Wednesday, July 13, 2011

Abbott. Economists vote.

Wednesday column

Tony Abbott’s already low opinion of economists is about to sink. Asked a week ago why he thought it was that most economists supported a carbon tax or an emissions trading scheme rather than his own “direct action” plan to tackle climate change he replied: “maybe that's a comment on the quality of our economists rather than on the merits of argument”.

The nervous laughter (he was speaking to a tent full of policy economists in an especially constructed marquee at the Melbourne Institute’s annual outlook conference) reflected both an appreciation of his cleverness in managing to deflect the question with humour, and also concern that someone who wants to be Australia’s next chief executive thinks so little of the people who would be his chief advisers.

Among those at the conference were Gary Banks, David Gruen, Greg Smith, Ross Garnaut, and the current head of Treasury Martin Parkinson - world class economists who have spent decades of their lives advising governments of all persuasions on the best ways to navigate economic challenges and boost prosperity. They have achieved great success. We would be poorer had they failed. They regard their mission as anything but funny.

Today in Canberra several hundred of Australia’s leading academic economists will deliver their verdicts.

At the start of their three-day annual conference the delegates were given voting slips and asked to put a tick next to either the “direct action” plan put forward by Tony Abbott or the carbon tax transitioning to a trading scheme proposed by Julia Gillard.

Abbott will get slaughtered. In some ways it’s an unfair contest... Many of the economists voting don’t know how Abbott’s policy would work. Most of the Australian public don’t know how it would work.

In his address to the nation Sunday night Abbott said it would mean “more trees, better soil and smarter technology” - which is nice, but to economists not a policy.

Gillard’s policy can be understood. It takes on board the two key lessons learned in economics over the past two centuries - that relative prices matter, and if you change them you change behaviour. Want more babies? Offer a baby bonus. Want more people to work? Raise the tax-free threshold, and so on.

My inbox get a drip feed of emails telling me at various times that higher taxes on cigarettes don’t cut smoking, that higher prices for wine wont cut drunkenness, and the like. None of these claims are true. When Gillard says higher prices for pollution will discourage pollution, economists are inclined to believe her.

They like too that her plan eschews the creation of a massive new bureaucracy to hand out grants for worthy programs to cut emissions. Although economists such as Banks, Garnaut and Parkinson work for the government, they are rightly contemptuous of its ability to pick winners. The market can do it for free.

And there’s something else. Gillard’s scheme offers certainty - not just for the next nine years as does Abbott’s scheme, which spells out a plan to achieve emissions reductions until 2020 and then stops - but to 2050 and beyond.

Whether firms like the prices imposed by the Gillard scheme or not, it lets them do the sort of planning they need to do when they are considering installing long-lived equipment such as new power plants or bidding for firms such as Queensland’s Macarthur Coal. The scheme doesn’t necessarily make the outlook for Macarthur Coal better - it may make the outlook worse, allowing Peabody Energy and ArcelorMittal to pick up their $4.7 billion target more cheaply - but it does make the outlook more knowable.

The Coalition's direct action plan is a mystery beyond 2020. The policy document presents this as a selling point. “Unlike Labor’s emissions trading scheme, the Emissions Reduction Fund will give Australia maxium possible flexibility to adapt to changes in global developments,” it says.

Bending over backwards to explain the virtues of his party’s policy in May Malcom Turnbull explained that: “If the theory of climate change was proved to be nonsense, then obviously there would be no point in cutting emissions at all. If the rest of the world ultimately resolved to do nothing then we would very likely be be better off spending the resources available on adaptation – moving to higher ground and so on.”

If ,as is more likely, there remains a need to cut emissions beyond 2020, businesses will need another round of government handouts, another round of non-self-funding public bribes to get them to continue their worthy programs and begin even more. And then a further round.

Those in the profession that do understand what Abbott’s policy might create are horrified. Some have devoted their working lives to pulling business off public welfare.

Dependent on a bureaucracy as Abbott’s scheme would be, it would be less effective than the market in allocating resources.

An Audit Office study of grants made under existing state and federal schemes found they were slow to cut emissions. Some took 2 years longer than promised. None of those studied had managed to spend more than 40 per cent of its budget in the time allocated. A separate Grattan Institute study found that in the past decade only 3 per cent of environmental grants had produced operational projects in the first five years, and only 18 per cent in the first ten years.

No wonder economists prefer the market. It may not be not perfect, but its quick.

And cheap. The NSW government’s Greenhouse Gas Abatement Program is widely acclaimed as the most successful of the grant programs. It has achieved reductions at a cost of $40 per tonne. Gillard’s scheme will do it for $23 per tonne.

Some at the conference Monday disparaged the whole idea of a vote. They think the answer’s obvious.

Published in today's SMH and Age

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