Convincing arguments demonstrating how Australia has managed to elect an economically illiterate and incompetent government.

However one argument against the Labor-Green scheme has been missed out. If the "hypothesis" of man-made global warming is proved wrong, reversing an ETS will prove horrendous. We have seen how Farrell was unable to reverse the economically insane solar feed-in tariff. Trying to reverse the ETS with all its derivative markets created by the Finance industry will be much worse.

Another excellent article, thank you. I'm also less than ecstatic about the proposal.

Firstly, the overcompensation of self-funded retirees and low-income earners is clever because it undermines the potential complaints of some of the most vocalpotential opposition through simple self-interest. Further, it gives the Govt an easy concession should there be trouble in getting the bill up, which can always be blamed on the libnats. Clever, no?

Second, the increase in marginal rates for women returning to the workforce, as you so lucidly put it, can be specifically compensated later as a "gender equality" matter, allowing the govt to buy a few more votes with a big announcement of how they've "made Australia a fairer place for women" or some such guff.

One thing that you obviously like and I don't is that it will also create a large market for yet another nebulous derivative product that has no inherent value beyond the legislated one. Given the nature of markets, I can't see how this can avoid leading to some artifical skewing of industry based not on the genuine reduction in greenhouse, but rather on the carbon trading opportunities presented.

Moreover, unless some cost-effective, permanent means of sequestration of greenhouse gases (not just CO2)can be put into practice, I can't see any of this doing much to reduce the overall atmospheric load of them. Woody plants, in a world that will triple the human population over the next 40 years on best projections can only be a buffer at best. There is some promise in polymerisation using CO2 and NOx as feedstock, I understand

http://www.newscientist.com/article/dn18387-co2-in-the-air-could-be-green-fuel-feedstock.html

http://www.chemicalprocessing.com/articles/2010/133.html

As you say, it's hardly good policy, but then Australian politics stopped being about good management years ago.

The sentiments in Saul Eslake’s piece are sound but, as befits the thinking of an economist, he falls short when it comes to technology. The problem is all about where future energy will come from, not the economic strategies for getting there. As well, I think his global political projections are too optimistic and that too is tied up with the problem of future energy sources.

Eslake’s whole argument rests on other nations eventually embracing the need to reduce emissions, so it makes sense for Australia, dependent as it is on fossil fuels, to ‘start earlier and move more gradually’. Fair enough, but to what? That’s the question both Australia and the really big emitters face. And there’s no credible answer, which is a huge stumbling block that will trip us all up.

I’m not talking about the switch from coal to gas. That’s the easy bit. It’s the next stage, technologies to get down to below, say, 100 kg carbon dioxide per megawatt-hour for electricity, non-fossil liquid fuels for transport, substitutes for carbon in steelmaking and cement making, etc. That’s where the unknowns lie. As Eslake says, the Productivity Commission and the Grattan Institute have already found wanting the subsidies handed out to renewables like solar and wind. What they have really found wanting is the technologies themselves. The politics of CCS will probably kill it. Of course there’s still nuclear, but that won’t be a panacea, even after Australians come to their senses.

The premise for a carbon price is totally different from the GST. The GST was a way to restructure the tax base from income to consumption. Carbon pricing is all about driving us away from the energy sources that actually created the wealth of the industrialised world. This is not meant to romanticise fossil fuels. It’s just a fact. What is consistently being romanticised, of course, is the future role of renewable energy.

I wish I was wrong.

Its a little scary that this article is based on the incorrect pre-suppositions that:

1.Carbon Dioxide emitted by man is a 'cost' which must somehow must be factored into cost structures. This is convenient myth which serves sectional interest groups. There is no 'cost' in Greenhouse gases. This idea is being used to create a new false economy through which a legion of people, including dodgy Carbon Traders, will benefit and we, the public, will lose. Its a Ponzi scheme which will receive continuous funding from the public.

2. The second problem here is that Mr Eslake is taking his Economic advice from Scientists.

Quote:"However, if the majority of scientists are right, as I BELIEVE they are, the largest greenhouse gas emitters will eventually embrace the need to reduce greenhouse gas emissions." Why?

