Tony Jones got stuck into Penny Wong on Thursday night. I get the impression he was a bit annoyed by selective government leaking and felt that the government should be telling us more about their own policies and the costings of those policies. Fair enough.
TONY JONES: … You must have Treasury modelling which tells you what a 10 per cent reduction would be, a 15 per cent reduction, a 20 per cent, or even a 25 per cent reduction in emissions would cost in terms of cost-of-living increases. Do you have that modelling?
PENNY WONG: Well, we have put out modelling in October, 2008, which laid out the various Treasury modellings and different scenarios, and, yes, it is true the carbon price will change. But can I say, Tony, we at the moment have made very clear we will not go beyond 5 per cent unless the rest of the world makes a range of commitments that we are seeking. Because we know climate change is a global problem, we’ve said, “Look, we will do no more and no less.”
There is a lot in just that passage. I understand that Wong wants to talk about the 5 percent – that is now bipartisan policy, but it seems to me that the government could increase that cap if the rest of the world inceases too. So Jones’ point is valid – where is the contingency planning for that event?
Wong then side-steps the question about the impact on the cost of living. As an aside, the term ‘cost of living’ is often used as short hand for the inflation rate – but I don’t think that is what Jones specifically has in mind. In theory the ETS will have a small inflationary impact because it is meant to generate a change is relative prices. So while prices might go up quite substantially that price increase would not be inflationary (money losing its value) but rather because one the inputs to production had increased in price (become more valuable). The Treasury modelling assumes that the RBA will be able to differentiate the two effects. I don’t know that they could so I’m not confident about that assumption.
Wong points us rather to the Treasury modelling released in October 2008. That modelling examines a number of scenarios and compares four scenarios to a reference case. These scenarios consist of a 5, 10, 15 and 25 percent cap. They also use three models to generate forecasts so there are three forecasts for each scenario. What I have done in the table below is show the range between the maximum and minimum forecast for each scenario for a number of economic variables. Treasury provide a forecast out to 2020 and 2050.
These costs are not trivial. This time last year the Rudd government announced that it would spend $42 billion – blow the budget surplus and take the Commonwealth into public debt – in order to avoid a 1 percent to 2 percent decline in GDP. Yet here we have a policy that deliberately generates an outcome of that magnitude out to 2020 and we’re being lead to believe that the costs of doing so are minimal. It looks worse out to 2050.
A massive problem with the modelling is that it cannot deal with unemployment. Rather the models reduce real wages in order to ensure that no long-term unemployment occurs. In the modelling short-term unemployment can last for up to ten years – a public policy disaster if that were to occur in reality. Then real wages fall and employment increases. But the current government is reducing labour market flexibility making it unlikely that real wages would be falling quickly or any time soon. So there is massive, unknown, unmodelled unemployment in the policy. But with investment falling, real wages falling, GDP per capita falling and consumption falling in most cases it is hard to see how living standards and quality of life won’t be falling too.
The other thing to remember is that these costs have more potential up-side in them than downside. The Treasury made some very strong assumptions in their modelling – specifically that an international market for carbon permits would be in operation. Australian firms were expected to be heavy users of that market (there would be a huge adverse balance of payments number associated with that). In the post-Kyoto failure world that market won’t be in operation for some time, if ever.