There has been much criticism of the European Emissions Trading Scheme, the world’s most significant cap-and-trade (tradable permits) scheme for curbing greenhouse gas emissions. The main criticism is that the scheme has failed to make significant cuts in pollution. The cap was so loose in the first phase (2005–07) that by the end of this period, carbon was trading for as little as €0.02 per tonne. Although the cap on emissions was tightened by 7 per cent for phase 2 (2008–12) (see Economics, 7th ed, Box 12.5), causing the carbon price to rise to about €30.00 per tonne by mid 2009, since then the price has fallen as industry has cut output in response to the recession. By February 2010, the carbon price was around €12.50 per tonne (see the Guardian article Carbon price falls to new low). For carbon price data see the European Climate Change site.
The experience of the ETS has resulted in many people in the USA and elsewhere calling for the use of carbon taxes rather than cap and trade as the best means for reducing greenhouse gas emissions. Others have called for a mix of measures. In the US Senate, three senators are seeking to overturn cap-and-trade proposals and take a sector-by-sector approach to cutting emissions.
But increasingly the evidence, supported by economic argument, is that cap and trade does work – or can be made to work – and that it is a better policy tool than carbon taxes. The following articles look at cap and trade and assess whether it really is the best alternative.
Buying off the big polluters looks bad but it works Sunday Times, Charles Clover (28/2/10)
Economists hail EU emissions trading success BusinessGreen, James Murray (15/2/10)
EU study plumps for cap & trade in ship carbon carbonpositive (17/2/10)
European carbon trading labelled ‘model for the world’ Ecologist (1/3/10)
Cap and Trade vs Carbon Tax – 6 Myths Busted Cleantech Blog (26/2/10)
Senators seen ditching cap and trade in new bill Reuters, Russell Blinch (27/2/10)
Senators to propose abandoning cap-and-trade Washington Post, Juliet Eilperin and Steven Mufson (27/2/10)
U.S. Senate may scrap Cap and Trade in exchange for Cap and Dividend The Energy Collective, Chris Schultz (27/2/10)
See also:
Emissions Trading Wikipedia
Questions
- What determines the price of carbon in the ETS? Why was it higher in 2008/9 than in 2007? Why has it fallen in recent months?
- Does it matter that the carbon price fluctuates with the business cycle?
- Explain whether it is better to allocate carbon credits free of charge or auction them.
- Assess whether or not the EU emissions trading scheme has been a success so far.
- Compare the relative merits of a cap-and-trade scheme with carbon taxes.
- What other alternatives are there to cap and trade and carbon taxes as means of curbing emissions? Compare their relative merits.
- What is the best means of curbing carbon emissions from shipping? Explain.
The demise of the dollar as the world’s reserve currency has been predicted for a long time now. Yet it is still way surpasses other currencies, such as the euro and yen, as the main reserve currency of most countries. Also it still dominates world trade with much of international trade being priced in dollars. Indeed, as the eurozone reeled from the Greek debt crisis in early February (see A Greek tragedy and Debt and the euro) so investors sold euros and bought dollars. The dollar gained 12 per cent against the euro from December 2009 to February 2010 (from $1 = €0.66 on 1/12/09 to $1 = €0.74 by mid February).
But a number of economists, investors and officials argue that the dollar’s dominance is gradually being eroded:
As the United States racks up staggering deficits and the center of economic activity shifts to fast-growing countries such as China and Brazil, these sources fear the United States faces the risk of another devaluation of the dollar. This time in slow motion – but perhaps not as slow as some might think. If the world loses confidence in U.S. policies, “there’d be hell to pay for the dollar … Sooner or later, the U.S. is going to have to pay attention to the dollar”, [said Scott Pardee, economics professor at Vermont’s Middlebury College and formerly on the staff of the New York Fed].
So what is likely to be the future of the dollar? Will it remain the number one world reserve currency? Will its position be gradually, or even rapidly eroded? What will happen to the exchange rate of the dollar in the process? Finally, what is the significance of the trade and budget deficits in the USA? Are these of benefit to the rest of the world in providing the necessary dollars to finance world trade and investment? Or are they a source of global imbalance and instability? The following article look at these issues.