There is no convincing evidence that US or China will ever make significant efforts to do so. Reducing Greenhouse gases is an Economic strategy not an Environmental one, which is why Gillard continues to push it depsite the fact that no environmental improvement will occur. A prominent Economist should not take advice on international Economic strategy from 'Scientists' who he implies are unanimous yet does not name a single one.

Unfortunately, the idea underlying this whole article is that the globe is warming, we are causing it and we will all have to do something about it. Somehow giving our money to Al Gore will solve all our problems. Don't think so.

Saul Eslake shows at least more sense than most activists in acknowledging that the Australian carbon tax by itself will do nothing, even if it does succeed in reducing local emissions.. This remains to be seen, incidentally. It is difficult to point to any economy to date where any action by a government has reduced emissions.

If you look at the figures for Kyoto or the European ETS, the bulk of those reductions are due to the way the base line has been chosen (former Eastern Bloc countries), or because the economy has switched its power generation from coal to gas (UK).

This state of affairs may change. Other nations may impose a carbon tax and then discriminate against others which do not have one, as Eslake suggests. If that is the case, why not wait until it happens? Why must we be the first?

Surely the first requirement for an economist costing a policy is to make sure the policy is founded in fact? If Mr Eastlake is called in to audit a policy which involves raising dragons from eggs, one would hope that he checks whether dragon eggs are, in fact, available. But our economists have become so enthralled with the prospect of seeing large sums of money moving from place to place (the economist's equivalent of Trooping the Colour at Buckingham Palace) that they have neglected to check whether the money NEEDS to go anywhere, and what effect, if any, it is likely to have when it gets there.

Go back and try again, Mr Eastlake, and this time try to focus on the results rather than the process.

Eslake, of course. I should have checked. Mea culpa.

Saul
I see you've alterered you view from

"majority of Australian economists favor a ‘market-based’ solution"

to

'... 80% of Australian economists ... think that 'price-based mechanisms – taxes, subsidies or an emissions trading scheme – as opposed to direct action, are the more appropriate mechanisms for cutting greenhouse gas emissions'.

That's much more accurate.

But I think another question should also have been asked.

Do you think price-based mechanisms should be imposed by Government and the value determined by regulation or should the market decide both implementation and price?

If those stats show a majority of economists and you support Government implementation then Tony Abbott will look even more accurate with his comments last month about Australian economists.

I think I know how he as a conservative/liberal, non socialist economist would answer.

In response to "imajulianutter",

1) I don't think the difference between the quotes you've taken from this article and my previous one is as material as you make out. The latter is simply from the results of a survey of Australian economists which wasn't available when I wrote the first article.

2) As I said in the first of these two articles about climate change policy, if it's accepted that climate change is a problem which warrants some form of government intervention (and I acknowledge, as other posters in this thread have pointed out, that neither proposition is universally accepted - and I am not critical of anyone for sincerely holding a contrary position) then most economists (me included) would say that a government which favours intervention using a market- (or price-based) mechanism has to choose between setting the quantity of emissions to be allowed and allowing the market to find the price on emissions consistent with that outcome (which is what an ETS seeks to do), or setting the price of emissions and allowing the market to determine the level of emissions compatible with that price (which is what a 'carbon tax' seeks to do).

'Direct action' involves the government setting both the price (at zero) and the quantity of emissions. It is the approach favoured by, for example, China (a Communist dictatorship). It is not favoured by any more than a small minority of economists. That, of itself, doesn't 'prove' that 'market-' or 'price-based approaches' are superior to 'direct action', and Ive never claimed that. All I've said is that it's why Tony Abbott struggles to find any support for his approach from Australian economists. That obviously doesn't bother him - and that's a choice he's entitled to make.

For Australia to go it alone on a price on carbon dioxide or an ETS is economic suicide.If we truely believe that the burning of fossil fuels is destroying the planet,then don't mine coal oil or gas and allow it to be sold off to China etc.No, the corporate elites want to accelerate the production of fossil fuels and charge us the consumer more to secure enormous profits for themeslves.

