Garnaut in Crikey

I had a piece in Crikey today on trade-exposed industries and the Garnaut report.

Garnaut out thinks the government on trade exposure

Crikey, 1st October, 2008

By Joshua Gans, Professor of Economics at the University of Melbourne:

In 1991, Larry Summers (then at the World Bank) initiated a storm of controversy when he wrote the following in a memo:

Just between you and me, shouldn’t the World Bank be encouraging MORE migration of the dirty industries to the LDCs [Least Developed Countries]?

Back then it was an argument about pollution per se and not climate change. But it did give rise to a very interesting paper by Graciela Chichilnisky (American Economic Review, 1994) who demonstrated that differences in the definition and security of property rights between countries could give rise to apparent comparative advantage.

In other words, it may be precisely because some countries have ill-defined pollution rights that they appear to have a comparative advantage in some “dirty” production. In particular, asymmetries in property rights may exacerbate global pollution as the North (with well-defined property rights) overconsumes underpriced resource-intensive products imported from the South (without such property rights). One thing this analysis did is put “consumption” on a par with “production” over dirty goods.

This is of relevance when reading Chapter 14 of the Garnaut final report. This is the chapter that outlines the details of emissions trading and how to deal with the “truly dreadful problem” of trade-exposed industries.

Garnaut frames the problem of one where, if we price emissions properly in Australia, trade-exposed industries will face falls in production well beyond what would occur if international competitors faced similar emissions pricing. He worries that by the time this occurs, Australian producers may never be able to bounce back.

Garnaut’s solution is to pay producers in those industries a subsidy based on the difference between the world price that would arise if everyone dealt with climate change and that which it currently is. In theory, this will lead to our producer’s facing the external conditions that ought to arise as opposed to what they actually are.

This solution is dramatically superior to the one in the Government’s green paper. It proposes to allocate free permits. For instance, if you emit a large volume of greenhouses gases per unit of revenue earned, you will receive 90% of your permit requirements (based on historic output) for free. At least this is what will occur until 2020.

Free permits misread the economics of the situation entirely. Put simply, unless they are non-tradeable, which, let’s face it, would miss the point of emissions trading, those permits are just a handout to those industries. Otherwise, those firms will curtail emissions and over-shoot just as Garnaut forecasts. The end result will be a situation where emissions from Australia have been reduced but emissions globally are virtually unchanged. In other words, we are not helping mitigate climate change at all.

Nonetheless, even the Garnaut solution requires some delicacy. How do you forecast the future price of exports and imports under a global agreement when the whole point of emissions trading was to reveal those prices? In my opinion, it would be better to bite the bullet and, at least for imports, assess the carbon cost of those imports and tax them. This will get the price signals right and also put pressure on trading partners to put in their own emissions trading schemes so as to avoid that tax.

3 thoughts on “Garnaut in Crikey”

  1. Having just read your article “Meltdown Hurts Climate for Change,” you should know that a new invention using zero point energy ruins your analysis:

    I would like to announce the arrival of a clean, cheap, abundant, and portable form of energy production that will make burning fossil fuel obsolete.

    The German physicist Heinrich Freidrich Lenz stated in 1833 the direction of an electromagnetically-induced current (generated by moving a magnet near a wire or by moving a wire in a magnetic field) will be such as to oppose the motion producing it.

    Today, most of our electricity is produced by “electromagnetic induction,” where a magnet is moved in and out of a coil of wire in a closed circuit.

    In other words, we now have to power the motion of either the magnet or the wire to produce electricity.

    Instead, wind a solenoidal coil around a magnet, and apply electricity. The magnetic field is amplified, and the magnetic gradient can be exploited to yield more electricity than was used powering the solenoidal coil.

    In other words, we avoid having to power the motion of either the magnet or the wire, and can instead have a solid state power generator.

    It has been reported that previous attempts to commercially exploit this simple principle failed. Not because such solid state power generators failed to produce a net gain in electricity production, but because the source of the net gain in electricity couldn’t be explained.

    A private California company called Magnetic Power Inc ( http://www.magneticpowerinc.com ) exceeded breakeven (i.e. produced more electricity than it used) with a prototype in late 2004. Here is an abstract of their patent application:

    US Patent Application Publication No. US 2006/0163971 A1

    Solid State Electric Generator

    A solid-state electrical generator includes at least one permanent magnet, magnetically coupled to a ferromagnetic core provided with at least one hole penetrating its volume; the hole(s) and magnet(s) being placed such that the hole(s) penetrating the ferromagnetic core’s volume intercept flux from the permanent magnet(s) coupled into the ferromagnetic core. A first wire coil is wound around the ferromagnetic core for the purpose of moving the coupled permanent magnet flux within the ferromagnetic core. A second wire is routed through the hole(s) penetrating the volume of the ferromagnetic core, for the purpose of intercepting this moving magnetic flux, thereby inducing an output electromotive force along wire(s) passing through the hole(s) in the ferromagnetic core. The mechanical action of an electrical generator is thereby synthesized without use of moving parts.

    I strongly suggest you listen to the first 15 minutes of the radio interview with Chairman Goldes posted on the MPI website. Soon burning fossil fuel for energy will be obsolete, and replaced with a clean, cheap, abundant, and portable form of energy production.

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  2. Joshua,
    For some time you have been advocating the imposition of tariffs on imported products that would compete with products made by Australian ‘trade exposed’ companies.
    In your latest article you are calling these ‘taxes’ instead of ‘tariffs’, presumably changing the semantics to avoid knee jerk accusations of imposing trade barriers. These import taxes would be calculated by assessing their carbon costs.
    This has seemed to me to be such good sense that, over the last 2 or 3 months, I have been conducting a straw poll with friends and business acqaintances. I can report a 100% “Yes, what a good idea” response.
    Hopefully some far thinking political party will pick up the idea, prove it with better market research than I have done (by the way, that excludes the Hollowmen focus group) and then run with it.
    Consider domestic transport fuels: If the tariff per litre is the same as the extra cost paid by Australian producers then there is no market disadvantage to Australian producers (unless they export their products which they hardly do at all). They have no grounds to claim dispensation of the carbon tax. Our federal coffers are enhanced by the carbon tax or by the import tax whichever the case might be.
    Consider coal or iron ore or other mineral exports: Local producers would pay more for their input fuels and other local carbon rich purchases but they would also place pressure on these vendors to improve their energy efficiency because of the carbon tax impost. These Aussie miners could not import their purcahses without paying the ‘Gans’ import tax, so Aussie vendors are protected from overseas competitors but not from purchaser pressure to get rid of the carbon tax impost.
    While costs for Aussie miners go up they have a watertight argument with their customers as to why their prices must go up – to cover the carbon tax costs. That’s even more pressure for Australian trade exposed producers to improve energy efficiency.
    My conclusion is the same as yours: No free permits. Taxes (or tariffs) on imports that would compete with trade exposed Australian producers.

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  3. Hello,

    The designers of the governments (and previous) proposals have considered this option. It is genrally agreed it would a good way to do two things:
    1) provide a price signal within australia to consumers with respect to the cost of carbon. (for example wood has a lower footprint than steel or concrete)
    2) protect the interest of traded good by providing credits for exports and charging costs on imports.

    The conclusion reached on each occasion was that it would be a huge administrative burden, and may be unapplicable due to world trade laws.

    So… what I am saying is your idea is not new. It was actually the first idea considred due to it’s apparent fairness.

    What is needed is a decsription of how it could be done in practice, and how international trade law claims could be avoided.

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