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Friday, October 20, 2017

Can this be right? Two simple factors solve emissions riddle?

Posted by steve on December 10, 2009

Doing beta-testing of a business simulation game on pollution fee systems I discovered the answer to getting reductions and maintaining economic stability is easy: you just need two factors in place.

I’ve just completed the first step of an assignment for a Swedish Foundation to create a business simulation game that informs people about the potential of emissions tariffs (The polluter pays principle).  More information on this is in my white paper on the subject. This first step has involved creating a formula “engine” that will allow some limited simulation of emissions fees, investment in clean technology and the effects on profitability, economic growth and tax revenue. Having set the engine up I started testing with fictitious teams to create base scenarios. – starting points – where no-one makes any decisions and the simulation runs on its own.

Before I tell you the two “golden factors” I discovered I should mention that economists have been asking for someone to put a price on the environment, claiming that with out a price, market forces will not operate to solve the problem. Some economists, Bjorn Lombard among them, argue that the price of renewables should go down, not that the price of fossil fuel should be put up with fees.

Clean engine researcher Anders Höglund, who also researches into economic steering mechanisms and is the father of the “Hoglunds Mechanism”, makes a simpler claim: “The cost of pollution is the cost a market actor is prepared to bear to NOT Pollute”. To put it in another way, if government raised fees on emissions enough, a point would come where market actors would find it cheaper to invest in clean alternatives and not pollute.If clean alternatives were not forthcoming despite hikes in fees, the revenue from the emissions fees could be paid to someone to find a clean methodology.

To give you an idea of what the simulation software produces:

Emissions1

This is a base scenario. Business as usual gives a Government goal for reduction, quite high pollution fees, but not change in behaviour of the market, which produces a profit for participating actors.

This scenario shows a progressive rise in fees.

emission2In this scenario, as fees become higher,  with no other change in market behaviour, they erode profits to an extent where market actors make a loss. This of course would not be tolerated in a real life situation but it forms a base scenario from which to play the business game.

The overall aim of this is, of course, to create a game that is simple enough to play in a few hours, yet complex enough to generate discussion, interesting results and insights. Because of this, the whole game play will get tweaked and improved as different simulations are tried and a wider range of players are brought in,

The discovery that emissions fees are a no-brainer really took me by surprise, and I am still checking and double checking. However, I feel I have come far enough with the beta version to share it with the brave few who are regular readers of my blog.

To test the engine I entered the following scenario as a given: government announces 1) its intention to see to it that emissions are reduced by a certain % over a given period 2) that it will increase emissions fees (over 100% of fuel price if necessary) until the market obeys .

Emissions3This is what happened:
Companies invest heavily in clean–tech, and continue to pay the costs over eight time periods. Fuel bills fall rapidly and profits return. Government income from fees on fuel falls too, but this is not a problem as the targets for reduction get met early on the period. The darker red line represents actual sales of fossil fuel and the blue line the target. the green line, profits, shows a healthy trend, even without reinvestment of fee revenue.

Conclusions from the first round of testing:
this really is a no-brainer: if governments act serious about reducing emissions, clean-tech will be forthcoming and business stability will not be affected. The cost of emissions is simply the cost to remove them, something which it seems economists are ignoring, On the contrary, emissions fees revenues could be used to be re-invested in clean tech to stimulate economic growth even more.

I am looking forward to your comments and of course if your organisation would like to invite us to run the simulation with you we would be delighted.

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