The ETS is just another dervivative scam like the selling of credit default swapes,collaterised debt obligations,or sub-prime mortgage scams that have milked your super funds dry.That money did not disappear,it ended up in the pockets of the fewer.So the scams continue under the guise of saving the planet.

Under an ETS,only those businesses who have the capital to buy Carbon Credits will be allowed to pollute, thus manufacture.There will be less competition thus much higher prices for us,the consumers.

That charlton Al Gore,who said he created the internet,will be laughing all the way to the banksters if this passes as ligitimate science and sound economic policy.It is a farce and an absolute lie!

Saul has a very good point, the ALP has a shocking record of implementation. There are a series of good ideas that have ended up being monuments to incompetence.

The pink batts and Building the Education Rort being prime examples of concepts with merit that ended up lining the pockets of shonky contractors at the taxpayer's expense and leaving little of value.

The concept of a carbon tax has some merit, but only if it matches an equivalent price of our major trading competitors, which according to the productivity report is in the order of $4 per ton.

Instead we have a economy wide tax that will levy nearly 400x the revenue per capita of the EU which we are supposedly trying to catch up.

I don't think there's any need to invoke the Red Menace, Mr Eslake: "It is the approach favoured by, for example, China (a Communist dictatorship)". I understand China is also quite keen on economic development, which is the approach favoured by, for example, the whole world.

I also understand that there are many regulations that don't rely on giving financial traders yet another baseless derivatives scheme. think, for example, of regulation around waste disposal. The price of garbage is set (at zero) and the business is responsible for the cost of disposal. Failure to comply with disposal regulations is punishable by hefty fines. Now, certainly there are "garbage traders", such as Pacific Waste, Simsmetal, etc, but they have to actually deal in the product - there are no "garbage futures", or "garbage credits". Businesses have developed and new industries have evolved to use the garbage as a feedstock for the production of other things. We call this recycling. It was an industry that didn't exist in any serious form 20 years ago and now it is a multi-billion dollar behemoth.

I pointed out earlier that greenhouse gases have some serious potential as feedstock for the production of fuel and polymers. It's not especially complex to produce methane from CO2 and it even releases energy that could be captured in the process. Methane is an excellent precursor to many processes. At present, all our plastics come from fossil fuel feedstock.

It seems to me that the truly laissez-faire approach would be to regulate to make greenhouse gases a noxious waste product and make businesses responsible for their removal from the waste stream. As good innovative capitalists, don't you think business would soon come up with a way to make real dollars out of that, by turning it into something that somebody wanted? Presumably the ETS is predicated on the idea that someone will do this, or there's no point in creating it at all.

Can you please explain why you favour the imposition of an artificial intermediating layer of financial derivatives traders in that process

I think this comment from the CEO of Novomer, a company spun off from research at Cornel Uni in the US that produces polymers from CO2, says it best:

""You can't have a cheaper feedstock than carbon dioxide. You actually get paid to use it," Hamilton said."

Here's a selection of links to sites that discuss this further. I don't think any are Communist, but I won't make any promises.

http://www.fischer-tropsch.org/DOE/DOE_reports/68111/68111_toc.htm
http://news.cnet.com/8301-11128_3-9811962-54.html
http://www.nap.edu/openbook.php?record_id=10153&page=83
http://www.novomer.com/?action=CO2
http://oasys2.confex.com/acs/238nm/techprogram/P1260309.HTM

There are many, many more.

Is this tax on carbon really a tax on carbon. Or just a wolf in sheep’s clothing.
It maybe that the architecture of the legislation is simply set up to provide mechanisms to assist monetary policy through carbon taxing. This could be achieved easily by sectoring the economy within the legislation. Read the “Henry” report.
If, for example, the mining industry start to over heat the economy the mining sector carbon tax, could be increased and revenues from this could be distributed to other sectors of the economy “easing the burden”. No doubt some of the cream will remain with the Government.
IF, this is the case I can’t see a problem. The country needs to be able to control monetary policy with something other than nuking the economy with interest rates. Much more finesse is required in this day and age or we may feel the pain. Which too many Australians means losing the family home. This scenario is ludicrous when really there is no good reason for any family to be without a home in some form.

