Singapore Trade Minister Lim lists fallacies of cargo regulation

THERE are three fallacies on the best way to achieving reduction in carbon emissions and the first fallacy is setting regulatory standards, declared Singapore Trade and Industry Minister Lim Hng Kiang.

The second fallacy, he said, is believing that regulations provide a reliable indication of the amount of carbon produced, while third is that lower prices should be charged for the first block of electricity produced, which hits less affluent consumers hardest.

Speaking at the Third MTI Economic Dialogue at Nanyang Technological University, Mr Lim said: "Many environmentalists believe that governments should set a certain energy efficiency standard for equipment and appliances. Economists, however, know that regulation imposes a shadow price - just because you don't see the price explicitly does not mean it is not there."

Mr Lim said regulations force costly compliance, which adds to cost of what ever is produce and he questioned value of the cost against any supposed benefit.

"Even if the cost is worth the benefit, do we know if regulation is the least cost - or most efficient - option to derive this benefit? For example, the government could force firms and households to purchase more expensive energy saving lights.

"Sure, energy use may fall, but how can the regulator be sure that there aren't cheaper ways to improve energy efficiency? The empirical record on misguided regulation is quite instructive. For example, according to a report by Lehman Brothers, regulations to reduce automobile emissions in Europe cost EUR700 (US$975)- EUR2,300 per tonne of carbon reduced.

"On the other hand, carbon permits in European carbon trading markets cost fewer than EUR50 per tonne of carbon. Even if we assume that the true social cost of a tonne of carbon emitted is twice as much, the cost incurred in reducing that tonne of carbon turns out to be seven to 23 times the benefit," he said.

Thus, regulating the emission standards is not a cost effective way to reduce carbon, he said. "Many regulations to encourage renewable sources of energy like solar ignore the costs they impose. Subsidising the generation of renewable energy has imposed on many governments a high fiscal cost. Some countries have even had to unwind these subsidies," Mr Lim said.

"A second fallacy is that regulations give certainty over the amount of carbon reduced. For example, if the government imposes efficiency standards, one can estimate the amount of gasoline saved. However, the economic reality is that a substantial amount of uncertainty remains, because of what is known as the rebound effect. If a car requires less gasoline for the same distance, the driver might use the car more often," he said.

Studies have found that up to 30 per cent of gasoline savings might be lost to the rebound, he said. Similarly, it has been observed that subsidising energy efficient air-conditioners encourages consumers to use them more often, thereby increasing overall energy consumption," he said.

A third fallacy is that we should set lower prices for the first block of electricity than subsequent blocks of electricity. There are well-meaning reasons for such a proposal. A uniform electricity price will likely be regressive, as lower income households spend a larger proportion of their incomes on basic necessities like electricity than higher income households.

A uniformly higher electricity price or a carbon price will therefore affect the poor more in relative terms. By pricing the first block of electricity more cheaply than subsequent blocks, the intent is to benefit the lower income groups who generally consume less electricity than higher income groups.

What is needed, he said, is to put a price on carbon, so that the consumer knows the marginal cost of his carbon emission and will adjust his behaviour accordingly. "Putting a price on carbon will send a powerful signal throughout the economy to encourage energy efficiency, switch to renewable sources of energy, and to reduce energy consumption. Unlike regulations or subsidies, a uniform price will let each individual, firm, or industry work out the most efficient response," he said.
(Source:www.schednet.com)