Climate change – Australian government further entrenches the market myth

I have very little time again today so I will have to type quickly. Yesterday, the Australian government announced it has scrapped its proposed $15 per tonne carbon price floor as part of the new Carbon Tax that it brought into law in July 2012. With the introduction of the carbon price in July 2012, the biggest polluters pay $A23 per tonne for the carbon they emit. The Government plans to allow this system (the Carbon Tax) to evolve into an emissions trading scheme (ETS) on July 1, 2015 so that instead of setting the price for carbon the government will set the quotas and let the market set the price. Yesterday, the Government made one significant change to their proposed 2015 move to an ETS. It announced that from July 1, 2015, Australia will partially link its carbon pricing system to the European Union Emissions Trading System (EU ETS). This move only entrenches the mistakes that are evident in the first proposal. Quite apart from the problems of a pure ETS, the schemes that are proposed are so politically compromised that their “market credentials” vanish. The problem of carbon emissions should be approached via rules-based regulation rather than a half-cocked neo-liberal market-based solution which will reward big polluters, lawyers and hedge funds.

Here are the media releases and fact sheets that the Government provided yesterday as part of its announcement.

In this document – What does a partial link between the Australian and European systems mean? – we learn that:

A partial link between the Australian and European systems is an interim step towards a full link no later than July 2018. Under a partial link, Australian businesses will be able to use European allowances to meet up to 50 per cent of their liabilities under the Australian scheme from the commencement of the flexible price period in July 2015. This will ensure that Australian businesses have access to a broader range of credible, low-cost abatement. The Australian emissions trading system will be in its initial stages and this will provide access to credits from a more established market to allow smoother introduction of emissions trading in Australia.

That is our big carbon polluters will be able to purchase half of their permits from within the EU ETS. So an Australian firm can use units bought from the EU ETS to satisfy compliance requirements in the Australian ETS. The Government claims that the principle benefits are that it reduces “the cost of cutting carbon pollution”, increases “market liquidity” (aka as providing more opportunities for hedge funds to manipulate currencies and other financial assets) and supports “global cooperation on climate change”.

The Government also said it:

… will not proceed with the implementation of its price floor and will limit the use of Kyoto Protocol eligible international units under the Australian scheme. In addition, Australia will set its price ceiling with reference to the expected 2015-16 price of European allowances.

The previous plan announced by the Government proposed a floor price of $15 per tonne, which they claimed would stop any price crash when the system was introduced in 2015 (note above: current carbon tax is $A25 per tonne).

Kyoto units relate to offsets which are calibrated in “eligible emission units” representing one tonne of carbon dioxide equivalent. Here is some information from the Australian government –
Eligible emissions units – about this issue.

Kyoto removal units (RMUs) are “issued by a Kyoto Protocol country on the basis of land use, land-use change and forestry activities under Article 3.3 or 3.4 of the Kyoto Protocol”. There are some restrictions on what activities can be engaged in these nations to earn RMUs (for example, establishing nuclear energy projects in some Kyoto Protocol country will not cut it – at present).

There are three types of “eligible international units”:

• certified emission reductions (CERs) from Clean Development Mechanism projects under the Kyoto Protocol, other than temporary CERs, long-term CERs, and CERs from nuclear projects, the destruction of trifluoromethane, the destruction of nitrous oxide from adipic acid plants or from large-scale hydro-electric projects not consistent with criteria adopted by the EU (based on the World Commission on Dams guidelines)
• emission reduction units (ERUs) from Joint Implementation projects under the Kyoto Protocol, other than ERUs from nuclear projects, the destruction of trifluoromethane, the destruction of nitrous oxide from adipic acid plants or from large-scale hydro-electric projects not consistent with criteria adopted by the European Union (EU) (based on the World Commission on Dams guidelines)
• removal units (RMUs) issued by a Kyoto Protocol country on the basis of land use, land-use change and forestry activities under Article 3.3 or 3.4 of the Kyoto Protocol, and any other international units that the Government may allow by regulation.

