t taxed or are able to get an almost immediate refund), which means that the price signals don’t flow into locally produced good & services or exports. The tax that’s been collected is then pooled and divided between individual taxpayers as an end-of-year refund. The idea is that individuals are incentivized to avoid dirty energy consumption and thereby get a larger refund than the tax they paid in.

    This works in the larger world context since it doesn’t affect imports or exports—and has only a sort of ‘decoy’ effect within a country in terms of sending price signals.

    The criticism that’s often made of this approach is that it tends to create a flow of money away from the poor (who, for example, can’t easily change to an electric vehicle) and toward the rich (who can). Although I can also see the tax being avoided by simply moving to bicycle or public transport (if these were possible options available to most people).

    The other drawback, of course, is that it doesn’t reduce the emissions from businesses—so only has a limited effect. In New Zealand, however, private motor vehicles are a large chunk of our genuine greenhouse gas emissions, so it seems that this approach may well be worth considering (perhaps as a first step towards a more comprehensive scheme).

    At any rate, it certainly seems a much better idea to me than the existing ETS scheme...

    Dunsandel • Since Nov 2006 • 1156 posts Report Reply

  • David Haywood, in reply to Ian Dalziel,

    They eat locusts in Dunedin now, ya know!

    As an energy engineer, I thoroughly approve! Extremely energy efficient, and -- according to a paper that I once read -- exactly what the digestive system that we inherited from our proto-hominid ancestors has evolved to digest.

    Dunsandel • Since Nov 2006 • 1156 posts Report Reply

  • David Haywood, in reply to Moz,

    I’m still confused by the apparently important difference between the PGST and a carbon tax when it comes to the point of sale tax calculations. I thought you were taxing inputs directly as a way of avoiding the complex carbon tax calculations at the point of retail sale, which is a strawman argument but I was trying to avoid derailing into that. When a “feature” of your scheme is that it works differently in theory but the same in practice, that’s not really worth discussing. But it seems to be important to you.

    Yes, as with some other carbon tax schemes that have been suggested elsewhere, my demonstration proposal would tax at point of production or importation. As I’ve explained, the calculation at point of retail would be administratively difficult.

    I think that I made a mistake by discussing both of the common objections against doing anything about GHG emissions (i.e. (a) too hard, and (b) we don’t need an extra tax) in the same blog. It would have been clearer if I’d split it into two parts: one describing the advantages of a comprehensive carbon tax that included embodied emissions, and another showing how this could be used to replace GST (at a ballpark analysis). As it is I think I’ve just made a lot of people confused.

    I was mislead, then, by all the stuff about it being inherently different from a carbon tax because it operates on a scale of centuries rather than financial years or electoral cycles.

    See, in all honesty, I don’t ever remember mentioning any such thing. Indeed, prior to you saying that just now, I would have stood up in a court of law and sworn that I didn’t!

    Sorry Moz, I was enjoying a friendly discussion (from my point of view), which I thought was very helpful in explaining my points to other readers. My apologies if I’ve mis-read the situation and have just managed to annoy you…

    Dunsandel • Since Nov 2006 • 1156 posts Report Reply

  • David Haywood, in reply to Moz,

    Politically the problem with “a carbon tax with tariffs” is that “new tariff” is philosophically unacceptable to most of the powerful international trade and financial institutions, as well as many of the hard right neo-liberal governments in power around the worlld (arguably including NZ). Regardless, NZ may find that part of imposing those tariffs is withdrawing from trade treaties, or compensating every single company that exports to NZ for the cost of the tariff. Or being dragged through ISDS procedures, then paying compensation.

    Maybe this is one of our points of misunderstanding, Moz – I don’t see that the flow of embodied dirty energy across borders has to be evaluated via a tariff.

    That’s why my demonstration proposal was framed as a modification/replacement for GST. It’s not a tarriff (import or export duty)*, since it’s applied at the same rate within the country as well. So it can’t be objected against any more than has happened (or, rather, not happened) with GST.

    As I’ve said, this was a demonstration proposal and not a ready-to-implement scheme, but if I was a New Zealand exporter or producer then I’d be delighted at the suggestion:
    (a) PGST is refunded at the border and so has no effect on exporters (other than a similar administrative burden to the current GST)
    (b) PGST is applied at point of dirty energy production or importation – so New Zealand businesses (barring importers and energy producers) would be freed of all the GST paperwork.

