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Having not been at home for much of the last week, I haven’t had any time to really blog much or even read the news. I was therefore much bemused to hear last night that Malcolm Turnbull survived a leadership spill of which I was completely unaware would even happen. I’d gotten so bored of hearing about climate change destroying the Liberal Party that I’d completely tuned out.

So I thought I’d blog about the wider questions that never quite get answered. It’s terribly frustrating that climate change is constantly on the news, but there are still vast swathes that are never discussed. Perhaps its because of the formulaic approach the news media take towards issues like this that they never cover any material but recycle the same old crap whenever a climate change-related topic comes up. So I thought I’d consider some of the views put by climate change skeptics.

1. Is Climate change is a hoax?

I’m not going to delve into the science of whether of not climate change is real. To be honest, I’m not qualified and you probably don’t want me to delve deep into statistical analyses anyway. Instead, I’m going to ask why would anyone want to force such a ridiculous hoax upon the world? If the ETS really will hurt the economy, and if it has no real benefits to the environment (since climate change is not real and presumably the fraudsters know this), what motive would anyone have? The deniers’ answer is that they hate capitalism and want to return to a less consumerist society, one which is less industrialised and polluted.

But if they hate capitalism so much, why are they implementing an ETS as opposed to some carbon tariff or a direct carbon tax? Emission Trading Systems were invented by right-wing economists (such as Coase, whom nutjob libertarian types love) who opposed regulatory approaches to pollution. Instead of outright banning sulfur dioxide emissions, they argued a user-pays system that used market-based incentive to lower sulphur dioxide emissions, and hence reduce acid rain. ETSs are inherently capitalist in nature, even if they serve to slow parts of the economy (for a legitimate reason, of course). In fact, the main people now arguing for a carbon tax (instead of a cap and trade system) seem to be on the Right. (They argue a C02 cap and trade is far too complicated, and it is more efficient to use a simple tax) It’s all a bit patently absurd if you ask me.

Furthermore, if global warming really is a hoax and the real goal is to return us to a more natural environment, then why all this emphasis on replanting trees? Sure, it creates a strong argument for not destroying rainforests, but it also encourages destroying rainforests and replacing them with monoculture artificial forests. These are acres and acres of one species of tree, planted by humans to absorb carbon and to be cut down and converted into something like paper which won’t release carbon back into the atmosphere. We can’t plant natural trees because they don’t grow quickly enough to absorb enough carbon. These forests are not at all natural, in fact they are devoid of almost all life. It’s like a swimming pool which hasn’t seen chlorine in a while. Sure there are a few bugs and algae, but its not really natural.

Nor does it discourage consumption per se. Nor anti-industrialism per se. It simply discourages consumption of one thing, and replaces it with another. Sleek Priuses replacing ugly SUVs. Rows of glistening solar panels rather than smoky coal factories. If they want to replace our modern industrialised society with something, it is not a Robinson Crusoe world where man lives in harmony with Nature, but a world created by Apple. Everything is shiny and sparkly, everything clean and white. And above all, it remains consumerist and somewhat polluting. But all that is just hidden beneath a thin, stylish metal shell.

And really, we also have to ask, if it is such a massive conspiracy, why aren’t more people speaking out? We see the left splintering – some advocating nuclear power (a very unenvironmental solution), some advocating an absolute ban on carbon (idiots). Why don’t they splinter when it comes to the core of the argument, that climate change even exists? The overwhelming majority of scientists opposed to climate change seem to be funded by those industries which are hurt by a future ETS. Yes, yes, I know if there is massive opposition then it is hard to get funding from anyone except those sources. But how hard is it for a scientist to gather a few facts and publish them? To point out errors. People take non-standard views on economics all the time without losing funding or tenure. The hypothesis (that it is a massive conspiracy to defraud the Australian people) just doesn’t make sense. I admit that the climate change advocates seem a bit slimy, exaggerating their claims, being too aggressive in their PR and their attacks on sceptics, but the sceptics can provide very little in the way of motive for this massive conspiracy.

2. Is the ETS a tax?

The answer to this question is a firm ‘perhaps’. It depends on which kind of emission trading system you want (and given the incredible complexity of an ETS, I am vastly oversimplifying this). There are three kinds of ETS.

The first is a simple tax on any carbon emissions you produce. This is actually not an ETS (since nothing is traded… which I would have thought to be the sine qua non of a trading system), but apparently some people refer to it as an ETS. This is um, obviously a tax, though given the linguistic difficulties some people seem to have ETSes, I thought I’d best point it out.

