Friday, August 05, 2011

Carbon scheme is doomed to fail

Gary Johns

POLITICIANS never admit they do not have a solution to a problem. Call it "yes we can!" syndrome. As a consequence, some have vowed to decarbonise their economies to save the environment from climate change.

The Czech Republic president Vaclav Klaus reminded the audience at a luncheon this week of the boast of former communist rulers of Czechoslovakia, "we control the wind and the rain!" Such hubris is alive and well.

Those nations headed down the carbon abatement path have asked economists to seek the most cost-effective means of doing so. The predictable answer was to price emissions. The trouble is it cannot succeed. A paper by David Campbell and others, After Copenhagen: The Impossibility of Carbon Trading, tells why.

The Kyoto Protocol carbon trading scheme has failed because while there may be a loose cap on emissions for developed countries, without a cap on all other countries the trade between the two is uncapped, so there is no overall emissions reduction. To illustrate, at the end of the Kyoto's first commitment period 2012, the increase in China's emissions will be in the order of 1000 per cent of the total reductions the developed countries were to make under Kyoto.

Further, the promises made after Copenhagen have no legal basis and refer to reductions in carbon intensity, which almost certainly will mean growth in absolute emissions. Any promises made are less credible than Kyoto itself, which was not credible. Pray tell us then, Prime Minister, what is the point of your carbon tax?

Forget about whether Australia is at the head of the pack on carbon pricing, it is, in fact, at the back end of a failed abatement experiment. And neither Australia's physical contribution to carbon abatement nor its "moral leadership" can help. China, India, Brazil and myriad others need to raise the standard of living of their people or risk political instability. (War and insurrection can damage the environment too.) So these countries will never agree to carbon reductions sufficient to allow the world to stay within the 2C limit we are told is essential. They have each given economic development explicit priority over reduction of emissions.

Speculation the Chinese will pursue a 40 per cent reduction by 2020 and commence an emissions trading scheme is about as credible, and indeed would be as destructive, as any of Chairman Mao's five-year plans. Consider these numbers. In 2006, China had 350 gigawatts of coal-fired power generation capacity. It plans to install an additional 600 gigawatts (plus transmission and distribution systems) by 2030. To put this into context, in 2008, the entire coal-fired power generation capacity of the US was 313 gigawatts (31 per cent of total US power generation capacity). By 2030 China plans to install additional coal-fired power generation capacity equal to almost 200 per cent of existing US capacity.

China is responsible for more than half of the growth in global emissions. And since 500 million Chinese live on less than $2 a day, it is pretty clear what China will be doing for the next 50 years. China has signed multiple 25-year contracts to purchase LNG from Australia and elsewhere. It is building more coal-fired power stations than the world has ever seen and, despite the fact that it is one of the world's biggest producers, it is importing coal, such is the appetite for energy. These power stations will operate for decades, well past Australia's romantic target of reducing emissions 80 per cent by 2050.

Last week former British prime minister Tony Blair said: "It is absolutely clear the world will move away from carbon dependence." Not quite.

As the Campbell paper says, Britain's policy under the Climate Change Act 2008 requires rates of "decarbonisation" of the national economy that "are impossibly costly to achieve. Nevertheless, that what is being pursued is impossible does not mean that immense costs may not be run up in the course of the doomed effort."

If politicians swallow their pride and ask a different question of the economists, they get a very different answer. Bjorn Lomborg did so some years ago. "If the global community wants to spend up to $250 billion per year over the next 10 years to diminish the adverse effects of climate changes, and to do the most good for the world, which solutions would yield the greatest net benefits?"

Numerous Nobel Prize-winning economists agreed on a priority list showing the most and least effective ways of reining in temperature increases. They concluded the most effective use of resources would be to invest in:

* Researching solar radiation management technology

* Technology-led policy response to global warming designed to develop green technology faster

* Researching carbon storage technology

Cutting emissions now is too expensive and politically infeasible. Cutting in the future when the technology is available is cheaper and feasible. As for abatement, as Campbell says, "action in pursuit of the impossible is irrational".


A bloated city hall

FOUR years since Melbourne City Council axed 143 staff after a scathing report warned the council was "top-heavy" and going broke, the council has more highly paid senior officers and more staff than it did before the purge.