I readily concede - as "Antiseptic" makes clear - that the public at large is entitled to me more skeptical about an ETS in the aftermath of the global financial crisis, which the misuse and abuse of derivatives played a major role in inducing. And press reports (such as that on the front page of the Fin Review a month or so ago) that banks are salivating at the prospect of an entirely new set of derivative products to play with can only underscore that skepticism.

Since I haven't worked for a bank for (almost exactly) two years, I have no vested interest in promoting an ETS as a way for banks (and others) to generate profits. Rather, I do so from the starting point that if the level of emissions is the problem, then the 'least cost' way of reducing them is for the government to set progressively lower limits on emissions, allow markets to 'discover' the price of emissions consistent with those limits, so that some combination of profit-motivated capitalists and planet- (or humanity-)loving scientists can 'discover' the low-emissions technologies which will enable energy (and other things societies want) to be produced in ways that comply with the lower emissions limits.

As "Tombee" pointed out in an earlier post in this thread, like most economists I don't know much about technologies. The ideas "Antiseptic" points to may work: I hope someone is looking into them.

I would like to think (though I can't be sure) that the tighter regulation of derivatives proposed since the GFC will prevent some of the abuses and misuses which contributed to the GFC from being repeated under any ETS.

And I'm surprised that "Arjay" hasn't said (yet) that the solution to climate change is a government-owned bank.

Thanks for the considered response. I hope you don't feel the need to put in the previous employer disclaimer too much, I think enough time has passed for that wound to heal...

I can assure you that these technologies are being investigated, but I'm very puzzled by the lack of interest or even publicity for these efforts. It seems to me that we're putting a great deal of effort into creating complexity out of something that should be pretty simple and that bothers me.

Well since you are on the topic of banks Saul,perhaps you could answer a few simple questions.
1/ Why must new money be created?
Is it because of our increases in productivity or are the Central banks who create all this new money the source of all productivity?If Central Banks are the souce of new productivity,then we do not need other industries or even people?
2/ If central banks do create our increases on GDP as debt,does this not mean we are being punished for being productive? Under our system,the more productive we are the more debt we incur.
3/ Why cannot the RBA be the bank of first resort when lending.With GDP + inflation= 6%, on a $1.4 trillion economy the private banks create $86 billion per yr as debt.Why cannot our productivity increases get expressed as a tax credit via our own RBA?Of that $86 billion created from nothing (much borrowed OS) the RBA only gives a dividend of half a $ billion the Govt.This $86 billion represents our productivity.This is why we are forced to flog off resources for nothing so we can have sufficient money for our economy to function.

Would you allow you neighbour to steal from you Saul and then say I'll do you a favour.I'll loan your money back to you but you must repay it with interest.This is what the West has been doing for nearly 100 yrs ie allowing private central banks to create our productivity as debt.

Well since you are on the topic of banks Saul,perhaps you could answer a few simple questions.
1/ Why must new money be created?
Is it because of our increaces in productivity or are the Central banks who create all this new money the source of all productivity?If Central Banks are the souce of new productivity,then we do not need other industries or even people?
2/ If central banks do create our increases on GDP as debt,does this not mean we are being punished for being productive?Under our system,the more productive we are the more debt we incur.
3/ Why cannot the RBA be the bank of first resort when lending.With GDP + inflation= 6%, on a $1.4 trillion economy the private banks create $86 billion per yr as debt.Why cannot our productivity increases get expressed as a tax credit via our own RBA?Of that $86 billion created from nothing (much borrowed OS) the RBA only gives a dividend of half a $ billion the Govt.This $86 billion represents our productivity.This is why we are forced to flog off resources for nothing so we can have sufficient money for our economy to function.

Would you allow you neighbour to steal from you Saul and then say I'll do you a favour.I'll loan your money back to you but you must repay it with interet.This is what the West has been doing for nearly 100 yrs ie allowing private central banks to create our productivity as debt.

Mr Eslake, if you're still around, this is a review of the current technologies being investigated.

http://www.globalccsinstitute.com/sites/default/files/45071%20GCCSI%20Accelerating%20Report_INT_07_DTP.PDF

The scale of the potential industry is breathtaking. I urge you to have a look and to press the case for this to be part of Australia's future.