The Dangers of Resource Economics

Karl FitzgeraldCommentaryLeave a Comment

From the health of the Murray to the clean air politics of Emissions Trading, the news abounds of issues balancing on the crucial understanding of resource economics. Natural resources are unique in that they are the building blocks of life. They also have a limited supply. This makes them incredibly valuable. The source of their value is their scarcity. The profits derived from resources are the focus of our thinking here at ESA.

Trading systems set up buy and sell resource permits, whether they be water or carbon, are set to struggle. Even Jeffrey Sachs agrees with our long term view. A Carbon Tax paid at source by the major polluters (numbering in the 100’s) is much more efficient than a Trading System requiring thousands of trades to achieve the same goals. Says Sachs:

It’s hard to monitor, it’s non-transparent, it’s highly political, highly manipulative, which is why the banks love it, the banks all want to trade, this is an investment banking dream.

The health of the Murray River was again the topic of discussion by journalist Kenneth Davidson in Trading Scheme Just Does Not Hold Water

There is money in water allocation trading without water. One of the main risks in water trading is the threat of rain (or a pipe with real water from Tasmania). It is understandable that the Victorian Government wants to control the Victorian water market.

When allocating property rights in natural resources, governments must be aware that the property created will be worth millions of dollars. If the public interest is not represented within the allocation of these rights in the first place, this leaves a massive hole for vested interests to step in and distort the decision making process.

If a Resource Rental system was incorporated in both water and carbon markets, the property rights of water traders would not be so affected by piping water from Tasmania (as the economic rent will be collected one way or the other). Similarly, if a Carbon Tax is in place, its simplicity would see a speedy adaptation by Aluminium and other power hungry industries, primarily because they know they can’t escape the charge by paying others to allow them to pollute (as an ETS does).

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