Still in shock at the ALP’s audacious handout to the nation’s biggest polluters, we thought it time to broach a few of the details hidden within the 824 page Carbon Pollution Reduction Scheme (CPRS) White Paper.

Billions of dollars of the commons is proposed to be given away by the climate scheme. Permanent and inalienable carbon permits will be handed over to the biggest polluters if it passes both houses of parliament. These do not expire. Five year windows have been announced where ’4 year vintages’ of the proceeding trading period permits are sold, presumably in tranches.

If the rapidly melting permafrost demands a drastic reduction in carbon permits, the taxpayer will have to compensate the polluters in buying those permits back. However, even then a case could be mounted in the courts to delay this.

Pricing Undermined

The CPRS relies on the pricing system to reduce outputs. However, the pricing system will be undermined by the ability to import carbon permits from international markets.

The international market will be flooded with permits, as world wide the development of carbon sinks has been growing but the purchasers are yet to come online. Australia will be one of the first carbon markets with a viable demand for carbon permits.

This will ensure that the carbon price will be low, threatening the viability of the system and risking the need for buybacks from polluters.

One wonders about the credibility of foreign permits that may not undergo the same levels of compliance in terms of qualitative property rights. A preliminary vetting of international permits has been announced, but one wonders how stringent this will be. Consider the example of a smokestack lobbyist owning a forest in PNG (probably bought for next to nothing). One can imagine it will not take them long to receive approval to import carbon credits from ‘their’ forest.

All this and more with $3.9bn in hard cash handed over to polluters with no strings attached. Over two thirds of the heavy polluters’ permits will be grandfathered in the first 5 year period.

What must be asked is whether we can expect polluters to billow their pollution quantities over the next few years as they attempt to prove they deserve “x” amount of carbon permits in handouts. Perhaps the ensuing carbon administration ‘will be learning’ so they can fudge these figures.

One must ask whether we learnt anything from the grandfathering of the European Trading system?

And to think the white paper quotes:

This was echoed by BP Australia:
A well-functioning market and its resulting forward carbon price expectations is a particular need in the oil & gas sector, with its long development timelines and requirements of significant upfront capital investment. (Submission 355, p. 6)

How will plummeting carbon prices during the first 5 year free for all, contrasted with rapidly escalating cases of extreme weather, hold true to long term ‘developmental timelines’? This contradiction in behaviours will only serve to undermine the system as weather patterns devolve.

Speculative Playground

The playing field has been arranged so that a speculative playground is possible. The unlimited banking of permits, the security of property rights plus the ability for foreign ownership of our carbon permits will ensure middlemen manufacture capital gains at the expense of the market. The absence of holding charges on these ever more valuable permits is of great concern. If speculation is harmful to our objectives, we will face no option but to compensate those middlemen and buy them out to enable reform.

Of particular danger is the possibility that polluters could play the market, using the speculative profits to offset the costs of purchasing more permits, just like Enron and others have done in the past.

Necessary Reforms

Under an ETS (Emissions Trading System), if carbon permits are re-sold, the secondary market could be charged a holding cost for these permits, ushering speculators out of the market.

However, why have millions of transactions amongst the people, when we could go upstream to the source of the pollution with a carbon tax and ensure that the 1000 or so major emitters pay the majority of the polluting costs? Then polluters deal with the compliance directly.

A carbon tax is much easier to administer.

A carbon tax sees the government earn revenue, whereas the ETS sees middle men and industry take the profit. This is magnified when so many permits are given away or can be imported. A carbon tax could be revenue neutral such that company taxes are reduced at a similar rate. Alternatively, the GST could be reduced as many large companies only pay 3% of the 30% in company tax they are expected to contribute (due to the prevalence of tax loopholes).

The government’s white paper says that not enough is understood between the inverse behaviour of pollution and pricing to rely on a carbon tax. With the fate of the planet in peril, one would hope the government would be willing to be conservative and understate its tax impacts. If we do cut back more on pollution than expected, then that helps future generations. This danger is nothing like the loopholes that the ETS allows. Any family or business doing the right thing by investing in solar power is simply subsidising the price of carbon for polluters. This would not happen under a carbon tax.

Under the ETS, one way to avoid the ‘solar panels subsidising polluters’ side-effect is for any clean energy development to trigger a reduction in carbon permits equivalent to the carbon savings such renewables deliver. This will be an administrative challenge. it will also be a legal challenge as any such move threatens the property rights of polluters.

