Incentives are some of the most important parts of a market, because they determine the market behavior of both the suppliers and consumers. When incentives do not align, markets can experience severe shortages and surpluses in supply and demand. This is the case is the oil market which is experiencing a dramatic rise in demand, because there are no incentives to discourage the current unsustainable levels of consumption. Recent reports from the energy industry show that peak oil production will be reached in the near future, no later than 2020. This is an extremely concerning fact as oil consumption is rising rapidly in developing countries, and China and India alone will consume 70% of the world’s oil by the year 2030. Oil is now connected to the production of 95% of industrial goods. Earlier this month, a German think tank warned of the potential conflict between and within nations that could occur as oil supply fails to meet demand. The group made the assertion that most of the worlds military powers have an extra 15 to 30 years of oil reserved for such a scenario. Despite the threats posed by an oil peak, demand continues to rise and very little is being done to correct incentives (Gettler).
Taxes are one way to correct incentives. Taxes are fees charged by the government on tax payers. In this case taxes would be increased on oil purchases as well as placed on carbon footprints. These taxes would be imposed on individuals and nations alike. Ideally, nations would buy permits on the global market that allowed that country a specific amount of carbon emissions in a given amount of time. This nation would then tax individual citizens for carbon emissions in order to raise funding to buy the national permit. Furthermore, through city planning acts such as driving can be made inconvenient by limiting parking and reducing the size of the driving space in order to include bike lanes. These taxes and fees would have the effect of decreasing overall demand for oil. This is because a tax, as seen in diagram A, will shift marginal personal cost up to a point where, ideally, it is equivalent to marginal social cost. By decreasing the personal benefit each person gets from oil, the tax decreases demand for oil within the market, seen in diagram B. If this was accomplished in even the largest oil consuming countries such as India, China, and the United States of America it would have a huge impact on decreasing world oil consumption. Furthermore, increasing the price of oil will most likely cause people to give greater consideration to more expensive alternative forms of energy. This would not only slow the arrival of the oil peak but may have the effect of completely negating it. If people engage in the use of alternative energy then demand for oil could drop almost completely.
The final transition to alternative energy will require the use of subsidies in order to promote the use of more costly energies over cheap and convenient oil. Subsidies consist of government funding that is given to suppliers (in this case, suppliers of alternative energy) in order to minimize their costs and risks so that they can compete in a market that they would otherwise drop out of or undersupply. Subsidies essentially raise the supply with in a given market, by reducing the costs of suppliers and giving them greater incentives to produce, which is seen in diagram C. The start up costs of producing and using alternative fuels are very high and countries and individuals will not make this costly switch unless they are given large incentives to do so. However, alternative fuels are definitely effective and some, such as hydrogen, are ready to be a primary fuel source today if the infrastructure can be put in place. Ultimately, it is all about giving firms and individuals the incentives to change, by controlling market incentives through government intervention.
If we do not use taxes and other tactics to raise the costs of oil, and if we do not subsidize the development and use of alternative fuels, then we are in for a rude awakening at the oil peak. Such an event could throw the global economy into a tail spin, and cause social unrest, the likes of which have never been seen. Thus it is imperative that we get our priorities in order and give the energy market the overhaul it needs.
SOURCE
Peak oil and climate must be tackled in tandem
Age, The (Melbourne, Australia) - Friday, September 17, 2010Author:LEON GETTLER Acting on the looming oil crisis could give politicians the political cover they need to move on global warming.
PEAK oil and climate change are on parallel paths. Both are inextricably linked and can only be solved together, requiring a shift away from a reliance on fossil fuels into what is now called the "post-carbon economy". For Prime Minister Julia Gillard's climate change committee, peak oil is an inconvenient truth, and BHP Billiton chief executive Marius Kloppers's call for a carbon priceand tax tells us something needs to be done soon.
As with climate change, the peak oil debate has been going on for years. The fundamental argument: how close are we to peak levels? International Energy Agency chief economist Faith Birol warns that the output of conventional oil will peak in 2020 if demand continues. Other specialists say oil will not so much peak as plateau, giving countries time to deal with the problem. It's all a question of timing.
These debates are a distraction from the real issues. Whether climate change is man-made or naturally occurring, we are seeing a change in weather patterns around the world. Similarly, governments, insurers and think tanks acknowledge that we face an energy supply crunch, suggesting peak oil is no longer the stuff of conspiracy theorists.
According to an article published in Der Spiegel magazine this month, a German military think tank report strategically leaked online warns that peak oil will occur soon "and that the impact on security is expected to be felt 15 to 30 years later". Peak oil , according to the report, could threaten democracy, creating "room for ideological and extremist alternatives to existing forms of government". It says this could "in extreme cases lead to open conflict".