    I don’t mean to frustrate you further, but thought that this was an important point to get across to other readers (if any).

    *EDIT: the way the difference between import duty and GST was explained to me by a tax guy: import duty is applied as you cross the border into New Zealand, but GST is applied (to imports and nearly everything else) as soon as you’re within the border. Apparently this is an important distinction from a trade agreement perspective.

    Dunsandel • Since Nov 2006 • 1156 posts Report Reply

  • David Haywood,

    By the way, many thanks to Moz, linger, Lilith, Andin, Michael Homer, Ian Dalziel and everyone else who read a very long blog and contributed to this discussion. It's certainly given me a lot of feedback in terms of trying to explain this stuff in future!

    Dunsandel • Since Nov 2006 • 1156 posts Report Reply

  • Bart Janssen,

    Setting aside the impossible task of getting a new tax put in place worldwide ...

    It occurs to me that don't you have a problem that once this is in place then governments have an incentive to increase greenhouse gas emissions in order to increase their tax take.

    This would be such a large portion of the government's revenue that it might become very difficult to do the thing you want them to do.

    Auckland • Since Nov 2006 • 4449 posts Report Reply

  • Moz, in reply to David Haywood,

    I'm not so much annoyed as confused. You're bringing up stuff from points I thought were clear to both of us, with entirely new approaches.

    scale of centuries rather than financial years or electoral cycles. See, in all honesty, I don’t ever remember mentioning any such thing.

    Again, two tracks:

    Physically, I thought that the long timescale was the whole point behind taxing everything as CO2 rather than having separate rates for all the different gases of concern, specifically methane? I thought you were arguing that since CH4 and CO2 have one carbon each, they pay the same tax. Or at least you seemed horribly confused as to how they could work differently in the short term when over a few decades the CH4 decays to CO2 and they become identical. That was where I got lost in working out what timescale you cared about, because that matters a lot.

    Politically, you're clearly working on a timescale where taking a few extra years to talk before starting to act is acceptable. Otherwise this proposal would start from where we are today, not from scratch, and it would be concrete and largely political rather than abstract.

    If this was 1970, you'd be kinda right and we did have a couple of decades to get our shit together. But it's 2016, we passed 1.5 degrees this year, and you don't seem bothered that the difference between you and Key on this issue is that no-one believes his delays are intended to solve the problem. You're still "if we work through the details ... we could eventually transition to a better system"... that's decades, David, not this year.

    I don’t see that the flow of embodied dirty energy across borders has to be evaluated via a tariff.

    I dunno, that was the term I used to summarise "charge the importer at the border". I'm not a sophisticated user of the language of international trade negotiations. My experience is mostly from turning up to the post office and being told I have to pay money before I get my parcel.

    It would be a brilliant stroke of engineering if you could end-run any political problems with a tariff by calling it a consumption tax, but this is the first time you've bought it up, when I would have expected it to be the main point.

    Sydney, West Island • Since Nov 2006 • 1177 posts Report Reply

  • Moz,

    Also, I came up with this but couldn't really fit it in to the above post, but I still like the analogy:

    in the long run we're all dead, but given the choice I'd still assassinate Hitler not Ghandi

    The short term effects *matter*.

    Sydney, West Island • Since Nov 2006 • 1177 posts Report Reply

  • Moz,

    I suppose I need to wait for part 3: the counter-productive effect of causing an increase in emissions from the rest of the world (as happens with our current ETS and the currently proposed alternatives).

    Because that's something I am not convinced of.There's a whole pile of work being done to deal with when, not if, a major country or trading bloc start taxing carbon at the border. To NZ it doesn't matter whether that's some other tiny non-entity like Ukraine or a global power like the USA or EU, we have to comply with whatever they want, pay the border-tax, or stop trading with them. The last seems... unlikely.

    Sure, right now, globally, some emissions are taxed, some are directly restricted, and most are uncontrolled. That's a problem, and your system looks as though it might work... but I've seen a lot of those sorts of systems and all of them have so far failed at "politically cannot be implemented". But you're still explaining the technical stuff, so I'll wait.

    Sydney, West Island • Since Nov 2006 • 1177 posts Report Reply

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