How long can the U.S. dollar defy gravity? Reuters, Steven C. Johnson, Kristina Cooke and David Lawder (23/2/10)
Is greenback’s dominance coming to an end? Stuff (New Zealand), Tony Alexander (24/2/10)
Reconstructing The World Economy Eurasia Review, John Lipsky (25/2/10): see final part on Reforming the International Monetary System. See also the following conference paper referred to in this article:
The Debate on the International Monetary System Korea Development Institute / IMF Conference on Reconstructing the World Economy, Seoul, Korea, Isabelle Mateos y Lago (25/2/10)
Questions
- To what extent does the world benefit from having the dollar as the main reserve currency?
- What is the role of US current account and budget deficits in supporting this reserve currency role? How important is the size of these deficits?
- What is likely to happen to the exchange rate of the dollar against other major currencies in the coming years?
- What alternatives are there to having the dollar as the world’s main reserve?
- Does it matter if China holds $2.3 trillion in foreign exchange reserves, with nearly $800 billion in US Treasury debt?
- Why is the value of its currency a less urgent problem for the USA ‘than it would be for other borrowers who borrow and pay for imports with dollars’?
- What are ‘currency swap accords’ and why are they important for China?
- What are the implications of the Chinese yuan being undervalued against the dollar by as much as 40%?
The European Commission has received three complaints against Google for anti-competitive practices. The complainants are Microsoft’s Ciao, UK price comparison site Foundem and French legal search engine ejustice.fr
“The Commission has not opened a formal investigation for the time being. As is usual when the Commission receives complaints, it informed Google earlier this month and asked the company to comment on the allegations. The Commission closely cooperates with the national competition authorities. No further information can be given at this stage.”
Although the complaints are different (see articles below), the common feature is that Google has used its dominant market position to the detriment of competitors and consumers. Not surprisingly, Google has vigorously defended itself against the accusations.
So just what is the case against Google? Are the complaints justified, or are they merely competitors whinging about their relative lack of success? The following articles look at the facts and the issues.
EU launches antitrust inquiry into Google ‘dominance’ Times Online, Mike Harvey (24/2/10)
Google Says It Faces Competition Complaints in Europe BusinessWeek, Brian Womack and Joseph Galante (24/2/10)
Google faces anti-monopoly probe by European Commission Guardian, Andrew Clark (24/2/10)
Why Europe could prove Google’s undoing Guardian, Bobbie Johnson (24/2/10)
Analysis: not evil? Are you sure? Times Online, Mike Harvey (24/2/10)
Google faces Brussels antitrust scrutiny Financial Times, Richard Waters and Nikki Tait (24/2/10)
EU Opens Antitrust Investigation Into Google. Microsoft’s Fingerprints Are Everywhere. Washington Post, MG Siegler (23/2/10)
Google Hit With Antitrust Probe in Europe PC World, James Niccolai (23/2/10)
Is Redmond The Puppet Master In Google EU Anti-Trust Investigation? search engine land, Greg Sterling (23/2/10)
Google Under Investigation by European Union PCMag, Mark Hachman (24/2/10)
EU inquiry points the searchlight on Google’s methods Telegraph, Kamal Ahmed (24/2/10)
Google under investigation for alleged breach of EU competition rules Telegraph, Kamal Ahmed (24/2/10)
Questions
- What is the case against Google? Does this make it in breach of EU competition law?
- Assess Google’s response.
- Is Google “doing anything to choke off competition or hurt our users and partners”?
- How could competition be increased for Google? Is this likely to happen?
On February 14, the Sunday Times published a letter by 20 eminent economists calling on the next government to cut the public-sector deficit more rapidly than that planned in last December’s pre-Budget report.
In order to minimise this risk and support a sustainable recovery, the next government should set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 pre-Budget report.
The exact timing of measures should be sensitive to developments in the economy, particularly the fragility of the recovery. However, in order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-11 fiscal year.
Then on 18 February the Financial Times published two letters, between them from more than 60 economists, backing Alistair Darling’s policy of delaying cuts until the recovery is firmly established. They openly disagreed with the 20 economists who wrote to the Sunday Times.
