Zero net carbon choice: do we want to be losers or winners?

You may regard economists as a dismal lot, always reminding us of the cost of this or the risk of that. But there’s one prominent economist with a much more positive story to tell.

Professor Ross Garnaut is more prophet than gloomy economist, a man with the vision of a better future that our politicians have lost as they squabble over votes.

The Morrison government trembles at the thought of the Paris agreement’s goal of achieving zero net carbon emissions by 2050. All it can see is the need for higher taxes and the loss of jobs in coal mining. Garnaut, by contrast, sees a golden opportunity for us to shift from an industry in terminal decline to a new set of industries with bright prospects in the low-carbon world that’s coming.

Garnaut foresees that, if we rise to the challenge of climate change, we "will emerge as a global superpower in energy, low-carbon industry and absorption of carbon in the landscape".

This vision is set out in his latest book, Superpower, which seems to offer something for everyone. Do you regret the decline of manufacturing? Garnaut sees how we could give it a new lease on life.

Have you always thought that, rather than sending our minerals off for further processing abroad, we should do it ourselves? Garnaut sees how we can.

With climate change making the land hotter, drier and more prone to bushfires, do you fear for the future of farming? Garnaut sees the bush getting a whole new source of income and activity.

Do you fear that, with the decline of coal mining, regional Australia will be left even further out of the economic action? Garnaut see all the new industries created by the world’s move to renewable energy being located in the regions.

Of course, as the author of two government reports on our response to climate change, Garnaut has form as a prophet. In his first report in 2008, he relied on scientists’ advice to predict that "fire seasons will start earlier, end slightly later, and generally be more intense. This effect increases over time, but should be directly observable by 2020."

On the other hand, Garnaut now admits that even his second report, in 2011, has been overtaken by events. Then, he calculated that the cost of moving to renewable energy would come early and reduce our rate of economic growth for many years before it was eventually outweighed by the benefits of climate change avoided.

Now, he sees that the move to renewable energy won’t cost a lot, low-carbon electricity will be cheaper and will give us major new export opportunities. These more positive benefits will come earlier than the benefit of less climate change.

The cost of moving to all-renewable electricity has been transformed by two things. First, the huge reduction in the cost of solar panels and lesser falls in the cost of wind turbines and batteries.

Second, by the fall in global interest rates to record lows, which seem likely to persist. Whereas much of the cost of coal-fired electricity comes from the cost of the coal, with solar and wind power almost all of the cost comes from setting up the system – sun and wind are free. Lower interest rates mean the capital cost is much reduced.

So far, a chunk of Australia’s prosperity derives from our huge natural endowment of coal and gas. Now Garnaut has realised that, relative to the size of our population, Australia is more richly endowed with sun and wind than any other developed country – or our Asian neighbours.

So zero-emissions electricity will be cheaper to produce (though we may have to pay more in transmission costs). More significantly, our carbon-free power will be much cheaper than other countries’.

Carbon-free electricity is the key to our efforts to achieve zero net emissions overall, and to our various opportunities to profit from the world’s move away from fossil fuels. Our transport emissions will be slashed by moving to electric vehicles and increased use of public transport.

The scope for exporting our electricity through submarine cables – or via tankers of electrolysis-produced hydrogen – is limited. But this will now make it economic to further process alumina, iron ore, silicon and ammonia before we export them. That processing is best done adjacent to the mine site.

At present, plastics and many chemicals used in manufacturing are produced from fossil fuels. But we will have more plentiful supplies of (renewable) biomass – plant material – than many other countries, which we can use to produce plastics and chemicals for ourselves and for export.

The "net" in zero net emissions implies that the world will still be emitting some carbon dioxide, but these emissions will be offset by "negative emissions" as atmospheric carbon is captured and sequestered in soil, pastures, woodlands, forests and plantations.

Guess what? Few countries have more scope for "natural climate solutions" such as carbon farming than we do. We need research to improve the measurement of carbon capture, but we have so much scope that, after meeting our own needs, we could sell carbon credits to the rest of the world. This could be a new rural industry, much bigger than wool.

