UK Parliament’s Environmental Audit Committee has concluded that the European Emissions Trading Scheme (ETS) is not working as it should. Thanks to a total emissions cap that is too low in a time of recession, the carbon price has fallen. The result is that there is no longer sufficient of an incentive for firms to invest in green technology. As the Financial Times article (below) reports:
The committee has urged the government to consider other measures, such as a floor price for carbon dioxide emissions, which would provide industries with greater certainty over the price of carbon and help to ensure the system of pricing was effective.
The MPs said a price of €100 per tonne of CO2 could be necessary to encourage investment, compared with current prices of about €13.
So is the committee correct? Or is a low price of carbon merely temporary, with firms realising that the price will rise as the European economy recovers? The following articles examine the issues.
Carbon markets failing, say British MPs Financial Times, Fiona Harvey (8/2/10)
Carbon prices are going the wrong way Independent, David Prosser (8/2/10)
U.K. Lawmakers Call for Intervention in Carbon Market BusinessWeek, Catherine Airlie and Ewa Krukowska (8/2/10)
UK should press EU for tighter carbon caps Reuters, Nina Chestney (8/2/10)
MPs propose carbon tax to boost green investment Guardian, Terry Macalister (8/2/10)
As UK Cap and Trade Falters, Government May Prop Up Carbon Prices Environmental Leader (9/2/10)
EU ETS intervention call howled down CarbonPositive (9/2/10)
The report
The role of carbon markets in preventing dangerous climage change Environmental Audit Committee
Questions
- Explain how the ETS works.
- What determines the price of carbon in the ETS? Why has it fallen in recent months?
- Compare the alternative policy approaches for encouraging green investment.
- What are the advantages and disadvantages of setting a floor price for carbon permits? What would be the effect on the balance of demand for and supply of premits?
- Discuss whether the total number of permits allocated should be reduced (i.e. the cap tightened).
- Compare the relative merits of giving the allocation of permits away with auctioning them.
- Compare the relative merits of a cap-and-trade system with green taxes.
In several of the posts in recent months we’ve considered the possible use of a Tobin tax as a means of reducing speculation in financial markets and possibly raising substantial amounts in tax revenue. See, for example: Tobin or not Tobin: the tax proposal that keeps reappearing and A Tobin tax – to be or not to be?. Although James Tobin’s original proposals referred to a tax on foreign exchange transactions, recent proposals have been to impose such a tax on a whole range of financial transactions.
Added impetus has been given to the move to adopt Tobin taxes by the publication of a video from an organisation known as the Robin Hood Tax Campaign. To quote the site “The Robin Hood Tax is a tiny tax on bankers that would raise billions to tackle poverty and climate change, at home and abroad. By taking an average of 0.05% from speculative banking transactions, hundreds of billions of pounds would be raised every year. That’s easily enough to stop cuts in crucial public services in the UK, and to help fight global poverty and climate change.”
So would this version of a Tobin tax work? The following videos and articles examine the proposal.
Actor Nighy backs Robin Hood banking tax campaign BBC Breakfast News (10/2/10)
Robin Hood banking tax ‘would raise billions’ (includes article) BBC Breakfast News (10/2/10)
Robin Hood tax on banks ‘would raise billions’ BBC News, Richard Westcott (10/2/10)
Celebrities launch ‘Robin Hood’ tax campaign BBC News, Hugh Pym (10/2/10)
Richard Curtis and Bill Nighy team up in new film urging Tobin tax on bankers (includes article) Guardian, Nick Mathiason (9/2/10)
Articles
Robin Hood tax offers a way to deal with our pressing problems Guardian letters (10/2/10)
Call for ‘Robin Hood tax’ on banking transactions Independent, James Thompson (10/2/10)
Joseph Stiglitz calls for Tobin tax on all financial trading transactions Telegraph, Edmund Conway (5/10/09)
I’m happy to play my part in the great Robin Hood Tax Telegraph, Bill Nighy (9/2/10)
The world’s greatest bank job! Ethiopian Review, Ian Sullivan (10/2/10)
Robin Hood tax could shrink currency markets by 14% ShareCast (10/2/10)
Don’t leave Greece to face the speculators alone Guardian, Larry Elliott (9/2/10)
Global support for a tax on banks is growing, says Gordon Brown Guardian, Helen Pidd (11/2/10)
Global bank tax near, says Brown Financial TImes, George Parker and Lionel Barber (10/2/10)
Get behind Robin Hood Guardian, Austen Ivereigh (19/2/10)
Questions
- Explain how a ‘Robin Hood tax’ would work.
