Wednesday, March 21, 2012


Debate at The Sydney Globalist launch, Sydney University, Wednesday, March 21, 2012

I'm happy to be speaking in favour of govt intervention in the energy market and against a 'free' market. I’ll be giving an orthodox, economic response to the question and my colleague John Mikler will give a more radical, political response. He’s meant to be channelling Bob Carr - who cancelled his appearance here tonight when he got a better offer from someone called Julie/Julia - but I’m not sure John’s voice is deep enough.

The question we’re debating - a marketplace or a government’s place - is a clever play on words, but really, it makes no sense. It presents a false dichotomy. In the real world - as opposed to the world of economics textbooks - there are no markets that exist without government intervention and, since the fall of communism, no economies that governments attempt to regulate with no role for market forces. Even the most extreme libertarian - and we’ll be hearing from some extreme ones tonight - wants the government to intervene in the market to protect property rights and enforce contracts etc. Markets as we understand them are, in fact, the creation of governments. So the choice we face is not between the extremes of no government or no market, but what degree of intervention we judge to be appropriate - ie we're searching for - and arguing over - the right combination of intervention and market forces.

I prefer to make these judgments fairly pragmatically rather than based on ideology, and so make them case-by-case, or market-by-market. Only a fool denies the powerfulness of market forces, or their general efficiency in allocating resources. But, equally, only a fool imagines markets are perfect - infallible.

The overwhelming weight of scientific opinion tells us the burning of fossil fuels over the past 200 years or so has led to an excessive build up of greenhouse gases in the atmosphere, which has probably already begun to alter the world’s climate in damaging ways. Should this build-up continue, we’re told, there’ll be significant disruption to the climate, leading to significant disruption to the economy and a significant decline in our material standard of living.

If the scientists are right and we do have a problem, it would be idle to expect that market forces would, without assistance, act to correct the problem. That is, this is a clear case of ‘market failure’. The actions of the private producers and consumers of fossil fuels impose costs on the community, but those costs are not reflected in the market prices at which fossil fuels are exchanged. If we could find a way to get those costs incorporated into market prices - if we could, in economists’ jargon, ‘internalise the externality’ - then we could expect the operation of market forces to help discourage the use of fossil fuels, encourage people to turn to alternative forms of energy and create a monetary incentive for people to search for technological solutions to the problem.

If all this sounds like terribly standard economics, it is. The argument I’ve just given you is accepted by the great majority of economists. I need to remind you that the emissions trading scheme - and its close cousin, the carbon tax - are ‘economic instruments’ that were invented by economic rationalists as the best way of dealing with the threat of climate change with minimum loss to our material standard of living. Many economists would leave it there, but many others would add that there could well be a role for supplementing the price on carbon with more direct interventions such the imposition of emissions standards for new motor vehicles or building codes requiring better insulation. I’m a belt-and-braces man myself.

Under the urging of economists, many governments have used trading schemes or pollution taxes to solve more localised environmental problems, such as over-fishing. In contrast, climate change presents a far more daunting challenge - in Professor Ross Garnaut’s words, a diabolical challenge - because greenhouse gas emissions are a global issue than can be dealt with only with concerted action by all the major countries. This feature of the problem presents considerable scope for free-riding (why doesn’t my country bludge on the efforts of other countries) and Mexican standoffs (I’ll do something only after you’ve done something).

So far it’s proved hard to get agreement between the major countries on binding commitments to reduce emissions, which is not to say most of them are making no effort. There are problems with organising watertight schemes for the trading of emissions permits between countries, and real but hugely exaggerated problems with the potential for ‘carbon leakage’ (the risk of losing industries to those countries with lower emissions standards than ours).

I’m sure we’ll be hearing about these problems at length - mainly from people who, with their superior scientific expertise, deny we’ve got a problem with climate change in the first place. My response to these difficulties is simple: Australia has enough at stake for us to want to be part of the effort to break the Mexican standoff by putting our contribution on the table and getting on will implementing it. Assuming nothing can be done is the best way to ensure nothing is done, with all the economic destruction that would bring.