In the second of the linked articles below, Andy Atkins, from Friends of the Earth, argues that the European Emissions Trading Scheme (ETS) has failed to make any substantial cuts is emissions and is creating the opportunity for carbon traders to become very rich in increasingly complex financial products based on carbon. “This risks the development of sub-prime carbon and financial crisis – with a double whammy this time of environmental catastrophe to match.” He thus argues for alternative methods of reducing carbon, such as green taxes, tough regulation and government investment in green technology
But is the ETS a failure? In the third article, Alexandra Galin, from the Carbon Markets & Investors Association, argues that the second phase of ETS (2008–12) is much more successful than the first (2005–7) and that substantial carbon reductions have been achieved. Her argument is that a carbon trading scheme’s success in cutting carbon emissions does not depend on the trading system, but on the tightness of the cap. In other words, in a ‘cap-and-trade’ system, it is the cap that reduces emissions; the trading simply achieves the reductions in the most efficient way.
Friends of the Earth attacks carbon trading (including video) Guardian, Ashley Seager (5/11/09)
Don’t let the reckless City trade carbon Guardian, Andy Atkins (5/11/09)
The European emissions trading scheme is now a success Guardian, Alexandra Galin (17/11/09)
Storm could follow calm in EU carbon market Reuters, Nina Chestney (11/11/09)
Carbon market clouded by uncertainty BBC News, Damian Kahya (11/11/09)
See also: Gathering momentum on tackling climate change? (May 2009 blog)
Details of the European Emissions Trading Scheme can be found at:
Emission Trading System (EU ETS) European Commission, Environment DG
Questions
- Explain how the European Emissions Trading Scheme works.
- What are the advantages and disadvantages of the ETS as a means of reducing carbon emissions?
- Compare theses advantages and disadvantages with those of green taxes.
- How does the market price of carbon traded within the scheme reflect the toughness of the policy? What else might the price reflect?
- What is likely to happen to the carbon price in the coming months? Explain.
A major failing of free markets is the principal–agent problem. This is where one party to a transaction (normally the principal) has poorer information than the other (normally the agent). A good example of this is rogue traders from the building trade – “builders who overcharge or do shoddy work”. Often people are persuaded by doorstep sellers to have their drives resurfaced or their roofs felted or to have double glazing installed. But frequently, the unsuspecting homeowner (the principal to the transaction) has little knowledge of the quality of the work being offered by the builder (the agent). This asymmetry of information means that the homeowner could be taken in by clever selling or reassuring statements.
Another example is estate agents. A recent OFT study found that nearly a quarter of estate agents deliberately misdescribe the properties they are selling, either by exaggerating a property’s benefits or omitting to mention problems, or, in some cases, by downright lying.
So how are agents able to exploit principals and what can be done about it? Is the answer to have better regulation, or is there a market solution?
More complaints of rogue traders BBC News, Brian Milligan (14/11/09)
Rogue trader complaints on the up (video) BBC News, Brian Milligan (14/11/09)
Crackdown on rogue doorstep traders Press Association (16/11/09)
Estate agents ‘regularly lie to homebuyers’ Telegraph (12/11/09)
Lying estate agents confronted with home truths Times Online, Rebecca O’Connor (12/11/09)
A summary of the OFT campaign against rogue traders selling at the doorstep can be found at:
Doorstep selling campaign strategy Office of Fair Trading (16/11/09)
The relevant section of the OFT’s site is Doorstep selling
The government’s Consumer Direct agency has four relevant sections on its site:
Doorstep selling, Home Improvements, Buying a home in England and Wales and Buying a home in Scotland
Questions
- Give some other examples of the principal–agent problem. Are there any cases where it is the agent that has poorer information and is thus exploited by the principal?
- What can bodies such as the Office of Fair Trading and Consumer Direct do to lessen the problem? What factors determine their success?
- Discuss the relative merits of alternative solutions to the principal–agent problem.
On 11 November, the European Commission announced that it was imposing fines totalling €173 million on plastic additives producers for operating a price fixing and market sharing cartel. There were 24 companies involved in the cartel. As Competition Commissioner, Neelie Kroes, said, “These companies must learn the hard way that breaking the law does not pay and that repeat offenders will face stiffer penalties. The companies’ elaborate precautions to cover their tracks did not prevent the Commission from revealing the full extent of their determined efforts to rip-off their customers”.
An interesting feature of this particular case is that one of the companies fined is AC Treuhand, a Swiss-based consultancy company. It is not a plastics producer, but took on the role of organising the cartel. Neelie Kroes said that “the company’s Swiss premises were chosen for secret meetings of cartel participants as they were outside the EU and beyond the commission’s jurisdiction. This made it harder for the watchdog to seize documents.”
Antitrust: Commission fines plastic additives producers €173 million for price fixing and market sharing cartels Europa Press Release (11/11/09)
FACTBOX-EU fines heat stabilisers cartel 173 mln euros Reuters (11/11/09)
EU fines consultant for alleged cartel role Financial Times, Nikki Tait (11/11/09)
EU cartel fine for plastics firms BBC News (11/11/09)
EU fines plastics cartel euro173 million Forbes (11/11/09)
Questions
- What conditions must apply if a cartel is to succeed in raising prices? To what extent did these conditions apply to the plastic additives cartel?
