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L. Ron Hubbard Can’t Save Your Life

July 12, 2011

I’ve been at a loss as to how actually write a blog as of late – I’ve got far too many ideas that spread too thin and overlap too much, and I often get interrupted when writing. I also lost 300 words recently, which were a crucial 300 words and really killed my enthusiasm for blog writing for a while. Oh and I went to Melbourne. So here’s something topical (somewhat of a rarity on this blog) which I can actually comment on: the Carbon Tax (that is actually an ETS).

I’ll make clear my distaste for ETSs. I’m personally sceptical of the necessity for derivatives markets – much of the time it does resemble a simple 50/50 gambling, you either win or lose. Now I do understand that derivatives do have a use – their traditional purpose was to secure the price of X tonnes of Y at a price you felt was desirable or at least fair, so that in a year’s time or so, you know you have X tonnes of Y without having to worry about the market price.  Whether it goes up or down is irrelevant to you; you’re more interested in actually securing the physical product. That’s only in theory however – often derivatives are simply used as financial gambling tools, more respectfully titled ‘speculation’. It’s common knowledge that in the last 20-30 years, financial trading of all kinds, but particularly derivatives, has absolutely sky-rocketed, given the regional and global integration of financial markets. Now this is no real issue in and of itself, but there is a reason why the last two major crises, in 1997 and 2008, both carried the word “financial” in their title. Speculation requires regulation, and such monumental increases in trading and value as well as their notable contribution to two crises (and more to come) lead to me conclude that there is not nearly enough regulation present.

So when it is proposed that we create a new, highly-important market for financial securities as a mechanism to prevent the most realistic threat to not only our ways of life but also our whole societal structure, pardon me if I consider it a tad suspect. ETSs rely strongly on assumptions of perfect competition, or at least perfect information; neither of which are particularly feasible. It ignores any real element on uncertainty, and the development of any international trading scheme is unlikely to occur and even less likely to be effective. I stress: ETSs are an economic rationalist response to the issue of climate change – if there is a market externality, then internalise it. Internalising is economic slang for “put a price on it”.

This isn’t to say that we shouldn’t put a price on it. For all my distaste for economic rationalism, parts of it are quite rational. You want people to use less of X? Make X cost more. Whether it’s demand elastic or inelastic (you would of course prefer the former), you’re still going to get people to use less of it. The issue is when you integrate this mechanism in such a decentralised way, which works perfectly when you assume that everyone plays fair and understands the rules, not to mention exemption from political concerns. Unfortunately, in the real world we’ve seen how disastrous financial markets can play out to be. Thus to me it seems far more appropriate to simply tax carbon emissions, not to deal with the huge fuss of an ETS which achieves largely the same goals. Perhaps ‘more efficiently’, but even disregarding the above reasons, any real improvement in a perfect world would be ever so slight. So while I am pleased Gillard’s government has adopted a carbon tax, I am disappointed that it is not permanent, but rather simply a stepping stone towards an ETS that I think will really do few people very much good.

Furthermore, it has to be strongly emphasised that simply internalising this externality does not complete the job – there needs to be significant expenditure and investment in renewable energies. Conveniently enough, a carbon tax not only increases the price of emissions, but also generates revenue for the government, creative a virtuous cycle in which the more that’s polluted, the more pain industries face and the more that’s invested into alternate forms of energy. Unfortunately this cycle remains largely theoretical, as the government is not gaining any revenue from the carbon tax, but in fact stands to lose $4b over four years. While somewhat politically motivated to provide compensation for not only households (which is sound politically and also prevents from consumption from falling very much) but also businesses, the extent of compensation for both is bordering a tad on ridiculous, especially given subsidies to some of the worst polluters, such as Victoria’s brown coal mines, which well and truly deserve to be shut down. Thus, while we are well and truly putting a price on carbon, Gillard’s claims that it is no “silver bullet” are frankly contradictory to Labor’s policy stance. Even if households were to be compensated as much as they are, the amount of business compensation is ridiculous, and was one of the key concerns for the EU when they instigated their ETS in 2005 – far from providing too little, the carbon price was far too low for many years. This is what happens when politicians take lobbyists at face value.

The starting target of $23 is alright – I’m just so grateful it was above $20. As it’s currently modelled by Treasury (and I for one share Tony Abbott’s criticism of Australian economists – the good ones are few and far inbetween, as despite sound management, most are typical neoliberals), it seems that it will cost few jobs. Will it make much of an impact? At first no, but the goal of 5% by 2020 is so ridiculously small that it’s hardly surprising. Regardless, it stands to potentially get stronger in the future, particularly if the Greens gain more control over the House in the next election.

If this were simply a carbon tax in and of itself, I’d give it a solid 7/10, just for it being a damn carbon tax that we can implement, people can realise it’s not the end of the world, and we can then fiddle as need be. Considering however, the over-compensation for businesses, I’d give it a 6/10. Yet, this doesn’t take into account the sinister nature of the ETS that may very well become an economic reality in a few years’ time. We’ll simply have to see what happens. Fortunately, Australia is a relatively well-regulated nation, so maybe we’ll be okay.

In any case, my only criticism is that it should be tougher. Gillard and her team deserve a pat on the back for their efforts. Maybe this time there won’t be a knife in their hand.

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