A tear in a salty sea
03/07/2012 § 9 Comments
The Government announced that the ETS will be modified. The changes hold off on implementing some parts of the ETS, and most notably keep agriculture out for a few years.
What can we make of this? It seems like a game theory approach might help. Imagine a 2×2 game. The players are NZ and the Rest of the World, and they can choose to implement an ETS or not. Here’s a possible pay-off matrix:
|NZ||Yes ETS||No ETS|
|No ETS||-10, 0||0,-1000|
What do these values mean? If everyone implements an ETS, then we just tick along as we are and there are no positive or negative consequences: 0,0. This is, apparently, a rose-tinted view of the future, but it will work for the moment. If no one implements an ETS, then there are serious consequences. New Zealand, however, doesn’t suffer too badly (there’s some science behind that). There are some unders and overs, but we’ll call it even. In that case (bottom right-hand cell): 0, -1000.
Then there are the two cells in which NZ and ROW take different approaches. If NZ implements and no one else does, then we pay a small cost but the world still suffers the same consequences: -5, -1000. In the reverse situation, NZ pays a reputational cost but the world turns out okay: -10,0.
Now, let’s add some probabilities. What’s the probability that the ROW will implement an ETS? Ten per cent? If so, the value to NZ of adopting an ETS is (-5 x 0.9) = -4.5, while the value of stalling is (-10 x 0.1) = -1. So, yes, stalling is worthwhile.
Given this payoff matrix, stalling is worthwhile until the probability of the ROW implementing an ETS rise above 33%. That is, it doesn’t have to be likely to happen — we just need a better than 1-in-3 chance.
The Greens are predictably exercised about the Government’s decision. In their statement, they quote the co-leader:
“New Zealand is missing the chance to protect and enhance its $20 billion clean, green brand,” said Mrs Turei.
This may be true — I don’t know. The two things that occur to me are:
- given the lack of action in other countries, I’m not convinced that greenhouse gas emission activism by New Zealand will be noticed or valued. If the voters overseas don’t care enough, why will the consumers overseas care?
- we can add some payoff in the matrix to estimate the potential impact. What if it is worth an extra 10 per cent in export revenue ($20b/GDP)? Let’s add ‘1’ to both NZ-Yes ETS payoffs. The value of implementing the ETS is then ((1-4) x 0.9) = -2.7. It still isn’t worthwhile.
The cold calculus of climate change is that, for the moment, ETS is a branding exercise. And it doesn’t look like the brand can pay for itself.