Whereas the original plan allowed up to 50 per cent of the permits to be sourced from these Kyoto units, the new proposal restricts that to 12.5 per cent. I will comment later on what all that means really.

The media reaction today has been focused on two issues:

1. That the European price might remain low (currently at $A9.80 per tonne) and so the market incentives to reduce carbon-intensive emissions will be low.

2. That the move will “blow a hole” in the Federal budget – The Sydney Morning Herald article (August 29, 2012) – Emissions trading easier to sell when it goes global said that:

Reducing or truncating the application of the $23 price would blow a hole in the budget in the immediate term and leave the government unable to pay the compensation and tax cuts that the carbon tax is funding.

The article also argued that:

PUTTING a floor price on carbon pollution when the carbon tax morphed into an emissions trading scheme in 2015 was always a silly idea.

If it were to be a fully-fledged trading scheme, linked to overseas schemes such as that in Europe, then an artificial $15 floor price would have been a major hurdle.

The problem is that the proposed ETS (and the present Carbon Tax) is so compromised with exemptions (from the tax) and subsidies (for those affected by the tax) that it is hardly a market.

The proposed ETS will generously exempt or compensate the heavy polluters and indefinitely exclude agriculture, which is about the largest emitter. The plan also will allow farmers to generate carbon credits (for sale) to other big polluter. The scheme is so politically compromised that its claim to be an “efficient market response” to climate change is a joke.

The end result will be no significant climate change response will be achieved but there will be some very rich companies, lawyers and financial market traders.

Please read my blog – Its all a matter of construction – for more discussion on this point.

The neo-liberals on bikes (The Greens) caved in (“compromised”) by allowing the floor price to be abandoned. They claim that the quid pro quo was the “reduction in the number of cheap permits companies could buy from developing countries”. Sure enough – but no offsets would be better. Please read my blog – Neo-liberals on bikes … – for more discussion relating to The Greens.

This Sydney Morning Op Ed piece (August 28, 2012) – European deal is a carbon PR coup – applauds the announcement but says that:

There are negative aspects to the move. It’s bad news for some hardened climate activists, who support climate action but not emissions trading. It’s also potentially bad news for those who support preserving tropical forests as a means of storing carbon, as the EU does not accept these credits into its scheme.

Count me among the “hardened” ones.

The ABC News report (August 29, 2012) – Scrapping carbon floor raises budget uncertainty reported that a Canberra Think Tank (Australia Institute) claimed that:

… the Federal Government’s decision to scrap the floor price on carbon is likely to lead to a hole in future budgets.

It is true that the Treasury carbon price forecasts, which were underpinning, in part, the Government’s obsessive pursuit of a budget surplus in the coming fiscal year are way to optimistic.

The Government has also said it will not withdraw any of the ridiculous subsidies it has given to households to essentially render the impacts of the carbon tax neutral. Which raises the question – if you believe in market-based solutions – then the price has to discourage quantity (in this case). By insulating consumers of carbon-based products from the tax where is the large substitution away from carbon-intensive products going to come from?

The Australian Institute claims to be progressive. Unfortunately their first statement on the issue merely perpetuates the neo-liberal myths pertaining to budgets. What exactly is a budget black hole?

Every day the government is crediting private bank accounts (directly or via cheque issuance) to pursue its socio-economic program. Each day also, they collect tax revenue by debiting private bank accounts (or writing receipts over counters to payees). The tax revenue is accounted for but “doesn’t go anywhere” in a physical sense.

A deficit arises when the spending exceeds the revenue and the net result is an addition of net financial assets (bank reserves). In achieving this outcome, the government hopes that its spending will boost aggregate demand (“finance” the leakages from the income-expenditure system), and, hence maintain high levels of employment and material prosperity.

The only hole I can see is one that needs to be filled. That is the spending gap – the leakages from the income-expenditure system – that are created when there is a CAD and/or a desire by the private sector to save.