- What powers does the European Commission have under Article 81 of the Treaty of Amsterdam? (See and also. See also page 369 in Sloman and Wride Economics 7th ed.)
- Are cartel activities necessarily against the interests of the consumer? Explain.
This podcast is from the Library of Economics and Liberty’s EconTalk site. In it, Scott Sumner of Bentley University discusses with host Russ Roberts the role of monetary policy in the USA since 2007 and whether or not it was as expansionary as many people think.
In fact, Sumner argues that monetary policy was tight in late 2008 and that this precipitated the recession. He argues that the standard indicators of the tightness or ease of monetary policy, namely the rate of interest and the growth in the money supply, were misleading.
Sumner on Monetary Policy EconTalk podcast (9/11/09)
Questions
- Why is it important to look at the velocity of circulation of money when deciding the effect of interest rate changes or changes in the monetary base? Can the Fed’s failure to take velocity sufficiently into account be seen as a cause of the recession?
- Is there evidence of a liquidity trap operating in the USA in late 2008?
- How could the Fed have pursued a more expansionary policy, given that interest rates were eventually cut to virtually zero and the monetary base was expanded substantially?
- Why does Sumner argue that monetary policy should focus on influencing the growth in aggregate demand?
- How useful is the quantity equation, MV = PT (or MV = PY) in understanding the role and effectiveness of monetary policy?
- What is the Keynesian approach to monetary policy in a recession? How does this differ from the monetarist approach? Are both approaches focusing on the demand side and thus quite different from supply-side analysis of recession?
- Why is the consumer prices index (CPI) a poor indicator of a nominal shock to the economy? Should the central bank focus on nominal GDP, rather than CPI, as an indicator of the state of the economy and as a guide to the stance of monetary policy?
- What are the strengths and weaknesses of using a Taylor rule as a guide to monetary policy? Would nominal GDP futures be a better target for monetary policy?
The Bank of England’s latest quarterly Inflation Report was published on November 11. With all the gloomy news over the past few months the report is pleasantly up-beat – certainly for the longer term. As Mervyn King, Governor of the Bank of England, states in his opening remarks to the publication of the report, “The considerable stimulus from the past easing of monetary and fiscal policy and the depreciation of sterling should lead to a recovery in economic activity.”
Nevertheless, recovery will be slow, especially at first. This means that it will be some time before output returns to pre-recession levels. “Despite a recovery in economic growth, output is unlikely, at least for a considerable period, to return to a level consistent with a continuation of its pre-crisis trend. That is in large part because the impact of the downturn on the supply capacity of the economy is expected to persist. But it is also because there is likely to be sustained weakness of demand relative to that capacity.”
There is surprisingly good news too on employment and unemployment. Although unemployment has risen sharply in recent months, the rate of increase is slowing and “There was a small increase of 6000 in the number of people in employment to 28.93 million, the first quarterly increase since May–July 2008 (see Labour market statistics, November 2009).
So should we be putting out the flags? Can the Bank of England ease off on quantitative easing (see Easing up on quantitative easing)? Or does it still need to keep on increasing money supply, especially as fiscal policy will have to get a lot tighter? The following articles consider the issues.
Mervyn King: economy remains ‘uncertain’ (video) Channel 4 News, Faisal Islam (11/11/09)
Bank of England governor dampens hopes of swift UK recovery Guardian, Graeme Wearden (11/11/09)
Recovery has only just started, warns sombre King Guardian, Heather Stewart (11/11/09)
Cautious good cheer BBC News, Stephanomics (11/11/09)
Bank of England’s Mervyn King says UK only just started on recovery road Telegraph (11/11/09)
The Bank of England’s Inflation Report is useless. Here’s why. Telegraph, Edmund Conway (11/11/09)
Bank of England raises growth and inflation forecasts: economists react (includes video) Telegraph (11/11/09)
Bank of England talks up hopes of strong recovery Times Online, Robert Lindsay (11/11/09)
Bank of England cautions on economic recovery BusinessWeek, Jane Wardell(11/11/09)
Just who benefits from quantitative easing? WalesOnline (11/11/09)
Inflation Report: Forget the fan charts, what we need is a clear economic policy Telegraph, Jeremy Warner (11/11/09)
We’ve no choice but to keep inflating Independent, Hamish McRae (11/11/09)
Is there a break in the economic gloom? (video) BBC Newsnight, Paul Mason (12/11/09)
The Bank of England Inflation Report can be found at the following site, which contains links to the full report, the Governor’s opening remarks, charts, a podcast and a webcast:
Inflation Report November 2009 Bank of England
Questions
- Explain what the three fan charts, Charts 1, 2 and 3 on pages 6, 7 and 8 of the Inflation Report, show.
- Why is the Bank of England more optimistic than in its previous report (August 2009)?
- Why did the sterling exchange rate fall on the publication of the report?
- Has the policy of expansionary monetary policy proved to be beneficial and should the Bank of England continue to pursue an expansionary monetary policy?
- What determines the balance of effects of an expansionary monetary policy on (a) asset prices; (b) real output; and (c) inflation?
- How have relatively flexible labour markets affected the impact of recession on (a) wage rates; (b) unemployment?