It employs more highly paid staff than any of the state's largest bureaucracies - including the Education, Health and Human Services departments, the police and VicRoads.

"Melbourne City Council is overstaffed, over budget, in debt and nothing is being done," Ratepayers Victoria president Jack Davis said. "It is a gravy train and those at the top are reaping the benefits of ratepayers' generosity."

Mr Davis said Lord Mayor Robert Doyle and chief executive Kathy Alexander owed an explanation of why they had not heeded advice to downsize - advice the council paid $300,000 for just four years ago.

The 2007 Ernst & Young report found council had too many highly paid executives, sparking mass sackings, including many managers, to save money.

The number of staff paid more than $120,000 fell from 63 in 2006-07 to 50 in 2008-09 but had since jumped to 68. Overall staff numbers have swollen from 1129 in 2006-07 to 1253.

The council has also suffered a $200 million budget turnaround, plunging more than $26 million into the red last year.

Dr Alexander said the increase was consistent with demand driven by population growth and the inclusion of Docklands and Kensington to the city.

She also defended the city's finances, saying last year's deficit resulted from a one-off asset transfer - the handing of the $74 million Yarra Park to the Melbourne Cricket Ground Trust - and that the underlying result was a surplus of $15 million.

She said council was set to record a further "underlying" surplus of $19 million for 2010-11 and was the only council in Australia to hold the highest possible AAA/A-1+ credit rating.

Dr Alexander is one of the state's highest-paid bureaucrats. She earns about $425,000 - more than Prime Minister Julia Gillard ($351,000) or Premier Ted Baillieu ($349,000).

Municipal Association president Bill McArthur said all councils needed a workforce that could deliver diverse services.

"There's a great level of resources and expertise at the City of Melbourne that many other councils can only dream of and we'd welcome them back to the MAV to share," he said.


The absurdities of consensus

By Professor Judith Sloan (an economist)

I belong to one of those professions for which there is supposedly a 'consensus' - on using a carbon dioxide tax or an emissions trading scheme as the most efficient means of reducing the growth of emissions.

To suggest that more information is required, because the proposition may be more a half-truth than a truth, is not allowed. It is a case of being in or out, being with it or not with it.

When filling out the survey conducted by the Economic Society of Australia dealing with this topic and other economic statements, I found myself circling the 'do not know/no opinion' option in most cases. Without additional facts, it was simply not possible to reach a definitive conclusion, let alone agree or disagree strongly.

Notwithstanding this significant qualification to the methodology, much has been made of the so-called 'consensus' among Australian economists on the carbon tax. Indeed, this idea of 'consensus' is being used as a political weapon to disparage anyone in the profession who dares to express an alternative point-of-view.

The clear message is that if you are not part of the 'consensus', you are an idiot and no-one should listen to anything you say. Well, count me out of the 'consensus', because bald statements about complicated policy issues should never generate only binary possibilities - agree or disagree.

The then secretary of the Treasury, Ken Henry, last year tried to corral Australian economists into some sort of phoney 'consensus' about the proposed mining tax, the Resources Super Profits Tax (RSPT). While enjoying the contest of ideas within the economics profession, he declared that, "I think there are occasions on which economists might, at least for a period, put down their weapons and join a consensus."

But why, Ken? It was a complete dud, both in theory and particularly in terms of implementation. Not only were the assumptions on which the proposed RSPT - a Brown tax - completely unrealistic, its application to existing projects meant that there was no way that the impost would only be taxing resource rents. (To be slightly technical, quasi-rents would almost certainly have been taxed as well.)

The bit I really liked about the proposed tax - note my ironic tone - was that the Government would not actually be ponying up its 40 per cent share of expenditures of mining projects - after all, the fiscal position was getting pretty tight - but rather would provide companies with an IOU that would be inflated annually by the risk-free long-term bond rate.

The companies could then use these IOUs, so the argument went, to secure project finance at this rate and without any transaction costs. So even though the Government didn't feel as though it was in position to hand over the cash to the companies at the time, financial institutions could be 100 per cent confident that the Australian Government would pay its full obligations in the future. Go figure.

And when a senior economics journalist asked Ken Henry to explain how the imposition of this tax would not affect the incentives for mining companies to invest, he was handed two pages of algebra. Some consensus, Ken.