Budget deficits should aim to fill that hole in and not allow aggregate demand to “fall through it”, which would lead to income and employment collapses.

If budget deficits are underwriting income growth, then workers can enjoying secure employment and achieve their saving desires.

Please read my blog – We are in trouble – squirrels are falling down holes – for more discussion on this point.

In 2009, I was one of the presenters on the special ABC Radio National Saturday Extra forum on the future for Australian coal. You can find a short film extract (13 odd minutes) from the Forum HERE and you can listen to the full 35 minute segment that they created from a meeting which lasted around 90 minutes HERE.

The following You Tube videos provide an edited version of the event – it is in two parts (to fit Youtube’s maximum 10 minute restriction at that time). The Federal Minister is featured in the first part with some energy industry players. I appear in the second part.

In general, I favour a rules-based regulation approach rather than a market-based approach to this issue. This is the first fundamental issue that has to be debated.

This distinction – choice – is not central in the public debate because of the dominance of the neo-liberal ideology. Even The Greens are not advancing rules-based regulation in any coherent way.

The important point is that carbon trading schemes (CTS) are neo-liberal constructs which start with the presumption that a free market is the best way to organise allocation. The Australian Government’s ETS fits into this box.

They recognise market-failure – that is negative externalities arising from the fact that the true cost of carbon use is not reflected in the final price we pay in the goods and services that rely on it and hence we over allocate resources to those industries. The ETS aims to reduce emissions through price incentives. But as I argue below they are deeply flawed as a result of their rationalist underpinnings.

The ETS amounts to nothing more than a privatisation of the commons asset which we call the atmosphere. I cannot believe progressive thinkers (including The Greens) would ever contemplate supporting such an approach. The ETS would create private property relations over public space.

In this blog – In this blog – Australia’s response to climate change gets worse … – I outline for non-economists how carbon taxes and trading schemes work.

As noted above, it should be obvious that if the government doesn’t allow the market to fully price the price of carbon – because it provides free permits or exemptions, then even within the logic of the market-based approach you will get market failure.

That is, the market outcome will not properly price the true cost of the carbon emissions and the process by which consumers change their demands away from polluting goods and services will be compromised such that there will be “too many” polluting and “too few” clean goods and services. Market efficiency in the mainstream sense can never be achieved under these circumstances.

The subsidies that the Australian Government is proposing to hand out (which exceed the revenue it expects to gain from permit sales) basically insulates petrol, electricity demand, coal exports, agriculture and more from the cold winds of reform. So while they claim they are using a market-based system that claim is fraudulent. The design of the proposed ETS actually makes a mockery of the logic of the market-based approach.

The European Commission introduced a quantity-based (capped) carbon trading system (CTS) with offsets. This is the scheme we are now proposing to link into.

Phase I of the EU ETS was a disaster when more permits were issued than there was pollution and the market collapsed from the excess supply of permits. Go the European leadership!

Phase II of the scheme was fatally compromised by heavy lobbying from large polluters who were able to gain under priced pollution permits. There was also a noted arrogance of the EU which permitted use of about 35 per cent of the global carbon dump while Europe has only about 12 per cent of World’s population.

The plan also introduced what was known as the Clean Development Mechanism (CDM), which was an offset system allowing polluters in Europe to invest in emissions-reduction infrastructure in poor and developing countries and then use the “offsets” to avoid undertaking more costly emission reductions in Europe.

These offsets are the same that I defined above.

There is ample evidence of the projects having disastrous effects in poor countries and regions. There has been very little technology transfer from the rich to poor countries. The projects undertaken have often brought civic leaders in poor countries into conflict with land-holders with the latter enduring significant reductions in their capacity to feed themselves.

The CDM accelerated the exploitation of local subsistence communities in poor countries. In addition, corruption and disregard from culture and community is rife in the creation of these offsets.

Australia is just joining the merry throng of post-colonial oppressors.

