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The Forum > Article Comments > Too much faith in the market > Comments

Too much faith in the market : Comments

By Sharon Beder, published 18/7/2008

Why do we put so much faith in the market to solve environmental problems?

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I agree with Sharon that we place far too much faith in the market and that we need strong government leadership and regulation if we are to make the switch to renewable energy. It will never happen in time if left to the market and yet by the same degree I can't imagine us ever having a government with the political will necessary either. Our only hope is a Greens led government and unfortunately I can't see this happening, considering the corporate fire power constantly levelled at the Greens to deliberately discredit them and undermine their influence.

"Nevertheless, there is a limit to what can be achieved in Germany because electricity has been privatised, which precludes direct intervention and investment by government."

We're in exactly the same situation here in Australia. Power companies are driven by the profit motive which means they need to generate as much power as possible and as cheaply and quickly as they can. If we're to cut emissions, they should be aiming to reduce overall consumption of power rather than increase it. There are so many ways we could be doing this which would collectively make a real difference, but it will never be a process led by private providers.

When our electricity provider was privatised, we relunctantly opted out of the Green Choice power we'd been consuming for many years, because the cost to achieve the same level we'd been on was going to double. We're now on the lowest "Green" option there is, but we're paying more overall for our power than we were and we've had to watch our greenhouse gas emissions increase. Instead of encouraging people to switch to renewable power, this company is actively discouraging it, and I can't imagine other private providers being much different.

Part of the government's present predicament is the fact that too much power and freedom has been handed to the market over the last few decades. And now, as Sharon points out, even when government can see what needs to be done, it is powerless to achieve it.
Posted by Bronwyn, Friday, 18 July 2008 11:26:39 AM
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There’s that ‘faith’ word again. Faith is a word for religionists and other people who believe in the non-existent, and others who believe somebody they don’t know just because they have a degree in science (in relation to climate change). Like religion, one brand is better than the other, they seem to think, totally ignoring contrary opinion from equally qualified scientists.

“There has been no mass shift to public transport”, claims the author. Only last night, the Adelaide news was that there had been a 70% increase in the use of buses, and more buses are being acquired. In this case, the effect of market forces can be proved. The SA government IS intervening, as called for by the author.

Market forces, unlike faith and conflicting scientific opinions do work. Many people are using their cars less; if the price goes higher, more will opt for public transport.

Having been gulled into believing the emissions theory, however, Rudd is hypocritical by softening the blow for motorists. Emissions from cars are either dangerous or they are not. Rudd seems not to be sure of anything with his climate change ‘solutions’.

Sales of large cars HAVE declined, and hybrid cars have proved to be no real alternative to small petrol only cars.

As the author suggests, an emission scheme will NOT work. The idea that it would is another example of ‘faith’ in unproven science.

This paragraph of Professor Beder’s is true:

“An emissions trading scheme will see the price of electricity and manufactured goods go up but that is no guarantee that the market will invest in alternatives, especially if polluters can pass on the extra cost to consumers, buy up environmentally dubious offsets, or be compensated for extra costs that might damage their international competitiveness.”

We will all be paying more for necessary commodities, but there will be no change in the climate until it changes in its own good time, even when market forces work to lower our consumption and living standards.
Posted by Mr. Right, Friday, 18 July 2008 12:25:02 PM
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The author is economically illiterate.

Firstly, she fails to understand that an emissions trading scheme is BOTH a market mechanism AND a regulatory one. Because it is mandatory it will deliver whatever cuts the government’s cap determines.

Secondly, she assumes only emissions reductions achieved through a carbon price will impose costs on the community. In reality, an emissions trading scheme will deliver our emissions-reductions targets at the least cost. If government mandates that we use more expensive means to achieve our targets then we will be worse off as a community, whether we pay the extra costs in higher taxes or higher fuel prices.

Thirdly, as Mr Right points out, she will not acknowledge that people and businesses can, and do, respond to prices incentives. Behaviour is already changing, and over time will change some more. Why should businesses invest in energy-saving technology because energy prices are rising? Because it’s profitable, just as Britain and Norway invested in North Sea oil production last time there was a serious oil price spike.

Fourth, she claims that “high price for carbon credits has to be stable enough over time to encourage long-term investment in renewables.” In reality the private sector invests every day in things whose long-term price is unpredictable – coal, gas, iron ore, nickel, alumina all have roller-coaster commodity price cycles but no lack of investors.

