Tuesday, 16 July 2013

Emissions Trading Schemes...why would a conservative party oppose it?

If you live in Australia you will know that the Prime Minister, Kevin Rudd, announced that he wanted to move from a carbon tax to an emissions trading scheme (ETS) next year.  What was baffling to me, was the response of the opposition leader, Tony Abbott who is looking (according to the polls) like almost certainly being Australia's next Prime Minister.

I suggest reading this article for a brief overview on the comments made by both parties and I will do a brief overview of why I think Mr Abbott is just playing politics and assuming the Australian voter is exceedingly dumb.

Emissions Trading Schemes internalise negative externalities

Negative externalities are those outcomes of the 'free market' which are bad, however which are generally not taken into account in the price of the good or service being produced.  In the case of energy for example, coal is the cheapest form of fuel in a private sense (i.e. to dig out of the ground and to burn) however there is a social and environmental cost to this which does not get included in the price of coal.  However there is a very real cost to this which is borne by society in terms of environmental effects which need to be fixed / cleaned up by future governments and taxpayers.  This is what is known as an externality.

Note that externalities can be both positive and negative however they both face the same problem in a market economy - the benefits of positive externalities and the costs of negative ones are not included in the price of that product.

The solution to externalities is to try and internalise the cost or benefit in order to reflect the true cost of the product.  This often has to be done via regulation (especially in the case of negative externalities) as profit seeking enterprises are never going to voluntarily give up the lower private cost / higher social cost item.

An emissions trading scheme is a market mechanism to internalise the cost of carbon for those who pollute and it also offers 'credits' for those who do not pollute (e.g. for those who use or create renewable energy).  It is the right-wing, market method of accounting for a cost where the market fails.  A left wing measure would have been to put a tax on the product which
effectively does the same thing.  [As an aside, as much as I hate taxes I think that they are great for discouraging behaviour deemed bad by society such as smoking].

The ETS is a right wing measure...so why do the right wing parties hate it?

Now that you understand basically what the ETS is trying to do it is baffling to see the right wing party in Australia, whose idea it originally was for an ETS in the first place opposing it so strongly.  Part of this can be explained by the opposition leader being a 'climate change sceptic' which is madness in this day and age.  If you have government panels, scientists and independent bodies all telling you the same thing then you accept it as fact even if it means you have to change some parts of your industry which may disadvantage you.

However I believe the majority of the opposition to this is just politics.  In the article I posted above the opposition leader says that the ETS is a "so-called market in the non delivery of an invisible substance to no one".  Mr Opposition Leader....that's the point of internalising externalities that society has to pay for.  That's exactly how a market in which you are rewarding 'good' outcomes and penalising 'bad' outcomes works!

Mr Abbott has proved time and again that he is a highly intelligent individual so I do not believe for an instant that he does not understand this concept.  But I think that a few months out for an election he is willing to bet that the electorate doesn't believe it.

To trash a good policy for political reasons is dumb and short sighted

In terms of economic policy I am right leaning and the ETS is the ultimate right-leaning solution to a problem facing the economy, our environment and the world.  It is a great policy that the Liberal party in Australia (the opposition party) originally came up with.

To scrap it now for political reasons...because the electorate does not really comprehend it and to use fear as a method of doing so is both short sighted and dumb.  I hope the opposition changes their mind and that the Opposition Leader is over-ruled in this within his own party.

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