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TEQs & Carbon Taxation
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RevdTess



Joined: 24 Nov 2005
Posts: 2935
Location: Newquay

PostPosted: Sun May 11, 2008 6:19 pm    Post subject: Commercial TEQs Reply with quote

I'm not clear how commercial TEQs are handled. Would businesses get a 'quota' of TEQs similar to the existing european carbon trading scheme? Or do they have to buy TEQs from a government pool every time they buy energy?

Providing a quota of TEQs to business is an odd approach really, since it's hard to determine how much of a handout each business should get, especially with startups, whose entire purpose is to grow as rapidly as possible. And an oversized quota handout could become a govt subsidy to business at the expense of citizens, rather like what happened in the existing carbon scheme vis a vis the electricity market.

On the other hand, if no quota is granted, then businesses must buy TEQs for every unit of energy they consume or carbon they emit, and under that contingency you'd expect one of two outcomes: i) TEQs held in the govt pool will be plentiful and the price will be very low, or ii) as the govt-imposed cap approaches, TEQs will become very expensive and many businesses will simply have to shut up shop either temporarily or permanently. This may be what we want - especially for high-energy low-margin businesses, but you wouldnt want TEQ prices to leap too quickly because economies don't like surprises, they like to be able to plan.

The european emissions trading scheme got around some of these issues by over-allocating carbon credits in the first year, then leaving it vague as to whether credits could be carried forward to (or borrowed from) future years, leaving market participants unsure as to what the true fundamental situation was. In a system where govts could change rules retrospectively, no one was too willing to try to trade too aggressively in any particularly direction. In fact, given the failings of that particular system it was amazing it ever got implemented at all. A testament to political will over practical considerations Wink
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Shaun Chamberlin



Joined: 04 Feb 2007
Posts: 120
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PostPosted: Sat May 17, 2008 7:56 pm    Post subject: Reply with quote

Tess wrote:

My argument was based on the expectation that at some point in the future, the nation would be living 'hand-to-mouth' as far as quotas are concerned, which is to say that at the end of each week the nation has just about run out of TEQs before the next allocation is loaded into the system. In such an environment the 'market' for TEQs would be very tight indeed. But what happens if a particular week sees very high demand (maybe the weather is particularly good or bad) and by the 6th or 7th day of the week, there are no TEQs left at all? This is after all the cap the system is designed to impose.

It's not the normal functioning of this market that I need to understand, it's how it is intended to work when we reach critically low levels of TEQ inventory. This is after all the 'big stick' that will encourage everyone to conserve.


As I have said before, the idea with TEQs is not to use high prices as a 'big stick' to beat people into conservation, but rather to make explicit the quantity limits within which the economy is going to have to exist, and so stimulate the necessary sense of common purpose in figuring out how best to do that. Assuming that the cap is set tightly enough, the TEQs scheme is functioning best if TEQs prices are low, not high.

However, the fundamental point you raise is actually one that I raised when I first heard about TEQs, but I think one that boils down to a misunderstanding of the way markets work. Let me explain what was explained to me and see if it satisfies you as it did me.

Price is essentially (not solely, but essentially) a product of supply and demand. If supply increases then price decreases, if demand increases then price increases. Also, if price increases then demand decreases (imagine how much less demand there would be for buying petrol if it were ?200 a litre).

Classical economists also argue that as price increases supply increases (because the higher price incentivises more supply to be brought to market to benefit from the higher price), but they are wrong in this context, since the supply is strictly fixed by the national carbon budget. They are also wrong about this in the even more critical area of global oil supplies, due to geological limits.

So under TEQs, because supply is fixed (by the carbon budget), price becomes a product of demand, and demand becomes a product of price. So if demand is very high, the price rises, and this in turn reduces demand, until equilibrium is reached. This is what economists mean when they talk of 'demand destruction' (in other words, those who cannot afford the product at the higher price, or perhaps who would rather choose an alternative at that price, simply drop out of the market, thus restoring the balance between supply and demand. People are dying from this right now as the global oil price rises - they cannot afford the energy they need for life. Classical economists view this as a drop in demand).

So in fact the situation of someone wanting to buy TEQs units and there being none available on the market never happens. What would happen in this worst-case scenario is that the price of TEQs units would get so high that many people would not be able to afford to buy them - the market would bring demand in line with supply. This would certainly be hard for a lot of people, but the reality of the physical limits we face is unfortunately a hard one. The key thing about TEQs is that we would all still get our guaranteed Entitlement each week, rather than simply getting nothing at all while everything goes to those who can afford to pay the highest price (effectively rationing by price) as happens in the current 'free market' (or indeed in a black market alongside conventional rationing).