To maximise our chances of benefiting from the move to a low-carbon world, however, we have to get to zero net emissions sooner than the other rich countries, not later.

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Getting and spending - what's it meant to prove?

In the Aussie calendar, tomorrow – the day after the Australia Day holiday – is the unofficial start to the working year. So today’s the last day we have a moment to pause and wonder what all our getting and spending – my usual subject matter – is meant to prove.

From a narrow biological and evolutionary perspective, our only purpose is to survive and replicate our genes, playing our part in the survival of our species. Apart from that, what we do on the way to our inevitable death is of little consequence.

Don’t like that idea? No one does. Enjoyable though we find the mechanics of reproduction, the human animal craves more than just sex, good meals and a bit of fun while we kill time until our funeral. We want somehow to find purpose and meaning in our lives.

Contrary to the message of much advertising and other marketing, this meaning can’t be supplied satisfactorily by the efforts of our business people, politicians and economists. Beneath the glitter, their message is simple: get back to your getting and spending. Just do more of it.

Is there anything scientists – as opposed to philosophers – can tell us about the meaning of life? Steve Taylor, a senior lecturer in psychology at Leeds Beckett University, can, even though he’s not religious.

In a recent article on The Conversation website, he tells of his work over the past 10 years talking to people who’ve had what he calls “suffering-induced transformational experiences”. These include being diagnosed with terminal cancer, suffering a bereavement, becoming seriously disabled, losing everything through addiction, or having a close encounter with death during combat.

“What all these people had in common is that after undergoing intense suffering they felt they had ‘woken up’. They stopped taking life, the world and other people for granted and gained a massive sense of appreciation for everything,” he says.

They spoke of a sense of the preciousness of life, their own bodies, the other people in their lives and the beauty and wonder of nature. They felt a new sense of connection with other people, the natural world and the universe, he says.

“They became less materialistic and more altruistic. Possessions and career advancement became trivial, while love, creativity and altruism became much more important. They felt intensely alive.”

A man who experienced a transformation due to bereavement spoke explicitly about meaning, describing how his “goals changed from wanting to have as much money as possible to wishing to be the best person possible”.

He added: “before, I would say I didn’t really have any sense of a meaning of life. However, [now] I feel the meaning of life is to learn, grow and experience.”

Taylor stresses that none of these people were, or became, religious. The changes weren’t merely temporary and, in most cases, remained stable over many years.

He says we don’t have to go through intense suffering to experience these effects. “There are also certain temporary states of being when we can sense meaning. I call these ‘awakening experiences’.”

Usually they occur when our minds are fairly quiet and we feel at ease with ourselves. When we’re walking in the countryside, swimming in the ocean, or after we’ve meditated, or had sex.

“We find the meaning of life when we ‘wake up’ and experience life and the world more fully. In these terms, the sense that life is meaningless is a distorted and limited view that comes when we are slightly ‘asleep’.”

So what’s the meaning of life, according to Taylor? “Put simply, the meaning of life is life itself.”

Wow. From my own reading of what psychologists tell us about life satisfaction, let me add two more-prosaic points. First, humans are social animals and we get much of our satisfaction from our relationships with our family, in particular, and also with our friends.

When economists and politicians try to make us more prosperous materially without ever considering what strain they may be putting on our relationships, they’re not doing us any favours. They – like us, so often – are mistaking the means for the end. Cannibalising our ends to improve our means doesn’t leave us better off.

Second, the simple economic model assumes work is an unpleasant means to the wonderful end of having money to buy things. But, as they say, if you can find a job you like – or get more joy from the job you have – you’ll never have to work.

If politicians, economists and the business people we work for put more emphasis on helping us find satisfaction from our work, they’d be adding more meaning to our lives (and theirs).

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Economics isn't as highfalutin' as the jargon makes it sound

If you’ve ever had the feeling you ought to know a lot more about economics than you do – even if only to make it harder for economists to bamboozle you – here’s my long-weekend special offer: the key concepts of the discipline explained in one article. As many as I can fit, anyway.

