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Alan Moran’s carbon tax contradictions

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The Institute of Public Affairs (IPA) has existed for around 60 years as a foundation of the conservative side of Australian politics. In the last 30 years especially, its strongest associations have been with the economic neo-liberal movement and with the powerful export-oriented mining corporations. It has been a consistent opponent of action to abate greenhouse gas emissions.

This post responds to Alan Moran’s latest piece on climate change policy as published by the newletter, On-LINE opinion. Alan Moran has for a long time occupied an influential position as head of the De-regulation unit in the IPA.

On-LINE opinion has rejected my critical comments on Moran’s stance on stylistic grounds: as having an unconventional format and being too lengthy. As regards the former, I take the view that point-by-point adversarial debate has vital functions. This form of ‘engagement’ is hardly likely to bring about substantive changes (as distinct from rhetorical ones) in the adversary’s position. That is not the intention, especially in this case. However, such  close scrutiny can be an effective way of exposing weaknesses in the adversary’s position. By so doing, the approach can strengthen the position defended, that of mitigating global climate change.

But equally important is the need to highlight persuasive ineffectiveness (not substantive weakeness!) in the arguments for mitigation. As argued below, this ineffectiveness is in the failure to underline the importance of the ‘prudential’ or ‘insurance’ paradigm in dealing with the finite chance of truly catastrophic effects of human-caused climate change.

This central aspect is touched on in the important reports by Stern and Garnaut — but is handled in a more focussed way in the hyper-linked contributions by Weitzman, Ackerman and Quiggin. It is not sufficiently prominent in the wider debate. Instead, the ground of the actual debate has almost exclusively been about the costs and methods of abatement, for example the comparative merits of carbon taxes, tradable permits, even ‘direct methods’. It has not been sufficiently about the benefits of climate change (risks) averted. This state of affairs cannot but play into the hands of the denialists, the vested interests, the careerists and the opportunists on this issue.

Despite the claims of some, the message about the risks and dangers of catastrophic climate change has not been sufficiently well transmitted and understood, and correcting this has unfortunately not been the focus of the present campaign. If that does not change then in the words of Alan Kohler (18 April 2011), ‘It is very unlikely the Gillard government will be able to successfully bring in a carbon tax with the support of no one but the bureaucracy and the academy’.

What can be done? It is time to rebalance the campaign for effective action to contain greenhouse emissions so as to avert catastrophic climate change. Hence, comments in the space below are invited …

Regards, Barry Naughten gnaught@netspeed.com.au  barry.naughten@anu.edu.au

By way of background to the comment, Alan Moran recentlyaddressed a rally against the carbon tax proposed the Government, the Greens and Independents holding the balance of power in the House of Representatives. In this context Moran was reported  as saying:  

        “Of course if there is a world consensus that there will be a tax put in place then Australia must follow”.  (emphasis added)

This remarkable statement suggested that Moran believes the ‘science’ of climate change, contrary to the stance often associated with his employer the IPA. Who is the real Alan Moran? It’s an intriguing question, and his ON LINE opinion-piece might provide some enlightenment. Among other things, it raises the question of a ‘self-fulfilling pessimism’ concerning the effects of policy action to abate national and global greenhouse gas emissions. Unfortunately, Moran’s piece indicates no trace of concern about a need to avert the problem of climate change by addressing its human causes.

Below, Moran’s text is in bold and the comments are in italics.

…..

Moran’s ON LINE opinion-piece  (Boot-strapping on a carbon tax) commences in the standard way:

Australia accounts for a trivial share of global emissions. Abatement action can only be meaningful if it is part of an international movement.

Comment: The  second of these points is of course granted—but such an ‘international movement’ would be cognisant of Australia’s being both the world’s highest emitter of CO2 on a per-capita basis, and affluent enough to bear its share of the burden. that Australia is being asked to take a sole leadership role in this matter is a carefully contrived myth.

But the likelihood of this [international movement] is receding. The US is abandoning its efforts at the federal level. Individual states, the latest ones beingNew HampshireandNew Mexico, are reneging on previous emission reduction commitments. Of other countries, China is targeting only greater energy efficiency, an inescapable corollary of modernization, while Japan has said it will go no further in reducing its emissions.

