Monday, October 30, 2006

Australia's Greenhouse Socialists

What’s the best tool that Australia can use to cut its emissions of greenhouse gasses? According to Australia’s Environment Minister Ian Campbell late yesterday it is “heavy investment from the public sector”.

It’s a policy prescription of which Australia’s Labor Prime Minister Gough Whitlam and his Energy Minister Rex Conner would have been proud.

On one reading, it was their socialistic distrust of the use of market mechanisms to secure Australia’s energy future that brought about their downfall.

But this Government’s distrust of market mechanisms is harder to understand..

The Stern Report released overnight in Britain makes the power of market mechanisms clear. Put simply, for any given greenhouse gas reduction target (and our government has such a target) market mechanisms provide the least-expensive means of bringing it about.

The US fight against acid rain in the mid-1990’s showed how they could work.

The problem in the US was emissions of sulphur dioxide. Rather than “heavy investment from the public sector” to find alternatives, or heavy-handed economically-costly restrictions on how much sulphur each polluter could emit the US Government issued annual permits to each of the existing polluters that at first allowed them to emit exactly as much sulphur as they always had.

After that it was a matter of letting the market work its magic – this case the Chicago Board of Trade.

The polluters that could cut their emissions cheaply found it profitable to install filters and sell the excess permits they no longer needed.

Other firms that found it hard to cut emissions had no immediate problem staying in business: they were able to buy any extra permits they needed from the polluters that that were able to sell them.

In every year that followed the US handed out fewer of the annual permits, increasing the profit for those firms that were able to easily cut emissions and increasing the cost to those firms that could not. The polluters who could cut back found themselves rich; those that could not found business increasingly expensive, but not as expensive as it would have been if they had been forced to install filters.

The US managed to halve sulphur emissions within a decade, without the need for either heavy public investment or heavy-handed regulation. As far as is known its economy didn’t slow a bit.

The European Union introduced carbon trading in January last year.

In his report released overnight the former World Bank Chief Economist Nicholas Stern talked about taking the European scheme global, by extending it first to the market-friendly economies of Australia, California and Japan.

Australia’s Ministers have said that they won’t join in until the big and growing carbon polluters such as China and India join in as well. And they’ve got a point.

But unless Australia does introduce carbon trading, whatever progress we do make on cutting emissions is likely to be costly in terms of economic output - unless of course we are not planning to make much progress.

Australian policy makers long ago abandoned the stance that we could only cut our industry protection if other countries agreed to cut theirs as well, and Australian consumers have benefited enormously as a result.

The Stern Report has offered us the opportunity to take the same approach to global warming.

It is a small-government pro-market approach, of the kind that this government might have been expected to embrace.