A necessary accessory of 'consensus' in the professions has, for some time, been the multi-signed letter, printed in the quality mainstream media. An early high-water mark for the global economics profession was the 364 economists in the UK who signed a letter in 1981, stating that there was "no basis in economic theory or supporting evidence" for the budgetary policy of the Thatcher government. Indeed, the letter contained a warning of a potential threat to "social and political stability".

As events panned out, these eminent economists - one is the current governor of the Bank of England - turned out to be wrong - dead wrong, in fact. Inflation was controlled, interest rates fell, the exchange rate adjusted, the budget was brought back into balance and, after a lag, the rate of unemployment fell. Investors began to believe that the UK government would stick to its guns (and resist the idiotic advice of the economists) and the British economy experienced a period of remarkably strong growth.

One of those economists who signed the letter, Professor Steve Nickell, now says that he did not agree with all the content of the letter but signed because it was "the only game in town". I guess that's what happens if you want to be on the 'right' side of the 'consensus' divide.

Like-minded Australian economists have also developed an affection for the multi-signed letter. There was one assembled to support the RSPT, one endorsing the Labor Government's stimulus spending and one to support the carbon tax. Not surprisingly, there is a fair overlap in the names on these letters.

Presumably, the principal purpose of these letters is to support the Labor Government in its bold, daring but correct policy initiatives, by lending the authority of a group of wise economists of renown to the cause. Indeed, the letter supporting the stimulus spending (which bravely mentioned the spending on roof insulation and the BER) ended with this little homily: "We hope that the economic achievements of the Australian Labor Government will be recognised by the population."

Of course, the more the merrier when it comes to these letters. The 50 who signed the stimulus letter was perhaps a bit disappointing and the numbers for the other two letters was lower again. Even so, it is important to create the illusion of 'consensus' within the profession because then those who have not got with the program can easily be labelled as imbecilic and out-of-date.

Perhaps the most extreme example of a fracturing of a consensus within the economics profession is occurring now in the United States, even though the possibility of a federal government default has been averted for the time being.

In the one corner are the Keynesians, typified by Paul Krugman, who regard any cuts to government spending as a guaranteed route to higher unemployment, double-dip recession and possibly depression. In the other corner are the economists who argue that the stimulus spending has failed, that there is no alternative to reducing the deficit and paying off the debt. Only in this way can there be a crowding in of private sector spending which will ultimately provide the basis for a sustainable economic recovery.

The surprising thing about this whole consensus thing is that anyone should ever have thought it could apply to economists. By reputation, they are one of the most divided professions and jokes abound on this very point. But the real issue is this: most public policy issues are complicated and nuanced. It is not possible to reach definitive and simple conclusions - it all depends - and we should not kid ourselves otherwise.


An economist who is good in theory but on the lunar Left in practice

THE prolific John Quiggin was honoured as a distinguished fellow of the Economic Society of Australia last month, ranking him among great economists such as Colin Clark, Trevor Swan and Leslie Melville. This recognises the 55-year-old University of Queensland professor's internationally published academic work, beginning with A Theory of Anticipated Utility in the Journal of Economic Behaviour and Organisation in 1982.

Mainstream economics assumes that individuals are by and large self-interested and respond rationally to incentives. But a newer stream has diverted around the observation that they're also only human, can be swept up with the crowd and are not always strictly logical. People buy lottery tickets even though on average they would get higher returns investing their money elsewhere.

A mathematics whiz, Quiggin formalised how people can attach a greater weight to unlikely but life-changing possibilities, from winning the lottery to catastrophic climate change. His theory was recognised by the Nobel committee that awarded its 2002 economics prize to Israeli-American psychologist Daniel Kahneman. Another Nobel laureate, Paul Krugman, last year used his New York Times column to plug Quiggin's book Zombie Economics, an assault on the policies blamed for the global financial crisis.

And yours truly commissioned Quiggin (along with The Weekend Australian's Christopher Pearson) to write a column in The Australian Financial Review in the mid-1990s. That's still going, along with the personal blog he started in 2002. And this is where the considered economic theoretician tips over into Green Left Weekly polemics.