Comment: It could be said that the EU and China, albeit in their different ways have been taking a leadership positions. But Moran completely omits to mention the E.U.’s major advances since the mid-1990s — and ludicrously purports to expect the dysfunctional U.S. to be taking the lead in global efforts to abate greenhouse gas emissions.

As to China’s position, it is also targetting renewables — now being the world’s leading manufacturer of PV panels. As to its improvements in energy efficiency, these are not merely a consequence of its developmental stage. Instances include the important area of road transport, with (i) tighter fuel-efficiency standards than those of the U.S.; (ii) partly consequential ‘leap-frogging’ of the U.S.in terms of vehicle technologies.

Carbon tax or alternative action fails to pass a cost:benefit test for the world as a whole …

Comment: Moran’s so-called ‘cost-benefit test’, with its standard ‘discounting’  assumptions, fails to deal with twin key questions: (i) effects of human-caused climate change are borne in the longer run by our children and grand-children; this inter-generational effect is simply not addressed in the ‘discounting’ procedure of standard cost-benefit analysis; (ii) sooner or later, as argued by climate scientists and (for example) the Harvard economist Martin Weitzman  there is a real risk of catastrophic effects for the planet’s biosphere and even for human civilisation. Other commentators such as Quiggin and Ackerman  have also stressed the importance of the combination of such possible catastrophic effects and the need to ensure against their occurence by mitigating emissions.

(side-comment: These short-comings of standard cost-benefit analysis are implicitly recognised in Garnaut’s economic analysis in his first Update paper. The point, elaborated by these authors, is the benefits side of such action can only be quantified in a very limited and partial ways. On other hand the more modest task of cost-effectiveness analysis remains undoubted: its more limited but still vital role being to assess the costs and consequences of action to meet given future constraints on greenhouse gas emissions. Such cost-effectiveness analysis confirms the role of emission pricing as central to the least-cost means of meeting such emissions targets. If sufficiently well-specified such model-based analyses can also indicate ahead of time the prices on emissions that are necessary to attain such target emission levels.) 

Thus, Moran may not be in ‘denial’ of human-caused climate change, but he systematically understates its gravity and hence the need for urgent and significant policy response.

… and still less forAustralia.

Comment: If widely adopted then Moran’s ‘policy pessimism’ in both national and international spheres would be self-fulfilling, and dangerously so.

But for some, such ‘self-fulfilling pessimism’ is beside the point. Who believes that Abbott desires effective abatement action? — not unless by some quirk it became consistent with his self-admitted approach of ‘begging’ to be Prime Minister (as reliably reported by Tony Windsor)

For its part, the export coal industry has an objective interest in such ‘policy pessimism’ in fact being ‘self-fulfilling’. Australia’s own domestic emissions of CO2 are not its prime concern. Rather, the export coal industry’s apparent strategy remains to sabotage the global abatement effort, thereby enhancing its prospects of exporting more coal into the future. Its former tool, the Howard Government, thus adamantly opposed ratifying the Kyoto Protocol—even when the (very mild) requirements of that international agreement were being met by the Australian economy.  For detailed argument to this effect see Clive Hamilton,  Scorcher: the dirty politics of climate change, (Black Inc.)  and contributions by the present author, here and here

By the way, it is not here being argued that Australia can or should embargo its steaming coal exports. The momentum of growth in coal-fired electricity capacity in China, first and foremost, precludes this as a realistic possibility and Australia lacks leverage anyway, given the alternative sources of coal. But as confirmed by the IEA, China must begin to curb its growth in coal-fired electricity by 2030 at the latest if global emission limits are to be achieved. Cost-effective policy globally must and should over time put major limits on the use of coal in electricity generation. This must at least be the case unless and until cost-effective methods of CO2 capture and storage (CCS) become available. And this will not happen in the absence of industry expectations of substantial and increasing price on CO2 emissions.

For the world as a whole, independent economic analyses provide very different estimates from the 12 per cent income sacrifices forecast by government sponsored studies like that of Garnaut or the UK Stern report.

