Tuesday, August 27, 2013

The C-c-c-razy Concept of a C-c-c-arbon Tax

Our Treasury proposes to introduce a carbon tax from 2015.  It is a serious mistake.  Not only are the reasons advanced by Treasury flawed, but international experience has shown that carbon taxes do not achieve what is hoped, namely a reduction in carbon emissions.  Instead, they capture wealth that could easily put to better use. They cost jobs. The burden of the tax falls largely on the poor. Treasury’s own paper shows this.

Treasury sought to justify a carbon tax in its 2010 discussion paper.  It claimed that climate change was an example of market failure, in that the environmental costs of climate change were not factored into energy prices. That, of course, presumes that one can determine the environmental costs.  A huge pan-European team laboured for 15 years. It found that the total environmental costs – health impacts from emissions, acid rain impacts on crops, water chemistry changes on fish life and climate change - amount to something between about €0.20 and €0.75/kWh.  That sounds horrendous, but the cost of not having energy, i.e. the benefit of energy, is about €25/kWh, so society is far better off! The market failure thesis fails.

Treasury also argued that South Africa was one of the largest emitters of greenhouse gases in the world.  That overlooks the fact that we are actually quite a populous nation.  When the number of South Africans is taken into account, we are only 34th in world rankings. We contribute a little over 1% to the total.  Anything we did to reduce our emissions would be invisible against the background of surging output elsewhere in the world.

A third reason Treasury advanced was the possibility that failing to address our emissions might result in trade sanctions.  Our primary trading partners all emit more per capita than we do, so the risk of sanctions would seem remote.

Finally Treasury held out the hope that we might develop some wondrous low-carbon technologies, which would enable us to develop new markets.  Yes, it is possible that we might, but the world is so heavily dependent on fossil fuels that any change towards a lower-carbon energy scene will not happen rapidly.  At best, Treasury’s hopes can only be regarded as a long shot.

So the reasons Treasury put forward for wanting a carbon tax in the first place are all flawed. Matters get worse when we turn to Treasury’s economic arguments.

First, its own models predict a significant loss of economic growth.  It admits its models are inexact, but they produce some surprising results.  For instance, a carbon tax would have, apparently, no impact on electricity sales – yet most of our emissions come from generating electricity! Nevertheless, Treasury’s admission that we will nearly all get poorer seems to be one of those sacrifices we need to make to save the world.

What is really surprising is Treasury’s calculation of where the burden of poverty will fall hardest.  I did not think I would live to see a day when an organ of this Government would seriously propose impoverishing the poorest of the poor while enriching the richest of the rich.  That is precisely what Treasury estimates.

But is there any hope that a carbon tax could achieve what it sets out to achieve, namely reduce our carbon emissions? Treasury has looked at a number of instances of carbon taxes elsewhere, but has not checked the effects.  In the EU, for instance, cited with approval by Treasury, emissions have levelled off – but the price of carbon has recently collapsed, and the Germans are quietly taking full advantage of the collapse by building 23 new coal-fired power stations. The Finns introduced a carbon tax as early as 1990 – and their emissions have grown relentlessly. Costa Rica introduced a carbon tax in 1997, since when its emissions have grown by over 60%.  India slapped a carbon tax on coal in 2010, since when its consumption has grown by nearly 30%.  Australia introduced a carbon tax in July 2012; by July 2013 the economic damage ran to billions, which cost Julia Gillard her government, and Kevin Rudd, her successor, immediately ditched the tax. We introduced a tax on gas-guzzlers, and the streets have grown more crowded with SUV’s.

Why does a carbon tax not work?   Most (over 80%) of global energy comes from fossil fuels, so energy use and emissions go hand in hand. Energy is an absolutely necessary element of wealth creation. It is not sufficient, because other factors such as skilled labour play their part, but without energy you cannot grow the economy, and you cannot create jobs.  As a developing nation, we need to grow our economy. That means our emissions are going to grow whether carbon is taxed or not.  In economist’s terms, the demand for energy is inelastic. Of course, it may become possible to produce energy economically without emissions, but it is going to take a long while to move away from the global level of more than 80% reliance on fossil fuels.

How could Treasury have gone so astray?  I think they were first misled when Government tried to turn the Long Term Mitigation Scenarios into plans. Scenarios explore extremes that have little chance of being realized in practice.  They have also been poorly advised by a British economist, Lord Stern.  Lord Stern moved into Tony Blair’s office in 2007 to produce a political excuse for a carbon tax.  His economics have been severely criticized by fellow economists, so that he has had to rely on ethical arguments to justify his belief in a carbon tax.  Invoking ethics usually means you have lost the argument.  Britain has not followed his prescriptions – why should we?

I can only conclude that Treasury’s proposals are flawed from start to finish.  But does that mean we should just give up on a lower carbon world?  Of course not.  The US has recently managed to get its emissions back to where they were twenty-five years ago.  An analysis by Yale university staff has shown that the arrival of shale gas is largely responsible; energy efficiency, less thirsty cars and fewer miles flown have also helped. We could easily do something similar.  Most nations get about a third of their energy from natural gas; we get only 3%.  If we grew our gas consumption by 20%, and cut our coal consumption by 20%, we would reduce our emissions by nearly a third.  Rather than destroy our economy with a carbon tax, let us explore vigorously for gas.   

Will Government stop dithering and positively encourage gas in all its forms?