Why emission trading schemes are not the answer: a left critique

First things first, this article is not an attack on the environmental activists who are valiantly trying to make our world a better place. Unfortunately they have been seduced into thinking that market forces can be used to correct the situation.

Just as Milton Friedman’s prescriptions for education, health or labour reform based on market forces and the profit motive are morally repugnant, so too is using market forces or the profit motive to achieve environmental outcomes.

The idea that labour is just another commodity to be traded belies all human dignity, so too is the concept that environmental pollution should be treated as a tradable commodity.

There is no economic evidence that controlling the impact of externalities such as carbon emissions is more effective via price effects than direct regulation. The principle behind Pigovian taxes or emission trading schemes is that by charging a tax equivalent to the social cost of the externality the demand curve will shift to what the socially acceptable quantum of permissible damage is.

For this to occur there must be perfect information to the market. Effectively for emission trading schemes to work there needs to be total reliance on the efficient-market hypothesis. So we accept that there is a market failure that does not recognise the social cost of pollution, yet we think we can rely on the same market which has already failed, to correctly establish a price mechanism to reduce the supply of pollutants to socially acceptable levels. Has anyone realised the inherent madness of this supposition?

Given the recent financial turmoil created by the lack of maturity and regulatory oversight of the derivative markets, there is a real danger that creating an “innovative” trading scheme for carbon emissions could have far reaching impacts wider than dealing with that particular externality. Hybrid securities based on bricks and mortar almost sent the world into the abyss; can we trust the merchant banks to be able to manage something as esoterical as carbon derivatives.

Those of us on the broad political left spectrum need to maintain consistency. If the reliance on economic rationalist policy is wrong for social welfare, health, education or the labour market we need to reject its use to address environmental issues.

The emission trading scheme is to environment protection what the trickle down policies of the New Right is to social welfare reform: just as the invisible hand of the market cannot be relied upon to magically address inequality nor can we rely upon the invisible hand of the market to correct environmental pollution or dangers.

What then is the solution?

Direct regulation is the only answer. Imagine if we had introduced a CFC emission trading scheme when faced with the threat to the ozone layer. Does anyone seriously think that we would have seen worldwide cessation of the use of chlorofluorocarbons?

What about when we wanted to remove lead from petrol, would a lead trading system have reduced lead in petrol?

Industrialised nations in the 60s and 70s introduced clean air acts to reduce the pumping of particulates into the atmosphere, primarily sulphates and nitrate pollutants. The results speak for themselves.

Planning legislation throughout the western world requiring the submission of environmental impact statements prior to development approvals being granted has, generally, seen vast improvements in environmental management.

What are some specific measures that can be implemented to reduce greenhouse gas emissions?

Motor vehicles

First of all the States and Commonwealth agree to an “urban” car registration category that from 2020 all new cars must be hybrids and no non-hybrid car would be registered after 2025 for residents in urban centres. To support this initiative government assistance to car companies would be limited to development of hybrid cars. There should be grants to service stations to put battery charging and storing facilities including solar generation on the premise.

Change the fuel standards immediately so that all petrol must contain 10 per cent ethanol, phased to 25 per cent by 2020. If this means importing from Brazil until local capacity gears up so be it.

Lobby for other countries to follow our lead.

Coal mining

Burning coal to generate power is one of the largest generators of greenhouse gases. This is where Australia can make one of the biggest changes to the world’s greenhouse emissions: not by investing billions of dollars into a ridiculous notion of burying CO2. Instead that money should be diverted to two areas: energy storage and transmission technology; and coal-to-diesel technology. I will return to this concept latter.

The major initiative is to cap export licenses of thermal coal from 2020, with a view to reducing the export licenses of thermal coal by 25 per cent by 2035.

This will send a very clear message to other countries that we need to find other energy sources; and that we can’t rely on dirty coal and science quackery for the future. No “ifs” or “buts”.

The thermal coal in the short term would still be mined on a limited scale reducing the impact on employment. Any coal mined would go through a coal-to-diesel process to provide transport fuels for those transport activities that cannot use hybrid systems, primarily aviation and seafaring transport, addressing the issues that will arise from peak oil threats.

Energy

Energy production is the primary source of carbon pollution, we need to dramatically overhaul its production, transmission and storage.

We are still using 19th century transmission systems and networks. We establish national grids where we have huge power stations which supply high quantities of energy over vast distances. However we have forgotten simple physics: energy is lost when we try and transmit energy over vast distances, especially when we use AC current through copper wires. We need to be using fibre optics, DC current and building localised power grids for communities. This will enable wider energy sources to be available for both base load and peak energy transmission.

In summary trying to establish an emission trading scheme in isolation is tokenistic and will not change worldwide greenhouse gas emissions, but leaving the coal in the ground will.