Comment: Moran attempts to belittle economic analyses having an association with Governments, and by implication, the UN-coordinated mechanisms. and centrally, the Independent Panel on Climate Change (IPCC). But these are conscientious expert assessments of peer-reviewed studies and results, open to public and professional scrutiny.

Why would governments have an interest in artificially drumming up concerns about climate change? The opposite is more plausible, as we observe Tony Abbott seeking, with some success, to capitalise on the understandable electoral difficulties facing a Government acting responsibly to price emissions.

The dozen or so peer reviewed studies estimate that a doubling of emissions would bring costs over the course of a century in the range of plus or minus 2.5 per cent. The major costs are associated with the IPCC forecast 20-80 cm increase in sea levels that economic analysts take as given.

Comment: Moran fallaciously implies that only projections of average cases matter. Unlike Stern, Garnaut and others such as Weitzman, Ackerman and Quiggin (as noted above), he fails to acknowledge the central relevance of both ‘deep uncertainty’ and ‘catastrophic climate change’.

These notions refer to the risk, with an uncertain timing, of activating positive feedback loops by exceeding certain ‘tipping points’. Associated damage costs would not simply be some decline in levels of economic growth attained—whether Moran’s supposed and trivial ‘2.5 per cent’ or the more substantial 20 per cent reduction below business-as-usual projections suggested by some others.

Climate scientists believe that global temperature increase of 2 degrees Celsius is now inevitable, associated with 450 ppm (parts per million) of CO2 equivalent compared with the pre-industrial level of 270 ppm. Even if this inexorable trend could be halted at this level there could still be grave consequences. At the other extreme, if emissions continue according to ‘business-as-usual’, as accepted if not advocated by Moran and the IPA, eventual temperature increases could exceed 10 degrees Celsius. According to Weitzman such scenarios would threaten human civilisation itself, for example, manifesting (inter alia) as ‘climate wars’  (and here ).

Elements in the right-wing of Australian politics make much of the current dribble of political refugees from Asia, but what of future environmental refugees  from the effects of climate change on a vulnerable eco-system as that of Bangladesh with its population of 140 million? If required, Australia could no doubt absorb a share of the comparatively minute populations of the ‘small Island-States’ that are at severe risk from climate change. Cases such as Bangladesh would be another category altogether.

While the ‘stakes’ are enormous, policy should not be a gamble but instead should be likened to a prudent insurance policy, with the cost of emissions abatement viewed as analogous to a premium necessary to avert these enormous risks to our children and grand-children, and to our most fundamental national security and global interests.

At a minimum and as advocated by Garnaut in his Updates, a reasonable abatement effort must be designed to achieve some middle way that involves minimum possible excess over 450 ppm CO2 (equivalent) by 2050.

Offsetting these claimed negatives are positives in the retreat of permafrost and increased growing seasons. Many areas, like Russia, would make unambiguous gains from warming.

Comment: Russia would not ‘make unambiguous gains from warming’. The contrary is likely. For instance, Russia is the world’s largest holder and producer of natural gas—and largest exporter, mainly to the E.U. In a CO2-constrained world, Russia thus stands to gain also from exporting gas to developing but dangerously coal-dependent states such as China and India. The argument here is that gas-fired combined cycle gas turbines (CCGT) offer the prospect of significant emission reductions in these developing economies, especially given their compatibility with both renewable forms of electricity generation and with end-use electrcity-saving strategies and technologies. But this desirable result will only happen if there is a sufficient price on CO2. forcing a switch away from coal in these developing economies.

Looking to the longer term in which catastrophic climate change is on the cards, it is difficult to see any nation-state gaining from the risk of civilisational breakdown, Russia or otherwise.

And when we think of these relatively minor costs (or benefits) we need to recognise that they take place over the course of a century in which real incomes are forecast to double.

Comment: Such sanguine long-run economic forecasts assume a crisis-free 21st century but this is inconsistent with ‘bad case’ but avoidable climate change scenarios outlined above, including the prospect of ‘climate wars’.  

Measures which shut-out the cheapest forms of energy would seriously reduce this expected increase in global income levels.

Comment: First, ‘the cheapest forms of energy’ is a misleading euphemism for coal and other CO2-intensive forms of energy. When the full social costs of coal are fully accounted for, it is no longer ‘cheap’. A loose term such as ‘cheapest’ is unprofessional for any economist, who could not but be aware of notions of external cost and their remediation through Pigovian taxes and the like (see below).

