Isra-Mart srl : Can we afford the carbon premium?

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Who could possibly want to read another column on climate change after the blizzard of comment we had last week following Marius Kloppers' speech? To get the CEO of the world’s biggest mining company to say that we need a carbon tax has jump-started this debate.

Whether the skeptics like it or not, the government is going to take some action on climate change now. What neither Marius Kloppers, Greg Combet nor Prime Minister Julia Gillard want to do is make it clear what that means.

What it does mean is that the price of energy will go up and everyone’s standard of living will go down. Any lecturer will tell you it is that simple in the first week of an economics course. If you want volume to go down you need to raise prices. We want the amount of energy produced by releasing carbon into the atmosphere to go down so we have to make people pay more for it.

Anyone who is advocating a reduction in greenhouse gases needs to acknowledge that they are asking the people of Australia to accept a lower standard of living today to protect the environment for tomorrow. There is no way around it. You cannot provide subsidies out of thin air nor can you 'tax just the polluters'. Anything the government contributes will have to be paid for as increased taxes, anything business pays for will be passed on as increased prices and this burden will fall on the average person.

Our Prime Minister says that before we get action on carbon she wants to build a national consensus. What that means is that the Australian people will have to agree that the need to fight climate change is so vital that they are prepared to accept a reduced standard of living today in exchange for reduced carbon gases in the future. It is a basic investment decision to invest today and reap the rewards tomorrow.

From the furious response of people during the week to Mr Kloppers' speech, this looks like a tall order. It will be impossible for Prime Minister Gillard to do so without being honest about what it means for ordinary Australians. Whether the way you choose to get volume down is to go for a carbon tax, a carbon pollution reduction scheme and emissions trading scheme does not alter the rules of economics.

In addition, we need to recognise that if we move ahead of the world it is going to cost jobs. We are a high carbon emitting nation and when we start charging people to emit, it makes them uncompetitive with producers in countries who can emit CO2 freely into the atmosphere.

Because it will cost both standard of living and jobs, it is not fair to marginalise those who ask the proponents of taxing emissions to prove that the planet is doomed without decisive action. The demonisation of the climate change skeptics is a formula for polarisation, not the consensus Prime Minister Gillard seeks.

By contrast there is a more moderate debate that should allow for the consensus our Prime Minister seeks to emerge. It rests on recognising the fact that the climate change skeptics are asking those who propose some action on climate change to clear a too severe burden of proof. We do not need to know for sure that climate change is being caused by greenhouse gases to spend money on addressing the issue. We just need to be convinced that it is more than possible and is likely probable that we are warming the planet. That is a test those proposing action can defend.

You don’t have to be certain that your house is going to burn down to buy fire insurance – you just have to think there is a chance it might. In fact, you are prepared to let the insurance company make huge profits for the peace of mind that if it does burn down you are covered. It's the same with climate change – we can want to protect ourselves even if we are not convinced that the climate is changing.

If the debate is framed as a society deciding to buy an insurance policy against something that is likely to happen, then we are only debating the nature and extent of the insurance policy. This allows us to get far further in organising programs and debating the extent of the money we will invest.

Clearly fossil fuels are the cheapest source of energy available. That is why we use them and why they have been such an important contributor to the economic growth that has come from the industrial revolution. Hydrocarbons are virtually miraculous as a source of energy, which makes developing wind, solar, and other low-emission technologies so tortured. Even nuclear power just cannot compete. Unfortunately because they are so superior we have become addicted to them. Are we prepared to invest 1 per cent of gross domestic product, 5 per cent or 10 per cent? That is the debate I think we should be having.

The reason we don’t have this debate is that the benefits are global while the costs are direct. The economists call this a problem of negative externalities. An externality is the jargon phrase people use to describe something that happens outside of one market economy – like untreated pollution affecting people downriver in a different economy, who have no recourse to stop to the pollution.

Historically, as economies became richer, more sophisticated and increasingly integrated, these effects became incorporated into the economy by regulation and pricing. Companies had to buy permits to release waste into rivers and also add equipment to pre-treat their effluent before it was released.

We look back and say that this is obvious now, but it was fought each step of the way by vested interest groups. This has happened in many areas of the economy as society has become richer. It has been a key part of progress and everyone understands this.

The problem with global warming is that we all grew up believing carbon dioxide was food for trees and plants and so good for the environment. It has been hard for society to understand that like most things in a diet, overconsumption can be very bad for you.

What is also hard to understand is that there might be sound economic reasons to move before the rest of the world to start getting our industries ready for climate change. Businesses can work with certainty and make adjustments and invest in research and development to change things. Since ‘the enlightenment’ society and business has shown a consistent power to surprise with its ability to adapt.

If we are a country leading from the front to address climate change then a series of companies are likely to use Australia as their research and development hubs in this area. So the short-term pain we feel in leading the world, could well lead to long term gain for the nation.

So we are left with two questions:

1) How much as a percentage of gross domestic product are we prepared to invest to address climate change as an insurance premium?


2) Are we prepared to make that investment ahead of the rest of the world?

The opinions expressed in this article are the personal views of the author.