… while unemployment is still high, it would be dangerous to reduce the government’s contribution to aggregate demand beyond the cuts already planned for 2010-11 (which amount to 1 per cent of gross domestic product). Further immediate cuts – even supposing they are practicable – would not produce an offsetting increase in private sector aggregate demand, and could easily reduce it. History is littered with examples of premature withdrawal of the government stimulus, from the US in 1937 to Japan in 1997. With people’s livelihoods at stake, a responsible government should avoid reckless actions.
… A sharp shock now would not remove the need for a sustained medium-term programme of deficit reduction. But it would be positively dangerous. If next year the government spent less and saved more than it currently plans, this would not “make a sustainable recovery more likely”. The weight of evidence points in the opposite direction.
So why do such eminent economists have apparently such divergent views on tackling the public-sector deficit? Is there any common ground between them? What does the disagreement imply about the state of macroeconomics? Read the letters and articles and then try answering the questions.
Tories right on cuts, say economists Sunday Times, David Smith (14/2/10)
Letter: UK economy cries out for credible rescue plan Sunday Times, 20 economists (14/2/10)
Economists reject calls for budget cuts Financial Times, Jean Eaglesham and Daniel Pimlott (18/2/10)
Letter: First priority must be to restore robust growth Financial Times, Lord Skidelsky and others (18/2/10)
Letter: Sharp shock now would be dangerous Financial Times, Lord Layard and others (18/2/10)
Economists urge swift action to reduce budget deficit BBC News (14/2/10)
Economists back delay on government spending cuts BBC News (19/2/10)
Economists back delay on government spending cuts BBC News (19/2/10)
Men of letters III BBC News blogs: Stephanomics, Stephanie Flanders (19/2/10)
Daily View: When to cut spending? (including podcast) BBC News blogs, Clare Spencer (19/2/10)
Cautious economists and cutters battle it out in print Guardian (20/2/10)
The great economics rift reopens Guardian, Gavyn Davies (19/2/10)
Focus on growth. Don’t argue about cuts Times Online, Eamonn Butler (20/2/10)
Recession’s ruins hide plenty of spare capacity Sunday Times, David Smith (14/2/10)
Questions
- To what extent is the disagreement between the two sets of economists largely one of the timing of the cuts?
- Is the disagreement the result of (a) different analysis, (b) different objectives or (c) different interpretation of forecasts of the robustness of the recovery and how markets are likely to respond to alternative policies? Or is it a combination of two of them or all three? Explain your answer.
- How would new classical economists respond to the Keynesian argument that it is necessary to focus on aggregate demand if the economy is to experience a sustained recovery?
- How would Keynesian economists respond to the argument that rapid cuts will reassure markets and allow private-sector recovery to more than compensate for reduced public-sector activity?
- Why is the effect of the recession on the supply-side of the economy crucial in determining the sustainability of a demand-led recovery?
- Distinguish between the cyclical and structural deficits. How would the policies advocated by the two groups of economists impact on the structural deficit?
As the news item, A Greek tragedy reported, the level of debt in Greece and also in Portugal, Spain, Ireland and Italy, has caused worries, not just for their creditors, but also for the whole eurozone. Here we give you the opportunity to listen to a podcast from the Guardian in which some of the paper’s main economic columnists, along with Observer commentator, William Keegan, discuss the effects of this debt on the euro. To quote the introduction to the podcast:
“In Brussels, European leaders have pledged ‘determined and co-ordinated’ action to help Greece – they won’t let it fail. Our Europe editor Ian Traynor says the announcement of a deal was designed to keep the markets happy.
But leaders of wealthier euro nations like Germany are hoping they won’t have to ask their voters to bail Greece out. Kate Connolly, our Berlin correspondent, explains why Germans are so reluctant to provide financial assistance.
It’s being seen as a defining moment for the euro. Economics editor Larry Elliott says not signing Britain up to the single currency was the best decision Gordon Brown ever made.”
The debt crisis facing the Euro Guardian daily podcast (12/2/10)
Questions
- To what extent is Greece’s debt a problem for the whole eurozone?
- Consider the arguments for and against bailing Greece out (a) by stronger eurozone countries, such as Germany and France; (b) by the IMF.
- What support for Greece would minimise the problem of moral hazard?
- How would you set about establishing whether the current eurozone is an optimal currency area?
- How do the current problems of debt affect the arguments about whether Britain should adopt the euro?