TAKING CARE OF BUSINESS
2 September 2008
Michael Stutchbury, Economics editor
CLAIMS that big business calls to hasten slowly on forcibly reducing the amount of carbon spewed out by Australian industry amount to old-fashioned rent-seeking miss the essence of theexercise.
Yes, we will see an orgy of self-interested arguments aimed at the Rudd Government's emissions reduction scheme.
Ross Garnaut warned in his draft report that "intense lobbying" could lead to "serious distortion of policy-making processes". But this lobbying will extend from smokestack industries and miners, through driving organisations and the pensioner lobby, to millionaire wind-farm financiers, solar panel-makers and insurance companies.
Economic reform in the 1980s and '90s was about removing government from markets and starving rent-seekers that would profit by rigging markets through political lobbying. But this new exercise of emissions reduction is based on imposing a government-created system on the rest of the market economy.
It's not surprising the Business Council of Australia would gather up evidence showing that some carbon-intensive firms - in activities such as aluminium, oil-refining, coalmining, cement-making and sugar-milling - could be hard hit because they would be undercut on world markets by competitors in nations that did not enforce a burden on their emitters.
But this has prompted the Fairfax economics editors - Ross Gittins at The Sydney Morning Herald and Tim Colebatch at Melbourne's The Age - to lay into the BCA and The Australian for making and reporting this point. Gittins claimed the BCA report - by former Hawke government econocrat Rod Sims - was a "scare story" and a disillusioning return of business rent-seeking despite the opening up of the economy since the '80s.
Colebatch said The Australian had "naively swallowed" the BCA's pitch for "business welfare", which he equated to the motor vehicle company lobbying for tariff protection and subsidies.
The suggested equivalence between car company protectionist rent-seeking and carbon lobbying has been encouraged by the observation, repeated in the green paper, that the capacity for an emissions reduction scheme to reshape the economy will be as profound as the opening up of the economy to import competition and financial deregulation in the '80s.
While that's true, some of the key policy dynamics of emissions reduction are the opposite of those for reducing import protection.
First, dismantling the tariff wall involved removing government regulation (by slashing the tax on imports). In contrast, emissions reduction involves imposing government regulation (by imposing a tax on emissions) to correct what Garnaut calls "the greatest market failure ever seen", the failure to include the cost of climate change in the price for emitting carbon into the atmosphere.
Second, cutting import tariffs imposed costs on a minority of interests but delivered greater benefits for everyone else. Businesses and workers in protected industries lost but everyone else gained more from cheaper costs and a more productive economy. The nation became wealthier. But forcibly cutting carbon emissions will impose costs on most of the economy while benefiting a minority of less carbon-intensive industries. The nation will become poorer.
Third, Australia benefited by unilaterally cutting import tariffs. We pocketed the efficiency gains from letting the market decide at home, nomatter whether other countries protected their industries or not. Thelevel playing field argument didn't apply.
In contrast, Australia could lose by imposing carbon costs on our industries when competitor nations don't. Our carbon-intensive industries then could lose out or even migrate to those competitor nations. The level playing field argument applies. The end result could even be worse for theatmosphere.
Colebatch suggests the Business Council wrongly assumes that we won't see much of a truly global emissions reduction agreement by 2020. But it's surely far more heroic to assume that we will get China and India properly on board by then, given the poor track record of rich countries in living up to their Kyoto promises. It's surely prudent to hedge the bet on this one, putting a domestic scheme in place but not ramping it up until the rest of the world comes on board.
Fourth, Australia has a history stretching back more than a generation of analysing, implementing and assessing the national benefits of unilaterally removing import protection from manufacturing (with no help, by the way, from The Age). The economic modelling of tariff reductions is reasonably straightforward and robust (although Colebatch still accepts the car companies' rent-seeking claims that the car industry will disappear without subsidies).
In contrast, the intellectual capital built up around emissions reduction policy is little tested. The thing that's supposed to be reduced - carbon emissions - can't even be measured properly. How the economy behaves when the new incentive structures are put in place is highly uncertain.
This applies in particular to "carbon leakage", the shift of emission-intensive and trade-exposed industries from local production to foreign production. Garnaut calls this a "truly dreadful problem" that justifies assisting EITE firms to avoid a temporary loss of production until Australia's global competitors act to limit their own greenhouse gas emissions. He stresses that this is designed to minimise damage to the economy, not to compensate business for having to reduce carbon emissions.
The green paper accepts the guts of this. Rather than forcing EITE industries to buy their emission permits at auction, it proposes giving them free permits of up to 90 per cent of their emissions until key competitor countries bring in their own comparable emission reduction schemes.
The Business Council report queries whether the mathematics of this works if Australia adopts a target for reducing emissions that causes the scarcity value of emission permits to rise to $40 a tonne or more. It suggests a modest beginning that keeps the cost of carbon emissions around $20 a tonne; again, until we get a global scheme in operation.
The Government is listening to this because it needs political consensus to give its scheme credibility. And, when the scheme is bolted on and the button pressed, it wants political cover if something goes wrong.
Copyright 2008 News Ltd. All Rights Reserved
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