Neither an ETS or a carbon tax is enough on its own to deal with the monumental challenges of sustainability and affordability. Still needed is a holistic approach to climate change from an economic perspective. We desperately need the most accurate economic tools on our side. The planet is demanding urban density, self funding public transport/ infrastructure and more time to slow down and live a sustainable life. A green tax shift off our labour and incomes and onto natural resources can ensure this happens. Tax efficiency, affordability and sustainability are then harmonious.

photo credit: net_efekt

Yesterday’s long awaited emissions trading white paper has left the future of the planet compromised.

The compromises on the 5% cut to greenhouse emissions typifies a government torn between lobbyists feathering their nests and the public’s wrestling of the issues via the omnipresent public opinion polls.

The trade-offs have been so extensive that no one is happy. The future of our dry continent has been jeopardised by weak leadership. The well funded smokestack industries are upset at the $8bn in extra costs they will face. Environmental groups are concerned that the cuts are so low.

Looking further into the detail, the handouts to the polluters in the form of free carbon permits threaten to undermine the whole process. Even more so, the $11.5bn in revenue raised will be handed back out to households ($6bn) and motorists ($2bn) such that only $3.5bn is raised. We might as well say that the ETS will only be set at 1% when taking into account these handouts.

Aluminium smelters whose electricity bills will rise with ET will be given that money back, in spades, receiving permits for one tonne of free emissions for every 0.7 tonnes included in their electricity bill. Come to Australia, polluters’ paradise!

says Tim Colebatch (The Age). All this and more when Alcoa already receives massive handouts from the Victorian taxpayer in the form of low resource rents on the dirty coal being extracted from their Anglesea mine.

A carbon tax, backed up with a system of Resource Rentals is a much more direct way to deal with this vital vital issue. Survival of humankind demands we look outside the square. Politics is only going to get more radical.

Bribathon Brumby’s recent free lunch handout to Victoria’s property lobby has ensured the urban sprawl forever mantra continues. It seems that those genuinely concerned about our future should form a lobby group and start donating to the political parties. It may well be the only way to get politicians to listen.

Both are wedge issues that CEO’s are making the most of as they nervously await their next round of share option bonuses. “If these wedge issues continue I will be able to cash out in time and retire with some real wedge of my own!” Rational beings cannot expect all 193 countries to agree on a trading system within the next 2 – 3 years. However, decisive, unilateral action is needed immediately and PM Rudd should be commended for showing this.

It was pleasing to hear Garnaut comment that if too many industries put their hand out, then a Carbon Tax will be preferred. We strongly support a Carbon Tax over an ETS. Then no industry can pay others so they can pollute (what an ETS allows by default). No speculators can distort the market. Little delay is required to implement it.

When property rights are created, a great danger lurks within an ETS in that speculative middlemen will seep into the market, snapping up carbon permits and enforcing scarcity onto the marketplace. This will force the price of carbon, and thus of related inputs, higher and higher. This in turn will undermine the ETS and possibly return us back to square one.

We can see this occurring after just the first 12 months of the ETS, with prices jumping higher than they should and the disadvantaged screaming. Investment banks will applaud the system whilst bank rolling new ski trips to Aspen. The ALP will announce another inquiry. Economic theory will be avoided yet again in preference for another piecemeal system that favours rent seekers over the productive economy.

A number of searches through the 586 page Garnaut report, jokingly subtitled No Pain, No Rain, fails to reveal any definition on the lifespan of each permit. The longer the time frame, the greater room for speculators to extort the market.

This could be avoided. A holding charge must be placed on all carbon permits. From this we can use our knowledge of Georgism to analyse how far we take it. Should the holding charge be placed only on those permits sold during the trading period? This would act like a Mill Tax, where any increase in the re-sale value is rightly captured by the government on behalf of the people. We must remember that we are not privatising the sky for the benefit of investment bankers and their speculative clients. Carbon is part of the Global Commons we were all lucky enough to inherit as our birthright.

Should we place a holding charge on all permits, this would inflate the price of carbon but deter speculators from even thinking about it. The extra revenue raised could be used to fund the abolition of payroll tax, indirect taxes like the GST or income taxes on lower incomes. This tax shifting would assist in keeping the prices of goods steady.

Looking at the big picture, the ETS is just the beginning of the Resource Rental system we are inevitably moving towards. The ability for behaviour to change is difficult when we are still paying more than any other generation for housing. The hours spent at work to pay the mortgage make it hard to remember the green shopping bags, let alone cycle or walk to the shops. The land banking speculators are forcing the sprawl further and further into the greenfields that should be soaking up our carbon. Our worldwide infrastructure deficit (ie lack of public transport, ageing transport, lack of affordable hospitals) sees society trapped in it’s ability to adapt to the looming climate shift. A Resource Rental system can alleviate these pressures by correcting the leakages prevalent in today’s post-autistic economic framework.

It’s only a matter of time before the content of these pages becomes vital for the survival of all living beings on planet earth.