Finally, the author says that the market will not invest in public transport systems and cycle ways, land-use planning, car emission standards etc. Quite true. But these are all everyday examples of public goods that even the driest economists would agree should be provided by governments. As far as I’m aware no-one has suggested that we should have an emissions trading scheme INSTEAD of these things.

They’re not perfect, but the underlying principles behind both the Garnaut Review and the Green Paper are spot on - let governments do what governments do best (provide public goods and regulate to address market failures) and let the market do what it does best (direct resources to their most productive uses at the least cost).
Posted by Rhian, Friday, 18 July 2008 4:12:45 PM
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The author wants greater govt intervention and then laments that the ETS in Europe hasn't worked. But isn't the ETS a govt intervention? Given that govt interventions often don't work, or yield perverse outcomes, its not surprising.

"Why do we put so much faith in the market to solve environmental problems? Why do we assume that increasing the cost of fossil fuel emissions will reduce their use rather than just increase everyone’s cost of living?"

To answer the first question: because govt solutions are usually worse than market solutions. And the second: although the price elasticity of demand is low, nonetheless people are beginning to conserve fuel, not only in Australia but in most developed countries (even in the USA). The only countries that are not conserving fuel are those that have govt subsidies - which further proves the point that demand does respond to prices.

Higher prices will eventually reach a tipping point where the cost of alternative energy sources become competitive. The problem is that the cost of those alternatives is so high that it will require much higher fuel prices to match them. So it is not the case that "the market has not been able to provide the alternatives required" but rather that the "alternatives required" are too expensive, relative to what is used now.

I think Prof. Beder understands this as she recognises the lack of political will to push prices up to the tipping point. And "We are fooling ourselves if we think there is a cheap solution to global warming". But how much pain will people endure before they say "enough is enough?"

Australians are being told that the pain of higher prices is worthwhile because it will help to slow climate change. Or as the PM puts it: the cost of inaction is greater than the cost of action.

I am growing increasingly skeptical of this assertion. Exactly what are the costs of action? And what are the costs of inaction? Will the world in 100 years time be really so terrible, just because it is a few degrees warmer?
Posted by bro, Friday, 18 July 2008 5:46:58 PM
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Having just returned from a motoring holiday in the UK, I feel qualified to make some comments.

The Poms are suffering a good deal of pain, with petrol at just under A$2.90 and diesel $A3.10 per litre, in a large part due to the greater excise. At this level of pain, they have switched to smaller capacity diesels as their greater efficiency offsets the higher price. This transition is more noticeable in the cities and I noticed that the faster, apparently well heeled drivers on the motorways still drove larger cars. I suspect that we will probably need a somewhat higher price for petrol than currently obtains, before we see a similar change here.

They also have a much better rail system than we have with really fast , (try 180 kph) high speed trains to regional centres, and much more frequent services on the underground. (two minute intervals).

A similar scenario also seems to apply in France, with even smaller cars such as the Mercedes Smart Car, and an efficient Metro rail system.

I would suggest that it has taken an original government initiative, in the form of even higher excise, to force the market to respond, whereas, the Australian government's plan to ease the motorists pain will actually have a counter productive result to that which is desired.

On the other hand, Dubai, with its petrol at below 50 cents a litre, still has a predominance of larger cars and they have only recently got around to building a monorail system to cope with the ever increasing traffic problems. This project is due to be completed next year. The Emirates seem to be "going to Hell in a hand cart" as far as the environment is concerned, with the advent of high rise air conditioned buildings expected to not reach a peak until next year to cope with the expected throughput of 70 million people each year at Dubai airport.

Posted by VK3AUU, Friday, 18 July 2008 6:09:33 PM
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They were never serious about it, thankfully folks are saying so. As you point out, their scheme has a doubtdul provenance, but they do it anyway.

Economics is the reason they're travelling this path. Govt is working this angle masterfully to expand its cash grabbing tax base. Plus the financial markets always appreciate a new crap-shoot, a bit of dislocation and distortion. It keep their wheels spinnning.

This is the consequence of an electorate that thinks with its heart more than its head. Pretty much anything goes if ya get the narrative right, awash in its self serving contextualisations. Stoked by half truth and liberal dashes of sentiment and afectation.

The truth doesnt seem to interest people. All that matters is how something is said.
Posted by trade215, Friday, 18 July 2008 7:22:20 PM
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