- How would such a tax differ from Tobin’s original proposals?
- What would determine its effectiveness in stabilising financial markets?
- Would it be effective in raising tax revenue?
- Compare this tax with other methods of stabilising financial markets.
- What considerations would need to be taken into account in setting the rate for a Tobin tax on financial transactions?
Over the weekend of the 5 and 6 February, the finance ministers of the G7 countries (Canada, France, Germany, Italy, Japan, the UK and the USA) met to discuss the state of the world economy. They agreed that the recovery was still too fragile to remove the various stimulus packages adopted around the world. To do so would run the risk of plunging the world back into recession – the dreaded ‘double dip’.
But further fiscal stimulus involves a deepening of public-sector debt – and it is the high levels of debt in various countries, and especially the ‘Piigs’ (Portugal, Ireland, Italy, Greece and Spain), that is causing worries that their debt will be unsustainable and that this will jeopardise their recovery. Indeed, the days running up to the meeting had seen considerable speculation against the euro as worries about the finances of various eurozone countries grew.
Of course, countries such as Greece, could be bailed out by other eurozone countries, such as Germany of France, or by the IMF. But this would create a moral hazard. If Greece and other countries in deep debt know that they will be bailed out, this might then remove some of the pressure on them to tackle their debts by raising taxes and/or cutting government expenditure.
Group of 7 Vows to Keep Cash Flowing New York Times, Sewell Chan (6/2/10)
Forget cuts and keep spending, Brown told Independent, Sean O’Grady (9/2/10)
European debt concerns drive dollar higher during past week Xinhua, Xiong Tong (6/2/10)
G7 prefers to stay on stimulants Economic Times of India (7/2/10)
G7 pledges to maintain economic stimulus Irish Times (8/2/10)
Mr. Geithner, On What Planet Do You Spend Most of Your Time? Veterans Today (6/2/10)
Gold Price Holds $1,050 – Gold Correction Over? Gold Price News (8/2/10)
Darling ‘confident’ on economic recovery at G7 meeting BBC News (7/2/10)
Britain has to fight hard to avoid the Piigs Sunday Times (7/2/10)
Europe needs to show it has a crisis endgame Financial Times, Wolfgang Münchau (7/2/10)
Speculators build record bets against euro Financial Times, Peter Garnham (8/2/10)
The wider financial impact of southern Europe’s Pigs Observer, Ashley Seager (7/2/10)
Medicine for Europe’s sinking south Financial Times, Nouriel Roubini and Arnab Das (2/2/10)
Yes, the eurozone will bail out Greece, but its currency has taken a battering Independent on Sunday, Hamish McRae (7/2/10)
Questions
- What is meant by a ‘double-dip recession? How likely is such a double dip to occur over the coming months?
- Why has there been speculation against the euro? Who gain and who lose from such speculation?
- Why might the ‘gold correction’ be over? Why might gold prices change again?
- What is meant by ‘moral hazard’? Does bailing out countries, firms or individuals in difficulties always involve a moral hazard?
- What is the case (a) for and (b) against a further fiscal stimulus to countries struggling to recover from recession?
- Would there be any problems in pursuing a tight fiscal policy alongside an expansionary monetary policy?
Since March 2009, the Bank of England has engaged in a process of quantitative easing (QE). Over the period to January 2010 the Bank of England injected £200 billion of new money into the economy by purchasing assets from the private sector, mainly government bonds. The assets were purchased with new money, which enters the economy as credits to the accounts of those selling the assets to the Bank of England. This increase in narrow money (the monetary base) is then able to form the basis of credit creation, allowing broad money (M4) to increase by a multiple of the increased monetary base. In other words, injecting £200 billion allows M4 to increase by considerably more.
But just how much more will M4 rise? How big is the money multiplier? This depends on the demand for loans from banks, which in turn depends on the confidence of business and households. With the recovery only just beginning, demand is still very dampened. Credit creation also depends on the willingess of banks to lend. But this too has been dampened by banks’ desire to increase liquidity and expand their capital base in the wake of the credit crunch.
Not surprisingly, the growth in M4 has been sluggish. Between March and Decmber 2009, narrow money (notes, coin and banks’ reserve balances in the Bank of England) grew from £91bn to £203bn (an increase of 123%). M4, however, grew from £2011bn to £2048bn: an increase of only 1.8%. In fact, in December it fell back from £2069bn in November.