It also warns of market failures, huge tax rises, food shortages and widespread rationing. Oil is used in producing 95 per cent of industrial goods, so the report predicts price shocks right through the supply chain. "In the medium term, the global economic system and every market-oriented national economy would collapse," it says.
The Germans also warn of a shift away from a market economy. It's back to central planning.
"A conceivable alternative would be government rationing and the allocation of important goods or the setting of production schedules and other short-term coercive measures to replace market-based mechanisms in times of crisis," the report says.
The climate change-peak oil link is also made in a new Australia Institute study, Running on Empty? The peak oil debate. It says tackling climate change and peak oil together is necessary but complicated. On the demand side, for example, China and India have turned global energy markets on their heads and will account for 70 per cent of new oil demand between now and 2030. More complications are added with technically feasible solutions that are climatically disastrous.
The first step is a carbon price . More to the point, we need a carbon tax. A trading system would not work as well because permit prices fluctuate, creating uncertainty and making it impossible to build a business case for investment in energy alternatives.
"Ultimately, these issues can only be addressed by the introduction of a comprehensive carbon-pricing mechanism that delivers an internationally consistent carbon price ," the paper says. "This can be achieved either by international trade in carbon permits or, the best and simplest option, an internationally harmonised carbon tax."
It is a contentious decision, but tackling peak oil is likely to force governments to tackle climate change, giving them the political cover they need for those judgment calls. It will also require tough decisions on urban planning. The German city of Freiburg, for example, has bicycle lanes all over the city. It discourages car use by mandating parking in a few designated lots and has designed its public transport to allow even large families to live without cars. It's a sign of things to come.
The reality is that politics will force hard decisions on peak oil . Examples already include financial help to the ethanol industry, with an extra $140 million in transitional assistance over the next decade and another $20 million to establish a Biofuels Research Institute in Townsville, all part of the deal Gillard secured with the rural independents.
More is required. To tackle peak oil , the government needs to implement the Henry review's recommendations to change the fringe benefits tax formula for company cars that potentially encourages drivers to clock up mileage, and introduce road congestion charges. It will also have to invest more in public transport, promoting alternative fuels and subsidised infrastructure for electric cars.
These are politically fraught decisions, but tackling the issue when oil has peaked will be impossible. Global warming and peakoil can only be resolved together. Peak oil might provide governments with just the excuse they need to make tough calls on climate change.
HL2 Internal Assessment: List of students
Incentives are some of the most important parts of a market, because they determine the market behavior of both the suppliers and consumers. When incentives do not align, markets can experience severe shortages and surpluses in supply and demand. This is the case is the oil market which is experiencing a dramatic rise in demand, because there are no incentives to discourage the current unsustainable levels of consumption. Recent reports from the energy industry show that peak oil production will be reached in the near future, no later than 2020. This is an extremely concerning fact as oil consumption is rising rapidly in developing countries, and China and India alone will consume 70% of the world’s oil by the year 2030. Oil is now connected to the production of 95% of industrial goods. Earlier this month, a German think tank warned of the potential conflict between and within nations that could occur as oil supply fails to meet demand. The group made the assertion that most of the worlds military powers have an extra 15 to 30 years of oil reserved for such a scenario. Despite the threats posed by an oil peak, demand continues to rise and very little is being done to correct incentives (Gettler).
Taxes are one way to correct incentives. Taxes are fees charged by the government on tax payers. In this case taxes would be increased on oil purchases as well as placed on carbon footprints. These taxes would be imposed on individuals and nations alike. Ideally, nations would buy permits on the global market that allowed that country a specific amount of carbon emissions in a given amount of time. This nation would then tax individual citizens for carbon emissions in order to raise funding to buy the national permit. Furthermore, through city planning acts such as driving can be made inconvenient by limiting parking and reducing the size of the driving space in order to include bike lanes. These taxes and fees would have the effect of decreasing overall demand for oil. This is because a tax, as seen in diagram A, will shift marginal personal cost up to a point where, ideally, it is equivalent to marginal social cost. By decreasing the personal benefit each person gets from oil, the tax decreases demand for oil within the market, seen in diagram B. If this was accomplished in even the largest oil consuming countries such as India, China, and the United States of America it would have a huge impact on decreasing world oil consumption. Furthermore, increasing the price of oil will most likely cause people to give greater consideration to more expensive alternative forms of energy. This would not only slow the arrival of the oil peak but may have the effect of completely negating it. If people engage in the use of alternative energy then demand for oil could drop almost completely.