More than a year ago, the boss of the Australian Competition and Consumer Commission, Rod Sims – surely the most experienced senior econocrat evading retirement in Canberra – began a speech by saying economics had become too mathematical and that to be a good economist all you needed was a deep intuitive feel for 10 or 15 concepts.

He then rattled off what he regarded as the 15 most important concepts, “in no particular order”. From those I’ll explain, in order, the five I consider to be most significant.

1. Opportunity cost

The first is one you should have heard of: opportunity cost.

Many economists consider “opp cost” to be the single most important and fundamental concept in economics, and the discipline’s most useful contribution to the betterment of mankind. Indeed, that’s the view Professor John Quiggin, of the University of Queensland, takes in his book Economics in Two Lessons, which I recommend as the best book to introduce you to economics.

Quiggin says “the opportunity cost of anything of value is what you must give up to get it”. Our wants are almost infinite, but our resources are limited, so we have to make choices. Economists’ eternal message to individuals and to the community is: think carefully before you spend your money, make sure you’re spending it on what you really want because you can’t spend it twice.

Really? That complicated, huh? Quiggin says “the lesson of opportunity cost is easy to state but hard to learn”. We keep forgetting to apply it. For instance, Prime Minister Scott Morrison is saying he’s not going to reduce our greenhouse gas emissions if the opportunity cost is to endanger jobs in the coal industry.

Sounds fair enough until you realise he’s saying jobs in a particular industry matter more to him than us doing all we can to help reduce global warming (which will destroy jobs in many industries).

We live in a market economy. We sell our labour in the jobs market, then use the money we earn to buy the goods and services we need in 101 product markets. Economics is the study of markets and, in particular, of how the prices set in markets work to bring supply and demand, sellers and buyers, into agreement (aka “equilibrium” or balance).

2. Invisible hand

The first of Quiggin’s two lessons is “market prices reflect and [also] determine the opportunity costs faced by consumers and producers” – which brings us to Sims’ next key concept, “the invisible hand”.

In a market-based economy (as opposed to a feudal economy or a planned economy), the differing objectives of workers, employers, consumers and producers are co-ordinated (brought together) not by the government issuing orders to people, but by the “price mechanism” (prices going up or down until both sides are satisfied).

That’s the invisible hand. And what motivates this invisible hand is the self-interest of workers, bosses, consumers and businesses. In the famous words of the father of modern economics, Adam Smith, in 1776, “it is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest”.

It’s amazing to think of, but it holds much truth: the invisible hand of markets and prices takes the self-interest of all those competing players and turns it into a situation where most of us have our wants satisfied most of the time.

3. Imperfect competition

But if that sounds a bit too pat – a bit too perfect – it is. It is, in fact, a description of what economists call “perfect markets” and “perfect competition”. And in real life, nothing’s ever perfect. The greatest female economist, Joan Robinson, was the first to formalise Sims’ third key concept, “imperfect competition” – the study of why markets and the price mechanism don’t always work as perfectly as the oversimplified “neo-classical” model of markets assumes they do.

4. Market failure

From the subtitle of Quiggin’s book you see that lesson one is “why markets work so well”, but lesson two is “and why they can fail so badly”. This takes us straight to Sims’ fourth key concept “market failure”. Markets are said to fail when they deliver results that aren’t “allocatively efficient” – when they don’t lead to the particular allocation of economic resources that yields the maximum satisfaction of people’s wants.

Economists have spent much time studying the various categories of factors that cause markets to fail. More recently they have turned to studying “government failure”, which is when governments’ attempts to correct market failures end up making things worse.

5. Externalities

Sims’ final key concept is “externalities” – a major category of market failure. These occur when transactions between sellers and buyers generate costs (or benefits) for third parties – known as “social” costs or benefits – that aren’t reflected in the market or “private” prices paid and received by the buyers and sellers.

These social costs or benefits are thus “external” to the private transaction and the private price mechanism. They constitute market failure because the market generates more costs (or fewer benefits) than is in the public’s interest.