The second is for the government to set a finite number of licenses (each for 1 tonne of C02) and have an auction for polluters to buy them. Those licenses can then later be traded between polluters on the ASX. The revenue from this initial auction goes to the government, and in that sense it is a tax. Some also argue that the increased cost of goods and services in an ETS economy is also a tax, in the same way that inflation is a tax, but I will come to this later.

The third option is similar to the second option, except that there is no initial auction. The government simply hands out the licenses, and they can then be traded by polluters on the ASX. This avoids the direct tax (since there is no auction) but it (arguably) still has the indirect tax from the cost of goods and services rising. First, as a matter of semantics, this is not a tax because the proceeds do not go to the government. (This seems an obvious point, but an important distinction between an alleged ETS ‘tax’ and a inflation tax, because inflation is caused by the government printing too much money which it can then spend).

More importantly, any increases in the cost of some goods will be offset by a decrease in the cost of other goods. So if Nike shoes are more carbon-intensive than Adidas shoes, then the latter will increase in price but the latter will actually decrease! This is inherent in the idea of a tradable system (and why an ETS is not a tax). Adidas may n0t use all the licenses it has been granted and it can sell them on the ASX for a profit. This can then be used to lower the price of their shoes to gain a competitive advantage over Nike. Or, instead of a competitor making lower priced shoes, it may be the producer of a ‘complementary good’ (a product which does much the same thing as a shoe, in this case, a pair of sandals). Or it may discourage you from buying quite as many shoes (women, I’m talking to you) and buy something else with your money instead. But, as long as your income remains stable then you are purchasing the same monetary amount of goods overall. You just spend that $5 on a green-friendly product, rather than spending it on a pair of shoes produced in some inefficient sweat shop somewhere.

The debate about whether an ETS is a hidden tax is mostly a matter of semantics and definitions. The answer is a strong no. But hidden in this question is the silent argument – this will make the cost of goods and services go up, which brings me to my next question…

3. Will an ETS increase prices?

As suggested in my previous answer, an ETS will increase the prices of some goods but not others. But that’s the case with all competition. If demand for one product disappears, then that product becomes more expensive to produce and to buy (because economies of scale disappear and it becomes rarer). For example, vinyl discs are much more expensive than they were 20 years ago. The question is simply if the average price goes up compared to before.

This is a surprisingly difficult question to answer. One might simply argue that there is a cap on one resource (carbon) and that the economy must shrink in size. You might further argue that there will be friction costs in transferring demand from carbon-intensive goods to low-carbon goods, then surely these two factors will slow economic growth. But that ignores the influence of innovation. Or as Schwarzenegger would say, for those of you who are so pessimistic about our economy, don’t be such economic girlie men.

I dislike using the innovation argument so broadly because it makes me sound like a capitalist fanboy, but it is well-supported by empirical evidence. If the above two arguments were true, every single time there was a supply shortage of some critical resource then the economy would nearly collapse. But it doesn’t, because people foresee the problem and come up with ways to overcome it. Take petrol for instance. The first time there was a massive oil shortage in the 1970s after the OPEC nations massively reduced their oil exports, it caused widespread inflation. Why? Two main reasons – firstly, people didn’t really expect it. Oh yes, there were foreign policy and economics wonks who said it was a possibility, but noone really thought it would happen so suddenly. A cap on carbon, however, has been in the works since before 1997 when Kyoto was first drafted. And many companies have taken steps to do this, for example investing in clean coal or diversifying their power supplies. Secondly, the 1970s were prior to the great deregulation that occurred all around the world, with Reagan, Thatcher and Keating. Without the great flexibility that brought, people couldn’t enact those brilliant plans of theirs to avoid this catastrophe. Everything depended on the government being competent enough to stop such supply shocks (eg. by negotiating with OPEC, or releasing their strategic oil reserve). If those measures failed, the market could do nothing to protect itself.

Now flash forwards to 2007-8. Oil prices once again hit record highs. Did the economy come tumbling down? Did inflation spike to record highs? No. Food prices should have gone up- consider how far food has to be transported from the farm to your doorstep, and how much petrol that uses. But they didn’t. Food producers did not absorb any price increases because they hedged their oil prices using oil futures (for the financially illiterate, this is like a form of insurance that locks in an oil price of $X for the future, so you pay $X regardless of what the actual price is in the future). Other companies used clever pricing equations to reroute their transport routes to minimise petrol consumption. BP apparently did this and the petrol savings paid for the cost of implementing that system in the first place. Even more companies stored oil, and sold it at those higher prices (thus increasing the supply of oil again). All these innovations could be seen on a macro level. There was no inflation (unlike the 1970s) and, when prices went up, demand went down. ie we used less petrol, because we learned to adapt without slowing economic growth too much. In other words, the trading system for oil (the futures market) acted as a giant shock absorber when the supply of oil suddenly ran short.

