Ken Henry, Bernie Fraser and Ross Garnaut are lions of Australian economics. They carry more intellectual and institutional weight than most of us mere mortals put together.
So if they broadly agree on any course of action we should all probably sit up and listen, right?
Three of Australia’s senior economists have backed carbon pricing as the most effective way to reduce carbon emissions.
That is so last decade.
Here is the thing: The correct theoretical solution to a long-lived stock pollutant is a tax. The correct theoretical solution to a short-lived flow pollutant is a cap and trade scheme – think acid rain. I suspect most economists would agree with those very broad and policy vacuous statements.
Translating theory into policy is hard. Acid rain was an obvious problem, there was a known economic solution to that problem, it was implemented, and the problem more or less resolved. To be sure there was a lot of initial resistance to the idea of introducing a cap and trade scheme. What we saw there was a genuinely innovative policy response.
Let’s have a look then at global warming. It is a less obvious problem. The argument being that at some undetermined point in the near future temperatures will rise causing discomfort and imposing huge economic costs on the global population. This is due to an increase in CO2 levels in the atmosphere – caused largely by human activity since the industrial revolution. To the extent that we all agree that CO2 emissions are a problem, and we want to do something about those emissions, then theory tells us that the least-cost solution would be to impose a tax on CO2 emissions (and of course equivalent emissions from other gasses that have the same or similar effect).
But here are some of the hurdles:
- agreement that global warming is actually a problem,
- agreement that we actually want to do something about it,
- translating a theoretical tax into an actual tax.
Now some people get stuck at the very first hurdle, others at the second, and still more at the third.
The fact is we have experience in trying to translate theoretical solutions into practical policies. All three of those economists named above have practical experience in this area.
- Ken Henry managed the implementation and introduction of the GST. This was a very successful tax reform – that nearly killed the Howard government. Not so successful on the mining tax – that did actually kill the Rudd government.
- Ross Garnaut is the intellectual source of the Petroleum Resource Rent Tax. A nuisance tax that actually doesn’t generate much income and probably stifles new investment.
- Bernie Fraser is a former Treasury Secretary and RBA governor. He has seen the operation of fiscal and monetary policy from both side of the policy spectrum.
The Australian carbon tax/price is not and cannot be a solution to the global problem of CO2 emissions (that I’m happy to define as being a long-lived stock pollutant). It is not part of the solution and is not the beginning of a solution either. In fact, given that the carbon tax is designed to evolve into a cap and trade scheme it is the wrong solution from a theoretical perspective. It has no redeeming features whatsoever.
Now for economists of their political persuasion to concede any of those points is heresy.
If you think global warming is a problem due to global CO2 emissions, then the solution to that problem is a global tax. That isn’t happening any time soon.
What then of the argument that Australia should reduce its own CO2 emissions even if everyone else does nothing? Okay. I’m happy to accept that this might be a choice Australians make. We have well-developed mechanisms for making collective choices called elections. The most recent election was just seven months ago and the party promising to repeal the carbon tax/price won a thumping majority. The Australian electorate having experienced the carbon tax didn’t like it, and voted against it at the 2013 election. The Australian electorate didn’t want a carbon tax at the 2010 election either.
So we end up at the position where experts are telling the electorate that they should accept a tax (evolving into a cap and trade) that they didn’t want four years ago but got anyway and still don’t like? A tad out of touch.
* Yes I know. For the grammar nazi’s we have bunches of bananas and groups of people. I’m just wondering what a collective noun would be for economists? A “hand” of economists or, on the other hand, a bunch of economists?