The other key advantage of TEQs here is that if we did reach this situation (which hopefully we would not - the lower the TEQs price, the better society is dealing with the necessary energy descent), then the high TEQs price would incentivise people to make rapid significant changes in their lifestyle. If the TEQs price were ?10,000 per unit then anyone who managed to use less than their Entitlement and was able to sell the surplus onto the market would clearly reap great financial benefit, which would in turn encourage more supply to become available from those who could manage to cut back.


Tess wrote:

To clarify, a lot of our discussion focusses on the issue of 'absolute barriers' to obtaining fuel. The 'cap' you say TEQs provide is the absolute barrier I'm am concerned about. You say in your post that TEQs 'deal with' the absolute barrier of peak oil or climate change. My concern is that they do this by creating an earlier absolute barrier that will cause so much distress and outrage that the scheme collapses.

I think if we can resolve this, then we will be on the same page.


Why do you feel that TEQs provide an earlier absolute barrier? They simply provide a way of recognising the very real physical limits exactly where they are and forcing our economy to respect them. The only sense in which they tighten the situation is that they take away the option of simply ignoring those limits and running off the cliff. I hope we're getting close to being on the same page now!


Tess wrote:
I'm not clear how commercial TEQs are handled. Would businesses get a 'quota' of TEQs similar to the existing european carbon trading scheme? Or do they have to buy TEQs from a government pool every time they buy energy?


This may explain why we've been talking past each other a bit. I had assumed that you had read Energy and the Common Purpose (freely downloadable via that link), and it would be well worth your doing so to fully understand the scheme.
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RevdTess



Joined: 24 Nov 2005
Posts: 2935
Location: Newquay

PostPosted: Sun May 18, 2008 12:16 am    Post subject: Reply with quote

Shaun Chamberlin wrote:

This may explain why we've been talking past each other a bit. I had assumed that you had read Energy and the Common Purpose (freely downloadable via that link), and it would be well worth your doing so to fully understand the scheme.


I have read it. Just couldn't remember what it said about companies because at the time I was already confused by the 'personal' TEQs and didn't take the rest in.

It appears from the document that no quota is provided for companies, therefore, as I said:-
Quote:

On the other hand, if no quota is granted, then businesses must buy TEQs for every unit of energy they consume or carbon they emit, and under that contingency you'd expect one of two outcomes: i) TEQs held in the govt pool will be plentiful and the price will be very low, or ii) as the govt-imposed cap approaches, TEQs will become very expensive and many businesses will simply have to shut up shop either temporarily or permanently. This may be what we want - especially for high-energy low-margin businesses, but you wouldnt want TEQ prices to leap too quickly because economies don't like surprises, they like to be able to plan.


Please don't tell me you actually think this would work? You'd destroy the economy by doing this. Of course, this *is* what we want to achieve, but preferably via a gradual slowdown, not a hamfisted series of roadblocks like this.


Last edited by RevdTess on Sun May 18, 2008 12:34 am; edited 1 time in total
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RevdTess



Joined: 24 Nov 2005
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Location: Newquay

PostPosted: Sun May 18, 2008 12:25 am    Post subject: Reply with quote

Shaun Chamberlin wrote:

However, the fundamental point you raise is actually one that I raised when I first heard about TEQs, but I think one that boils down to a misunderstanding of the way markets work. Let me explain what was explained to me and see if it satisfies you as it did me.


Dude, I'm an oil market analyst. I hold an MBA. I thought you realised that I don't need an economics 101 lesson.

Quote:

So under TEQs, because supply is fixed (by the carbon budget), price becomes a product of demand, and demand becomes a product of price. So if demand is very high, the price rises, and this in turn reduces demand, until equilibrium is reached. This is what economists mean when they talk of 'demand destruction' (in other words, those who cannot afford the product at the higher price, or perhaps who would rather choose an alternative at that price, simply drop out of the market, thus restoring the balance between supply and demand. People are dying from this right now as the global oil price rises - they cannot afford the energy they need for life. Classical economists view this as a drop in demand).


If you're going to tell me that rising prices for TEQs are going to reduce demand for them, this is obvious and not the issue I have with TEQs at all.

Quote:

So in fact the situation of someone wanting to buy TEQs units and there being none available on the market never happens.


This would require prices to spike to choke off demand. You have previously said that prices would not be changing in real time on the forecourt. Therefore the price response won't be there to choke off demand fast enough to avoid TEQs running out. And if the price response IS there, then you have the situation I've been concerned about all along, which is that people will think they can buy fuel on the forecourt but then discover they can't because the TEQs have either run out or become so expensive overnight that they can't afford it. This is the absolute and necessary component of this system that must be there in order to destroy demand.

The problem I think is that you haven't actually understood that I watch markets all day every day and I know how they react to shortage and oversupply, and I know what would happen if TEQs became very scarce. You on the other hand are assuming that the market will function in a smooth and predictable manner, while at the same time imposing a fixed limit on supply - the very thing that will prevent any market from functioning in the way that you want this one to.