So this lesson alone teaches us that innovation can be a powerful tool that is often forgotten. An ETS fosters this innovation by directly rewarding those who use carbon more efficiently. It lets big polluters pay people to offset their emissions, spreading the costs throughout the economy to those who can most afford it, creating jobs at the same time to plant those horrible monoculture forests I talked about. When there are two polluters, Adidas and Nike, it rewards the one which pollutes less. This spur of innovation not only lessens the economic damage from a cap on carbon, it may even encourage new directions of growth. Think about how Toyota’s factories are now pumping out Priuses, whilst dirty old GM is being dismantled. I can’t say whether these forces for innovation will indeed be strong enough that they completely prevent inflation or prevent an economic slowdown. But I can say that economic doomsayers are just as bad (and just as wrong) as environmental doomsayers. A government-mandated cap on carbon is no different from the foreign mandated cap on oil that the world experienced in 2007-8. And I have faith that the global economy is complex enough to handle simply absorb the extra costs without too much hassle.

4. Will an ETS cost jobs?

The surprising answer to this is yes (in my opinion, I have no numbers to back me up). I was never much convinced by the argument that those workers who would lose their jobs in car manufacturing would be replaced by ‘Green collar’ workers. As part of my argument in (3), I said new industries would be formed, but there’s no guarantee that the number of jobs created in the new industry will match those lost in the old industry. In fact, I would wager that there are less. Solar power requires a lot less people to run than a coal plant, and a coal mine. They also tend to be jobs which require skill (like an engineering degree) rather than coal mining which simply requires on the job training, so you can’t simply fire the people from the coal plant and expect them to work in the new solar plant. This trend seems to hold true for most of the new industries created – carbon consulting/accounting etc. The only one I can think of that creates blue-collar jobs is planting forests to offset emissions. But again, its the march of progress. Factory jobs are being phased out everywhere, the carbon cap is just another reason to not work in a factory and to go to university.

5. Will an ETS hurt our farmers/our automotive industry?

Yes. That’s the point. We discourage carbon-intensive industries, and therefore hurt them. It’s a very obvious point but doesn’t always occur to people. The more important question is whether it will hurt our farmers more than farmers overseas. If there is a global cap and trade system, then all farmers are equally worse off which means no one is relatively worse off (in fact, Australian farmers are better off since we live in the driest areas and are most sensitive to climate change). In my mind, this should be the crux of the debate, not whether we should have an ETS but to structure an ETS so that it does not hurt Australian industries relative to the rest of the world. Our emissions may not count for much, but every country must do its part or no country will do its part and the entire world will go up in flames (not literally, I’m not a environmental sensationalist).

As a brief addendum, I should add that an ETS won’t hurt every farmer. As I said, those farmers who are more carbon efficient are relatively better off than their carbon-intensive competitors and they can grab a larger share of the market.

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2 Comments

  1. “Food producers did not absorb any price increases because they hedged their oil prices using oil futures (for the financially illiterate, this is like a form of insurance that locks in an oil price of $X for the future, so you pay $X regardless of what the actual price is in the future). Other companies used clever pricing equations to reroute their transport routes to minimise petrol consumption. BP apparently did this and the petrol savings paid for the cost of implementing that system in the first place. Even more companies stored oil, and sold it at those higher prices (thus increasing the supply of oil again). All these innovations could be seen on a macro level. There was no inflation (unlike the 1970s) and, when prices went up, demand went down. ie we used less petrol, because we learned to adapt without slowing economic growth too much. In other words, the trading system for oil (the futures market) acted as a giant shock absorber when the supply of oil suddenly ran short.”

    John, did you miss the whole ‘financial crisis’ thing? I hear it was pretty serious. 😛

  2. That was a year later due to entirely different reasons. (I emphasised 2007-2008). Although the stock market started wobbling in August 2007ish, but real economic growth did not really decline until late 2008. And by then noone blamed oil prices, everyone was blaming the collapse of the financial system itself.

    There were a few oil spikes between 1970 and 2009 that weren’t followed by recessions as well.


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