The final transition to alternative energy will require the use of subsidies in order to promote the use of more costly energies over cheap and convenient oil. Subsidies consist of government funding that is given to suppliers (in this case, suppliers of alternative energy) in order to minimize their costs and risks so that they can compete in a market that they would otherwise drop out of or undersupply. Subsidies essentially raise the supply with in a given market, by reducing the costs of suppliers and giving them greater incentives to produce, which is seen in diagram C. The start up costs of producing and using alternative fuels are very high and countries and individuals will not make this costly switch unless they are given large incentives to do so. However, alternative fuels are definitely effective and some, such as hydrogen, are ready to be a primary fuel source today if the infrastructure can be put in place. Ultimately, it is all about giving firms and individuals the incentives to change, by controlling market incentives through government intervention.
If we do not use taxes and other tactics to raise the costs of oil, and if we do not subsidize the development and use of alternative fuels, then we are in for a rude awakening at the oil peak. Such an event could throw the global economy into a tail spin, and cause social unrest, the likes of which have never been seen. Thus it is imperative that we get our priorities in order and give the energy market the overhaul it needs.
SOURCE
Peak oil and climate must be tackled in tandem
Age, The (Melbourne, Australia) - Friday, September 17, 2010Author: LEON GETTLERActing on the looming oil crisis could give politicians the political cover they need to move on global warming.
PEAK oil and climate change are on parallel paths. Both are inextricably linked and can only be solved together, requiring a shift away from a reliance on fossil fuels into what is now called the "post-carbon economy". For Prime Minister Julia Gillard's climate change committee, peak oil is an inconvenient truth, and BHP Billiton chief executive Marius Kloppers's call for a carbon priceand tax tells us something needs to be done soon.
As with climate change, the peak oil debate has been going on for years. The fundamental argument: how close are we to peak levels? International Energy Agency chief economist Faith Birol warns that the output of conventional oil will peak in 2020 if demand continues. Other specialists say oil will not so much peak as plateau, giving countries time to deal with the problem. It's all a question of timing.
These debates are a distraction from the real issues. Whether climate change is man-made or naturally occurring, we are seeing a change in weather patterns around the world. Similarly, governments, insurers and think tanks acknowledge that we face an energy supply crunch, suggesting peak oil is no longer the stuff of conspiracy theorists.
According to an article published in Der Spiegel magazine this month, a German military think tank report strategically leaked online warns that peak oil will occur soon "and that the impact on security is expected to be felt 15 to 30 years later". Peak oil , according to the report, could threaten democracy, creating "room for ideological and extremist alternatives to existing forms of government". It says this could "in extreme cases lead to open conflict".
It also warns of market failures, huge tax rises, food shortages and widespread rationing. Oil is used in producing 95 per cent of industrial goods, so the report predicts price shocks right through the supply chain. "In the medium term, the global economic system and every market-oriented national economy would collapse," it says.
The Germans also warn of a shift away from a market economy. It's back to central planning.
"A conceivable alternative would be government rationing and the allocation of important goods or the setting of production schedules and other short-term coercive measures to replace market-based mechanisms in times of crisis," the report says.
The climate change-peak oil link is also made in a new Australia Institute study, Running on Empty? The peak oil debate. It says tackling climate change and peak oil together is necessary but complicated. On the demand side, for example, China and India have turned global energy markets on their heads and will account for 70 per cent of new oil demand between now and 2030. More complications are added with technically feasible solutions that are climatically disastrous.
The first step is a carbon price . More to the point, we need a carbon tax. A trading system would not work as well because permit prices fluctuate, creating uncertainty and making it impossible to build a business case for investment in energy alternatives.
"Ultimately, these issues can only be addressed by the introduction of a comprehensive carbon-pricing mechanism that delivers an internationally consistent carbon price ," the paper says. "This can be achieved either by international trade in carbon permits or, the best and simplest option, an internationally harmonised carbon tax."
It is a contentious decision, but tackling peak oil is likely to force governments to tackle climate change, giving them the political cover they need for those judgment calls. It will also require tough decisions on urban planning. The German city of Freiburg, for example, has bicycle lanes all over the city. It discourages car use by mandating parking in a few designated lots and has designed its public transport to allow even large families to live without cars. It's a sign of things to come.
The reality is that politics will force hard decisions on peak oil . Examples already include financial help to the ethanol industry, with an extra $140 million in transitional assistance over the next decade and another $20 million to establish a Biofuels Research Institute in Townsville, all part of the deal Gillard secured with the rural independents.
More is required. To tackle peak oil , the government needs to implement the Henry review's recommendations to change the fringe benefits tax formula for company cars that potentially encourages drivers to clock up mileage, and introduce road congestion charges. It will also have to invest more in public transport, promoting alternative fuels and subsidised infrastructure for electric cars.
These are politically fraught decisions, but tackling the issue when oil has peaked will be impossible. Global warming and peakoil can only be resolved together. Peak oil might provide governments with just the excuse they need to make tough calls on climate change.
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