Economics of Contentment Part 07 – First published on the Sydney Opera House Ideas website.
In this installment of ‘The Economics of Contentment,’ John Treadgold considers how we should factor our own happiness against those of future generations. Yes, climate change is on the table, and John tries to bring some much needed clarity to the policy debates we’ve seen hashed out these past few years.
We’ve got it so good: economic growth, low unemployment, solid banks and a kinda stable government. But what we also have is the highest per capita emissions of CO2 in the developed world.
Yep, each individual in Australia burns through more CO2 than anyone else. You’d think if any country were going to act on climate change, to research new forms of energy, and to move away from the old-tech of coal and oil, it would be Australia. After all, we have the cash, we have the know-how and the infrastructure, we have wide-open spaces bathed in sunshine, and we have the embarrassing burden of being big polluters. So why then are we so happy to ignore this responsibility? Why are we letting the vested interests of mining companies and power-plant owners dictate policy and action?
I can hear people shouting that per-capita emissions don’t matter, that China, India and the US need to reduce their emissions for there to be any noticeable change in global output. While this is true, I feel strongly that it’s unfair to expect developing countries like China, that are only now going through their period of carbon-intensive industrialization, to reduce per capita emissions when they emit a meager 5 tonnes per person to our 18 tonnes. We ALL need to reduce emissions and Australians most of all.
Our country may be geographically large, but our population is small, and yet we still emit 1.5% of the world’s C02. That may sound like a small amount, but it is more than France, Italy, Spain and South Africa emit. We burn coal for electricity, we drive and fly to traverse this big country (as we don’t yet have the luxury of fast-trains), and we have a big dairy and meat industry that produces lots of methane – a gas far more damaging to the atmosphere than CO2.
We’ve got it good, but we’re dumping a lot of crap into the atmosphere in the process. It’s easy to point the finger at the polluters, but in the end it’s our, the consumers, refusal to pay more for power and research that is making it difficult to find a solution.
Putting a price on carbon is one way to reduce pollution. The labor government implemented an Emissions Trading Scheme (ETS), which Gillard then switched to a tax, and now Rudd has moved again to an ETS. The political wrangling is all a little confusing, but I’ll try and explain a little of how carbon trading works and whether it is actually going to reduce emissions.
As an economics student I was introduced to this concept early on. In theory, the government sets an upper limit of how much carbon dioxide (CO2) can be emitted in any one year. In the first year this limit will typically be a slight reduction on current emission levels. Then… a number of permits are created that represent this limit on emissions and the market decides how much each permit is worth. Are you still with me? So if you’re an operation that pollutes you have two choices:
i) reduce emissions, or
ii) buy permits to cover your pollution.
This is where the system becomes elegant: it is the companies that can reduce their emissions at the lowest cost who will choose to reduce emissions first! If it costs $15 to reduce emissions by one tonne and a permit is $20 then you’ll choose to make the emissions reduction. But for big power plants it might cost $25 to reduce emissions, so they’ll choose to buy permits instead. Then the next year there will fewer permits available, so the market will bid up the price of each permit. The cap on emissions is what drives pollution reductions in this system.
This incremental constriction of supply will mean permits will eventually cost upward of $26. At this point, the above power plant will find it cheaper to implement emissions reductions than to buy permits. It’s hoped that given enough notice they’d have done research to development and implement the necessary emissions-reducing technology. AND, they might even be able to sell the new technology to other less developed countries. Yes, there is a threat that Australia could actually become a leader in technological innovation. Scary, I know.
I should emphasise that the point in all of this is to REDUCE the usage of polluting products, such as coal-fired electricity The Abbot rhetoric that harps-on about the price of power of power going up is so infuriating because THAT’S THE POINT! Coal fired power is currently underpriced for the damage it does, and the aim is to add the cost of pollution to the current price of coal-fired electricity so that clean-energy can become competitive.
The price of living impact is another common argument but the prices won’t have an impact on cost-of-living if families if you choose to reduce your power usage, or if we find ways to produce less carbon-intensive power from the sun or the wind or the waves.
Phew… ok, so if you survived that Econo lesson, let’s look at the Rudd/Gillard version. Rudd’s first iteration didn’t limit permits very much, and it gave concessions to any companies that are exposed to international competition. This was a weak system, and yet the scare mongering by the opposition was enough to see him dispatched.
Gillard switched to a tax to get the ball rolling: a set-price on a tonne of emissions for those emitting over a certain threshold. This less elegant option wasn’t as economically efficient that an ETS, plus it also had the unfortunate word ‘tax’ in the name. I fear poor communication has been a major problem in this whole carbon trading debate. There is a huge lack of understanding of the basics and it certainly contributed to Julia Gillard’s undoing.
The tax’s aim was to increase the price of power so that we would use less of it. (In its first year the Gillard/Labor carbon tax increased power prices by only 0.4%.) It was based on an assumption that carbon emissions were bad for the environment, that they needed to be reduced, that they were currently underpriced, and that correctly pricing them would lead to the necessary reductions. This all seems quit reasonable, doesn’t it?
If we can’t pay a little more to improve our environment now, then when will we be able to? Revolutionising our industrial processes is expensive; there is surely no better time to start. Whether or not you believe 97% of climate scientists about the dangers of climate change, it is clear that innovation in energy production and efficiency is a good bet in a world where fossil fuels are running out, and where the population is growing exponentially.
How will history judge our smug refusal to give up even a modicum of wealth and pleasure today, when we have indisputable evidence that it will have dire consequences for generations to come? We are running out of time. This is one issue about which we should not be content.