Second, the point of policies to price emissions is to minimise the aggregate cost to the economy of reducing such emissions to a given target level.

For Australia, greenhouse action to ensure that global emissions are brought to a world average level entails a reduction of domestic emissions by 80 per cent. Treasury forecasts increases in costs of $860 a year for a $30 carbon tax and this would not take us close to the 80 per cent reduction to bring us to a global average.

Comment: In Government policy statements of long term intent, reductions of the order of 80 per cent have been related to a 2050 time horizon, not to next year’s proposed introduction of a (fixed) price on emissions.

Second, whatever the status of the dated Treasury estimate Moran cites, it is not a ‘cost’ to the Australian economy. Rather, it refers to electricity bills, increases in which would be subject to compensation funded from emission tax revenues, a point he later concedes and does not challenge.

The Abbott-led Opposition also claims (though no louder than the proverbial dog-whistle in Australian terminology) its intent to reduce greenhouse gas emissions, this supposedly being achieved through so-called ‘direct methods’. But for a given level of emissions abated this mechanism would mean greater cost to the economy and its citizens.

It is the consumer, not, as the Government’s media infers, corporate Australia, that pays the costs of the carbon tax. Costs are passed on in price increases …

Comment: If costs are to be so easily passed on, why are certain corporate interests, especially those owning coal-fired electricity capacity (but, not ‘corporate Australia’ generally), so vocal in demanding compensation for lost profits and wanting free tradable emissions permits? These lost profits Moran later describes, contradicting himself, as ‘illegal expropriation’ by government. As to certain energy-intensive export-oriented industries, it is their inability to pass on emission-related price increases (and considerations of ‘carbon leakage’) that is accepted by Garnaut as a legitimate basis for compensation (see below).

… or are reflected in lower levels of competitiveness of our industries.

Comment: In competitive markets with CO2 priced, corporate gainers will include natural gas producers and manufacturers of energy-efficient vehicles and appliances, and renewable forms of electricity generation.

Already we are spending $3 billion a year on promoting [sic] climate change …

Comment: This is carelessly stated nonsense — no-one is deliberately ‘promoting climate change’, though this is incidental to many economic activities—first and foremost the combustion of coal.

… and subsidising carbon-reducing technologies.

Comment: Some subsidies have indeed been wastefully paid out to high-cost technologies on the self-serving pretext of their reducing overall CO2 emissions. These policy practices were rife under the Howard Government (especially under National Party influence). This unfortunate pattern could be repeated if the ‘direct action’ approach of any future Abbott government were adopted. Of greater concern is that future large hidden subsidies will be paid to nuclear power on the spurious grounds of its claimed cost-effectiveness in reducing greenhouse gas emissions.

In addition we have the renewable policy which requires 20 per cent of electricity to come from high cost renewables by 2020. On conservative assumptions this will cost $2.7 billion a year. A carbon tax at $30 per tonne levied only on electricity would raise a further $6 billion ($15 billion if it is on all emissions).

Comment: Once again, Moran confuses increased resource costs to the economy with Government revenue raised from pricing CO2 — which will be used to cut taxes elsewhere, relieving associated burdens. But since pricing emissions (rejected by Abbott) is the least-cost approach, these increased resource costs would be higher under Abbott’s ‘direct action’ approach, with no tax revenues available to compensate for these cost increases, where warranted.

Garnaut wants to allocate revenues from the tax mainly to compensating the poor and promoting R&D.

Comment: Since Moran offers no comment here he seems not contest the justice of this compensation (though his use of the 19th century term ‘poor’ is condescending and inaccurately restrictive).

He [Garnaut] also advocates some form of cushioning effect on the most vulnerable export and import competing sectors. But the complexities this entails are enormous in view of overseas producers’ vast differences in the carbon intensity of their electricity. Garnaut opposes compensation for the generators. It is doubtful the Government will agree, especially since generators severely disadvantaged by a new tax would have a good claim to have been expropriated and seek compensation.