As time has passed, it is clear that the big winners in the EU ETS have been the heavy polluters and the hedge funds (at least prior to the crisis) while the losers have been consumers, the environment, and poor communities.

Market-based systems are insensitive to equity issues. The proposed ETS will hand out property rights to big polluters but there is no equity considerations built into this approach which is no surprise because markets are not equitable.

Moreover, markets are insensitive to biological systems. The mainstream economics approach is that you can pay for pollution through more growth. We have to generate wealth before we can clean the place up. Many progressives also believe this line.

Mainstream economic theories about resource efficiency are based on the idea of a production possibilities frontier where maximum output is obtained through some optimal mix of inputs (including pollution). The only thing you need to do is make sure the true costs of all resources are reflected in the mix.

That theory underpins the idea of an ETS. Cap schemes assume there is some known pollution level that is safe. But market systems do not know when a biological system dies – so we need to be more risk averse than economists would recommend. There may be a point – that we certainly cannot predict with any accuracy – beyond which there is no trade-off between pollution and other goods and services. After that point the planet dies.

This recent UK Guardian article (August 27, 2012) by George Monbiot – Along with the Arctic ice, the rich world’s smugness will melt – is apposite here.

He says:

What we are seeing, here and now, is the transformation of the atmospheric physics of this planet. Three weeks before the likely minimum, the melting of Arctic sea ice has already broken the record set in 2007. The daily rate of loss is now 50% higher than it was that year. The daily sense of loss – of the world we loved and knew – cannot be quantified so easily.

So the climate change science appears to be right – which means that major changes are required now. But structural change that are required will require us to leave most of the remaining fossil fuels in the ground. Systems governing transport, community organisation, agriculture, production and more will need to change – very quickly.

The ETS proposed by the Government – which is so compromised that it will, at best, lead to reductions of a few per cent per year are not consistent with the scale and immediacy of the structural changes required.

Conclusion

I would take a rules-based approach to reducing carbon emissions. I would not provide any further incentives to the coal industry to research clean coal. I would instead impose a sunset condition – industry closure regulation on the industry – say 2030 and if they can come up with a clean coal solution then well and good.

Meanwhile I would be fast-tracking investment in renewable base load generation capacity as a matter of priority.

While issuing the shut-down rule I would also increase the carbon tax in the meantime with no exemptions to force the industry to more realistically price the cost of production and to fast-track the entry of renewables. The funds raised would not “finance” anything – but reflect another important role of taxation in MMT – to alter the allocation of resources away from “bads”.

European Commission major conference – Jobs for Europe

The European Commission is holding its – Jobs for Europe: The Employment Policy Conference – next week in Brussels (September 6-7, 2012).

The Conference site says:

The conference will build on the Employment Package put forward by the Commission on 18 April and on the outcomes of the 2012 European Semester, but also on a series of conferences which the Commission organised during 2011 in order to explore new dimensions of employment policy, notably regarding the functioning of European labour markets, wage developments, flexicurity in a crisis context, and inequalities.

One of the five main topics is “Pathways to full employment: job guarantee, social economy, welfare to work”.

I have been invited to lead a discussion on the Job Guarantee – which as regular readers will know – is a pet topic and something I first started working on in 1978 as an honours student (fourth-year undergraduate).

The EC has prepared this document – Issues paper: Job guarantee – Concept and implementation – to inform the session I am presenting. It is an excellent sign that the EC is now considering core Modern Monetary Theory (MMT) ideas to be of sufficient merit to include as one of the main topics of this major European conference.

The draft program is available HERE.

While attendance at the Conference is “by invitation only” it will “be web streamed live”. When I know more details I will announce them here.

I am looking forward to it although more travel is pending! During this trip I will also go to Maastricht as usual this time of the year and then spend four days in London.

Then I will make a very big announcement!

That is enough for today!

(c) Copyright 2012 Bill Mitchell. All Rights Reserved.