One example of an external benefit is the gain to the wider community (not just the particular individual) when a student graduates from university (which is why uni fees are set at only about half the cost of the course, so as to “internalise” the positive externality).

As for external costs (“negative externalities”), Quiggin notes that the leading British economist Lord Nicholas Stern has described climate change as “the biggest market failure in history”. So now you know why so many of the nation’s economists are appalled by Morrison’s dereliction.

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Climate change: we can't stop it by refusing to change

After Donald Horne's book in the 1960s, we all know we live in the Lucky Country. What we've forgotten until now, however, is the qualification Horne added: "Australia is a lucky country run mainly by second-rate people." We haven't been feeling so lucky this burning, smoky summer. But our present leader, Scott Morrison, has certainly been looking second rate.

This summer we've had our Pearl Harbour moment. Just as the Japanese bombing of Hawaii in 1941 stopped Americans viewing World War II as some distant threat, so our season of unprecedented drought, heatwaves, bushfires and smoke haze has woken us up to the present reality of global warming.

There we were thinking climate change would be a problem for our children and grandchildren – who, we hoped, wouldn't remember our refusal in 2013 to pay a bit more for electricity so as to reduce greenhouse gas emissions.

Now we realise it's a problem – a frightening problem – for us. One likely at least to continue for the rest of our lives at its present level of harm and unpleasantness, and more likely get much worse in the years ahead unless something decisive is done by all the major economies, including us, to reduce net emissions to zero over the next 30 years and stop us cooking.

It's a wake-up moment not just for us, however, but for the entire rich world. They've been watching in fascinated horror as global warming has punished the Aussies for their repeated refusal to take it seriously.

Ostensibly, Morrison has realised we need to change course. "We want to reduce emissions and do the best job we possibly can and get better and better at it," he said when it dawned on him we were holding him responsible for the fires regardless of what the constitution says about them being a state responsibility.

"In the years ahead, we are going to continue to evolve our policy in this area to reduce emissions even further," he said. But then he started adding qualifications. "We're going to do it without a carbon tax, without putting up electricity prices and without shutting down traditional industries upon which regional Australians depend for their very livelihood."

Really? Sounds like he's promising us all the benefits without any of the costs. Nothing needs to change to make things much better. Which, in this age of cynicism and distrust of our lengthening string of second-rate leaders, makes you fear all that's changed is the marketing spiel.

What we need is a leader great enough to seize our Pearl Harbour moment and turn it into a Port Arthur moment – the moment when a prime minister exercises true leadership and uses the horrible reality of death and destruction to win public support for big changes to stop such things becoming regular events.

John Howard, Morrison's role model and mentor, saw such an opportunity and seized it. He did so not because it offered political gain, but because it was a leader's duty to deliver something great for those he led. He did so knowing it would prompt great resistance from within the Coalition. But with the public behind him and his political opponents unlikely to oppose him, that was a risk he was prepared to take.

Just the same conditions apply to Morrison's decision on whether to turn us from laggards to leaders in the global effort to halt the rise in average temperatures to less than 2 degrees. Has he the courage to stand up to the noisy minority of climate change deniers in the Coalition, who are now so badly out of step with public opinion?

There's a central lesson to be learnt from this appalling summer. The dichotomy Morrison has so far relied on – the environment versus the economy – is false. "We'd love to help the environment, but not if that involves a cost to the economy."

Sorry, since the economy sits within the natural environment, anything that damages the environment also imposes loss – of property, businesses, jobs, wellbeing, lives and health – on the economy and the humans who constitute it.

It follows that, in our obsession with the cost of fighting climate change, we can no longer ignore the far greater cost of not fighting it. The one option that's not available is no change. We can refuse to change, but nature will change things whether we like it or not.

The economy is always changing, as some industries expand and other contract. Jobs are continuously being lost in some fields and created in others. This is the very process by which we've become far more prosperous over the past two centuries.

So the notion that our steaming coal industry can be preserved in aspic is laughable. Its days are numbered. But we don't have to kill it, the rest of the world will do that for us as – like us – they increasingly turn to renewable energy and away from fossil fuels. Business can see that; Morrison professes not to.