Comment: The economic life-time of coal-fired power stations, in the absence of costly refurbishment, is 30 years. Yet the prospect of prices on CO2 should have been recognised for the last 20 years at least. Indeed, much harsher pricing of CO2, and applied much earlier, was widely expected in the early 1990s. The coal-fired electricity generating companies should have ‘seen the writing on the wall’ but instead chose to resist at the political level, admittedly in the context of Government led by a purported climate ‘sceptic’ in then Prime Minister, John Howard. However, it is clear that employees of high-emitting industries subject to contraction over time due to CO2 pricing have a good case for structural adjustment payments, publicly funded retraining etc.

In also claiming the tax, if used judiciously, will raise national productivity, Garnaut clearly dismisses the views of Winston Churchill who said, “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”.

Comment: Churchill’s talents did not include any special acumen in matters economic—as witness his disastrous decision to put the UK back on the Gold standard in 1925, crippling its tradable goods sector and ramping up unemployment. Leaving aside such petty point-scoring, it is more important to note that Moran fails to distinguish national wealth and welfare from that of the IPA’s main benefactors, often foreign-owned, the export-oriented mining companies. The most obvious case in point is the Australian Treasury’s proposed super-tax on the profits of export-oriented mining companies, bloated by the absence of a tax on resource rents. This proposal was breath-takingly scuttled by Abbott in less than 24 hours, due to his raised expectations of massive donated advertising from the sector, and imminent prospect of the PM’s lodge. Needless to say, the IPA and Moran himself were prominent in opposing this super-tax.

But this Abbott-led Coalition’s scuttling of the proposed tax on minerals exporters (with the connivance of the Gillard Government) was a direct loss, not merely to the Federal budget, but to the Australian economy at large.  Here was a clear case of a tax that could have, and should have, added to Australian prosperity—at the expense of mining giants that are to a significant degree, foreign-owned.

Churchill’s colourful description actually understates the absurdity of a tax as a wealth generator. Even without other problems, a tax requires the deadweight of a bureaucracy to administer it and to redistribute the funds it raises.

Comment: Apart from the important points just made about gains to foreign corporate owners at the expense of the Australian economy, it should be noted that administrative costs are proportionately minimal for a broad-based tax.

Further, regarding the proposed carbon tax, Moran also ignores the fundamental argument that imposing such a tax or charge an economic ‘bad’ such as CO2 emissions (or, for example traffic congestion) will indeed improve net wealth and welfare. As noted earlier, this notion of a Pigovian tax or charge is a standard result in the theory of welfare economics. Strangely, this important result in the theory of markets is rarely noted, much less advocated, by the conflicted advocates of ‘free’ markets (in principle) and vested interests (in practice) such as the IPA.

Not only that, but revenue raised nationally from such a socially beneficial tax can (and will) then be used to reduce income taxes on (skilled) labour, rendering those taxes less distortionary—thereby even further enhancing national welfare and prosperity.

And, if a $26 per tonne enhanced productivity just think what wonders $260 per tonne would do!

Comment: This would imply a linear mathematical relationship that no-one claims: a crude example of the ‘straw-man’ fallacy.

……

Alan Moran is Director of the Deregulation Unit at the Institute of Public Affairs.

Comment: Presuming a policy case for ‘deregulation’ is extremely odd in view of recent history. A more relevant claim is one of regulatory inadequacy. Apart from the lack of a price on greenhouse gas emissions other significant examples of such inadequacy can be listed.

First and foremost there is the financial mis-regulation that contributed to the Wall Street Meltdown (2008) and its predecessors, including the Enron affair ; Second is the mis-regulation of deep-sea drilling allowing occurrence of BP’s Deep Horizon oil spill in theMexicanGulf, a comparable Australian case being that of Montara. A third looming case is the evident failure to regulate on-shore gas drilling, so as to obviate pollution of ground water from hydraulic-fracking of shale.

Even worse is the tragic failure of the Japanese authorities to safely regulate its nuclear power industry, leading to industrial disaster partially consequent on the most costly (but foreseeable) natural disaster in history.

These, and many other such cases, suggest not de-regulation but radical reform of regulatory processes, especially to remove them from de facto control by the industries supposedly being regulated.


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Written by Barry Naughten

April 16, 2011 at 11:23 am

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