Amid musings on what Karl Marx did and did not get right, Barack Obama is clearly far too centrist. Julia Gillard has sold out Labor values by promoting equality of opportunity rather than equal outcomes. Queensland Premier Anna Bligh and Treasurer Andrew Fraser should be sacked for privatising government businesses. Union boss Paul Howes is promoting tired and failed ideas. John Howard forced workers to trade away their human rights to get a job.

It steps up a notch with Rupert Murdoch and, to use Bob Brown's description, the hate media of The Australian. Jumping on the News of the World phone-hacking scandal, Quiggin claimed in the AFR last month that "the power of News Corporation and the shamelessness with which that power is used to promote the political and commercial interests of the Murdoch empire is even greater here than in the UK".

Even wilder, the unedited blogger refers to Murdoch's "corruption" of Australia's political process. The newspaper you're now reading is "filled with lies" aimed at furthering Murdoch's political and commercial interests.

The Australian is a "worthless gutter press rag". It is a "sad joke", even if the "downward spiral" of The Age and The Sydney Morning Herald means there isn't much competition. It is "part of a political machine, using its power and wealth to crush its opponents and critics by whatever means it finds most convenient".

Murdoch's readers "have demonstrated, over and over, that they prefer comfortable lies to inconvenient truths". That's because "everyone is increasingly aware that truth and falsehood are no longer meaningful terms for those on the Right".

Yet it's hard to see how The Australian furthers Murdoch's commercial interests apart from selling newspapers. If it aims to buy or bludgeon commercial favour, it hasn't worked. News Limited has made little headway in its corporate push to ease the sport programming restrictions for its pay-TV interests.

Late last week, I pressed Quiggin for some examples to support his commercial agenda charge. He pretty quickly started talking about Kerry Packer. Like Stephen Conroy, Quiggin also doesn't seem to grasp the nature of journalism and newspapers, such as with his claim that News Limited has run "blatantly fact-free political campaigns" on climate change and Labor's fiscal stimulus.

The budget stimulus contained some of the worst government spending programs in the nation's history. Along with talkback radio, The Australian led the media in exposing this. The paper's Anthony Klan was shortlisted for the Graham Perkin Journalist of the Year award for his series of reports on Gillard's $16 billion Building the Education Revolution.

On climate change, Murdoch has backed giving the planet the benefit of the doubt. The Australian supports putting a price on carbon over Tony Abbott's direct action. But the journalistic default should include some scepticism over whether scientists can accurately predict the climate decades ahead. And the Productivity Commission, the institution most responsible for the reform agenda behind Australia's modern prosperity, clearly has issues with the Labor-Greens carbon package.

Quiggin's real complaint is that The Australian remains an agenda-setting newspaper that is closer to the nation's centre of political gravity than he is. The newspaper wasn't so dishonest and partisan when it campaigned for a "yes" vote in the 1999 republic referendum, punctured Howard's boat children overboard claim, led the media pursuit of the AWB scandal and supported a vote for Kevin Rudd in 2007.

Quiggin no doubt deserves his distinguished fellowship for his theoretical work. But some may puzzle that, just as the warnings mount over the stalling of the 1980s and 90s economic reform agenda, the Economic Society honours someone who fought against the agenda in the first place. Zombie Economics argues it should be junked because "ideological" policies such as privatisation and central bank independence will cause another global financial crisis.

Fortunately, few took notice of the Whitlamesque claim in Quiggin's co-authored 1994 book, Work for All, that "severe restrictions" on government spending were partly to blame for the growth of unemployment since the 1970s.

Quiggin's coffee-sharpened mind can readily poke holes in the theoretical foundations of modern economics. But now he writes that Labor is no longer obliged to treat The Australian and other Murdoch newspapers as publications that seek to more or less report the truth of what they cover. So, as a first step, their corporate owner must be cut down to "a more manageable level".

As the PM ought to say to Quiggin and others calling for government to intimidate the press, don't write crap.


1 comment:

Paul said...

An "underlying surplus". Love that one. We all have an "underlying surplus", its just those constant streams of pesky "one-offs" that prevent the glory of our "underlying surplaces" (surpli? Mr spellchecker) from casting their radiance upon our miserable lives.

Maybe we just need more "seasonal adjustment".