Second-rate leaders throw in their lot with those who fear losing from change, letting the rest of us suffer while they attempt to resist the irresistible. First-rate leaders seek out ways we can benefit from that change, restoring the luck of the Lucky Country. How? Watch this space.

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RBA should stop pretending there's any more it can usefully do

Every institution – even, as we’ve learnt to our sorrow, the Christian church – is tempted to put its own interests ahead of its duty to the greater good. Now it’s time for the Reserve Bank to examine its own conscience. If it cuts interest rates again in a fortnight’s time, in whose interests will it be acting?

Many of the Reserve’s immediate customers in the financial markets expect it to cut the official interest rate at its meeting early next month and then again a few months later, at which point the rate will be down to its "effective lower bound" – 0.25 per cent – and it will be time for it to move to using purchases of government bonds to lower the risk-free rate of interest more widely in a program of "quantitative easing".

That’s what its market customers expect of it and it will be tempted to comply, showing it’s still at the wheel, in charge of steering the economy, doing all it can to get things moving and keeping itself at the centre of the macro-economic action.

What could be wrong with that? Just that it’s unlikely to do any good, and could do more harm than good. It’s hard to see that yet another tiny interest-rate cut will do anything of consequence to stimulate spending.

Rates are already so exceptionally low it’s clear that it’s not the cost of capital that’s making businesses reluctant to invest in expanding their production capacity. Whatever their reasons for hesitating, cutting rates further won’t change anything.

Moving to households, the record level of household debt does much to discourage them from borrowing to buy goods and services and so boost economic activity. Interest-rate movements mainly affect discretionary spending on household durables (cars, white goods, lounge suites etc), but sales of these are in the doldrums despite already super-low rates. So, again, another cut is unlikely to change that.

In justifying recent rate cuts, the Reserve has relied heavily on the expected consequent fall in our exchange rate, which should stimulate the economy by making our export and import-competing industries more price competitive internationally.

And the reverse is also true: if we leave our rates well above the low levels of the big advanced economies, the dollar will appreciate and make our industries less price competitive. However, that argument’s of little relevance by now, and we shouldn’t be encouraging a beggar-thy-neighbour game of competitive devaluations.

But even if further rate cuts, and quantitative easing after that, will do little to boost demand, surely they couldn’t do any harm? Don’t be too sure of that. They’d hurt those who rely on interest income from financial investments – though bank interest rates could hardly fall any further.

Speaking of banks, the closer interest rates get to the floorboards, the more their profits are squeezed. If you don’t see that as a worry, you should: when lending becomes unprofitable banks become reluctant to lend. Sound good to you?

There may also be some truth in the argument that whereas in normal times news of an interest-rate cut boosts the confidence of consumers and businesses, at times like this they’re a sign the economy isn’t travelling well and new commitments should be delayed.

But here’s the biggest reason further rate cuts would do more harm than good: the clear evidence that, since the cuts began and prudential supervision was relaxed, house prices in Melbourne and Sydney have resumed their upward climb.

This is an appalling development. Getting our households even more heavily indebted is a cheap price to pay for scraping the last bit of monetary stimulus off the bottom of the barrel? Making first-home ownership even more unaffordable for our young people is just something we have to live with?

The one thing we know is that while "monetary policy" has lost its ability to stimulate demand for goods and services, its ability to stimulate demand for assets - such as houses, commercial property and shares - most of it fuelled by rising debt, continues unabated.

When in the 1970s we switched from using the budget to using interest rates to manage demand, we little realised that the serious side-effect of monetary stimulus was rising asset prices and rising debt.

Essentially, Australians buy and sell our houses among ourselves, bidding up the price of that little-changing stock of houses. Then we tell ourselves we’re all getting richer. Why is this anything other than damaging self-delusion? Why should the Reserve Bank be one of its chief promoters?

It’s time for Reserve governor Dr Philip Lowe to stop doing more harm than good and turn the management of demand back to the people we elected to run the economy.

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