Despite the continued sluggishness of the economy, at its February meeting the Bank of England announced an end to further quantitiative easing – at least for the time being. Although Bank Rate would be kept on hold at 0.5%, there would be no further injections of money. Part of the reason for this is that there is still considerable scope for a growth in broad money on the basis of the narrow money already created. If QE were to continue, there could be excessive broad money in a few months’ time and that could push inflation well above target. As it is, rising costs have already pushed inflation above the 2% target (see Too much of a push from costs but no pull from demand).
So will this be an end to quantitative easing? The following articles explore the question.
Bank of England halts quantitative easing Guardian, Ashley Seager (4/2/10)
Bank calls time on quantitative easing (including video) Telegraph, Edmund Conway (5/2/10)
Bank of England’s time-out for quantitative easing plan BBC News (4/2/10)
Shifting goalposts keep final score in question Financial Times, Chris Giles and Jessica Winch (5/2/10)
Bank halts QE at £200bn despite ‘sluggish’ recovery Independent, Sean O’Grady (5/2/10)
Easy does it: No further QE BBC News blogs, Stephanomics, Stephanie Flanders (4/2/10)
Leading article: Easing off – but only for now Independent (5/2/10)
Not easy Times Online (5/2/10)
Quantitative easing: What the economists say Guardian (4/2/10)
Questions
- Explain how quantitative easing works?
- What determines the rate of growth of M4?
- Why has the Bank of England decided to call a halt to quantiative easing – at least for the time being?
- What is the transmission mechanism whereby an increase in the monetary base affects real GDP?
- What role does the exchange rate play in the transmission mechanism?
- Why is it difficult to predict the effect of an increase in the monetary base on real GDP?
- What will determine whether or not the Bank of England will raise interest rates in a few months’ time?
In 2008, the UK government set up a National Equality Panel to investigate inequality. “The Panel was asked to investigate the relationships between the distributions of various kinds of economic outcome on the one hand and people’s characteristics and circumstances on the other.” The panel delivered its report, An Anatomy of Economic Inequality in the UK, in January 2010. It “addresses questions such as how far up or down do people from different backgrounds typically come in the distributions of earnings, income or wealth?”
The aspects of inequality examined include: educational outcomes, employment status, wages and other sources of income (such as benefits) both for the individual and the household, and wealth. “In our main report, we present information on the distributions of these outcomes for the population as a whole. Where possible we indicate how they have changed in the last decade or more, and how the UK compares with other industrialised countries. But our main focus is on the position of different social groups within the distributions of each outcome.”
A major influence on people’s income was the income, wealth and class of their parents since these affected education, peer groups and a whole range of other life chances. This made it virtually impossible to achieve equality of opportunity.
The report also looks at policy implications. These include not just the redistribution of incomes, but also the more fundamental issue of how to create equality of opportunity. “The challenge that our report puts down to all political parties is how do you create a level playing field when there are such large differences between the resources that different people have available to them.”
So what has happened to inequality? What explanations can be offered? And what can be done to lessen inequality? The following articles look at the findings of the report and offer their own judgements and analysis.
Rich-poor divide ‘wider than 40 years ago’ BBC News (27/1/10)
The Big Question: Why has the equality gap widened even through the years of plenty? Independent, Sarah Cassidy (28/1/10)
UK is one of world’s most ‘unequal’ societies Irish Times, Mark Hennessy (28/1/10)
Unequal Britain: richest 10% are now 100 times better off than the poorest Guardian, Amelia Gentleman and Hélène Mulholland (27/1/10)
No equality in opportunity Guardian, Phillip Blond and John Milbank (27/1/10)
Has the wealth gap really widened? Guardian, Tom Clark (27/1/10)
Inequality in a meritocracy Financial Times, Christopher Caldwell (29/1/10)
Who wants equality if it means equal poverty? (including video) Times Online, Antonia Senior (29/1/10)
A Major miracle on equality Public Finance, Richard Reeves (29/1/10)
UK one of the worlds most unequal societies; report says The Sikh Times (29/1/10)
Only policies, not posturing, will bring down inequality Independent (28/1/10)
The Report
The full 457-page report can be accessed here.
A 44-page summary of the report can be accessed here.
A 6-page executive summary can be accessed here.
Click here for the charts and tables from the report.
Another good source of information on the distribution of income is the Annual Survey of Hours and Earnings published by the Office for National Statistics.
Questions
- How can we measure inequality?
- Outline the findings of the report.
- Why is inequality so high in the UK and why has it continued to deepen?
- Have tax credits helped to reduce inequality?
- To what extent are greater equality and faster economic growth compatible economic objectives? How are incentives relevant to your answer?
- What specific policies could be adopted to give greater equality of opportunity? Identify the opportunity costs of such policies.