Please let's not go through the economics 101 again, okay? I'm not dumb. Don't insult my intelligence.


Last edited by RevdTess on Sun May 18, 2008 12:46 am; edited 3 times in total
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RevdTess



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PostPosted: Sun May 18, 2008 12:29 am    Post subject: Reply with quote

Shaun Chamberlin wrote:
Why do you feel that TEQs provide an earlier absolute barrier?


... is answered by your own post:-

Shaun Chamberlin wrote:

So under TEQs, because supply is fixed (by the carbon budget)


You've therefore replaced a fixed geological limit on oil production with an earlier absolute limit imposed by a fixed supply of TEQs.

Please get a practical (not theoretical) understanding of how markets work before you start trying to impose dangerous trading systems on people's lives. God help us if you ever succeed with this ill-considered plan!
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Shaun Chamberlin



Joined: 04 Feb 2007
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PostPosted: Sun May 18, 2008 2:11 pm    Post subject: Reply with quote

Tess wrote:

Dude, I'm an oil market analyst. I hold an MBA...
Please let's not go through the economics 101 again, okay? I'm not dumb. Don't insult my intelligence.


Tess, my sincere apologies if you felt patronised. Understand that a substantial part of my job involves explaining these things in as simple terms as possible. Inevitably - and especially in this forum context - I will sometimes end up telling people things they already know. As you suggested, I'm just trying to get to the bottom of where any disagreements between us lie, which inevitably involves checking we agree on the basics.

Shaun Chamberlin wrote:

So in fact the situation of someone wanting to buy TEQs units and there being none available on the market never happens.

Tess wrote:
This would require prices to spike to choke off demand. You have previously said that prices would not be changing in real time on the forecourt. Therefore the price response won't be there to choke off demand fast enough to avoid TEQs running out.


It would be just as it is currently. International petroleum prices don't filter through to forecourt prices by the second, but they do filter through.

Tess wrote:

And if the price response IS there, then you have the situation I've been concerned about all along, which is that people will think they can buy fuel on the forecourt but then discover they can't because the TEQs have either run out or become so expensive overnight that they can't afford it. This is the absolute and necessary component of this system that must be there in order to destroy demand.


But people have a TEQs entitlement, which costs them nothing. They are still able to get their ration of fuel no matter how high the TEQs price goes. It is those who want to use more than their entitlement who could find the price prohibitively high - it is their demand that is destroyed. And if people can make do with less than their entitlement in such a high-price scenario then they can profit greatly, thus encouraging more supply onto the market.

In the current energy markets if the petroleum price goes too high then people will simply not be able to afford fuel. You are right to identify the very real challenges to our markets as fuel beomes scarce, but TEQs softens the impacts of dealing with these already-existing supply limits. It does not create any new supply limits:

Shaun Chamberlin wrote:

So under TEQs ... supply is fixed (by the carbon budget)

Tess wrote:

You've therefore replaced a fixed geological limit on oil production with an earlier absolute limit imposed by a fixed supply of TEQs.


No, the carbon budget is merely a reflection of the physical limit of greenhouse gas concentrations that provides us with a desirable environment.

Of course, a carbon budget might be set too loosely (and so fail to address the problem) or too tightly (and so impose too strict absolute limits on the economy, as you suggest), but the cap in the budget is designed merely as a reflection of our physical reality. It is not an arbitrary new cap, just a way of incorporating into our economy the physical reality that going beyond the cap destroys our environment.

And while the Government are of course already very publically debating what that carbon budget should be, TEQs simply enables us to respect it.

I hope we're getting to the crux of things now, and apologies again if I went too basic!
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jo



Joined: 20 Oct 2007
Posts: 184
Location: London

PostPosted: Sat May 24, 2008 1:18 pm    Post subject: Green Tax Slippage Reply with quote

Just by following the impacts of the "natural" Carbon Price from
rising oil prices, you can clearly see how difficult it will be implement
a universal Carbon Tax.

For instance, today, Gordon Brown is being "urged" to show
lovingkindness to Britain's poor motorists (see below).

The bottom line is : the people at the base of the financial stack
are facing increasing costs for food and home energy and fuel,
so you cannot expect them to be able to stomach extra green
taxation on top of that. How can they pay extra on all fronts ?

If you're trying to get some kind of financial incentive for Carbon
Emissions reductions, green taxes or duties are clearly not the way
forward in this new age of Peak Oil and Rising Prices.

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http://www.telegraph.co.uk/news/newstopics/politics/labour/2017813/Gordon-Brown-Crisis-hit-Prime-Minister--told-to-scrap-car-tax-rises,-after-loss-of-Labour-seat-of-Crewe.html

Crisis-hit Brown told to scrap car tax rises
By Andrew Porter and Andrew Pierce
Last Updated: 10:10AM BST 24/05/2008

Gordon Brown is being urged by ministers to scrap rises in car taxes and petrol duty as he struggles to regain popularity after a humiliating by-election defeat.

The new car taxes have proved so unpopular that one Labour MP described them as 'a poll tax on wheels'

Cabinet colleagues are privately urging him to tackle the issue of motoring costs as a way of helping households struggling with rising fuel, energy and food bills.

Alistair Darling, the Chancellor, is facing more calls to cancel the 2p increase in petrol duty this autumn following a month of record prices at the pump and a recent surge in the price of oil.

The Treasury is understood to be considering an about-turn on the plans, which would see hundreds of pounds added to the tax bills of millions of drivers.

A junior minister added: "Every MP is getting it in the neck about the cost of driving and it isn't going to be enough to keep talking about world oil prices. We should be thinking about what we can do to help.

The Labour MP Derek Wyatt, who is defending a majority of only 79 in his Kent seat, called for immediate cuts in fuel duty.

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jo



Joined: 20 Oct 2007
Posts: 184
Location: London

PostPosted: Tue Jun 17, 2008 10:29 pm    Post subject: Rather Taxing Speculation Reply with quote

So, what will it be ? Price controls for petroleum and by-products ? Massive efforts to pump more crude ? Dropping taxes ? Raising taxes for special purposes ? The Oil Endgame is dropping down on us.

Hands up those who think the Saudis have been inflating the estimates of their reserves ? And why should they open up their wells to Western inspection ? What a ridiculous suggestion. I mean, what about sovereignty here ?

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http://www.independent.co.uk/opinion/leading-articles/leading-article-the-oil-era-reaches-its-desperate-endgame-847898.html

Leading article: The oil era reaches its desperate endgame

Monday, 16 June 2008

Saudi Arabia appears ready to cave in to demands from Western governments for the kingdom to make special efforts to increase its production of oil. Analysts forecast that the world's largest producer will shortly raise its output by half a million barrels a day.

The United Nations Secretary-General, Ban Ki-Moon, confirmed this impression at the weekend after emerging from talks with the Saudi monarch, King Abdullah.

But there are also indications that the Saudis will make their own counter-demands when oil producers and consumers meet at an emergency energy summit next weekend.

One such requirement might be for Western governments to play their part in adapting to the higher prices by relaxing their domestic taxes on fuel.

This represents a considerable shift from Saudi Arabia. Up until now, the country's rulers have blamed the soaring oil price on speculation in Western financial markets ? a phenomenon driven, they say, by a false perception of a shortage of global capacity.

There is little doubt that speculation is playing some part in pushing up the price of oil to an unprecedented $140 a barrel. Yet the fact that inventories have been at normal levels suggests this is not the driving force behind price rises.

Growing demand is the far more likely culprit. It is often asserted that Saudis still have vast oil reserves. But there is no independently verified proof of this. We have no choice but to rely on what they choose to tell us.

If the kingdom really thinks the present price is the result of a speculative bubble driven by misinformation about its reserves, it ought to open up its oilfields to independent inspection to dispel the doubts. Of course it will not do this. But, for now at least, it looks ready to increase production.

An increase in Saudi oil pumping might well have the desired effect of bringing down the price somewhat. But what if it does not fall low enough to ease the pain of the world economy? How long before our political leaders return to Saudi and its Opec allies to plead for more?

And what will be the political price extracted for this? What we are seeing in this desperate horse-trading is the endgame of the oil age. Even if we have not yet reached the inevitable moment of "peak oil", when production begins its inexorable decline, it is abundantly clear that the age of cheap fuel is over.

The economic leaps forward by China and India represent a step-change in energy demand. The rate of discovery of new oilfields has failed to keep pace with the speed at which nations are joining the global economy. That means the price of oil will remain considerably above the level to which we have historically been accustomed.

That is the central fact that governments ought to be addressing. It is ridiculous for the Saudis to attempt to tell Western governments how they ought to tax fuel sales, just as it is ridiculous for Western governments to tell Saudi Arabia and other oil producers how much they ought to pump out of the ground.

The debate ought to be about how best to break our economic dependence on oil.

Governments should recognise the pain being endured by drivers and businesses at the petrol pumps. But their response should not be to tell their electorates that hectoring the Saudis will bring down the price of fuel, or to mess around with short-term gestures such as suspending taxation.

Instead, it should be to announce that funds from higher fuel taxes will be channelled into alternative, clean power generation and energy conservation schemes.

The fact that so many of our political leaders are pinning their hopes on the oil producers riding to the rescue merely confirms how tenuously they grasp the new reality.

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