If you want a simple tip on how to open a ‘Pandora’s nest of worms’, then based on the responses to our brief comments on climate change yesterday, that’s how you do it.
So, hold on to your hats.
Your editor is about to make a sweeping generalized statement.
And we’re about to make it on the basis of absolutely no research whatsoever.
Are you strapped in?
Here goes…
“No problem was ever solved through taxing it.”
There. I’ve written it in black on a white background. We’re probably not the first one to say it. But it’s there to be refuted and scoffed at for eternity. Or until we potentially realize our mistake and erase it from the interweb!
But wait. We’ve got a taste for it. How about a second sweeping, un-researched ad hoc statement?
“No problem was ever solved through banning it.”
Don’t be surprised if both of those quotes appear on your desk calendars next year!
The Money Morning mailbag is overflowing with opinions on climate change from readers.
They were evenly split between ‘fors’ and ‘againsts’ the concept of climate change. But either way, it’s about time your editor got his hands dirty and stood up to be counted.
So, here we go…
The way we look at this issue is that everyone – and we mean everyone – is looking at climate change (henceforth referred to as CC) from the wrong angle.
Almost without exception the political sheep, pressure groups, corporations and the public at large, all approach CC as an environmental problem.
“Hang on,” you say, “what about British economist Nicholas Stern’s approach. Didn’t he assess the economic impact?”
Well, you can read his 700-page report for yourself here. We can’t say that we’ve read the full thing yet. But considering who the report was written for – the UK Treasury – our skimmed reading leads us even more to the conclusion that the report is more interested in a tax grab than reducing carbon emissions.
The following chart and statement from the report reveals this:
“This contrast between short-term and long-term marginal cost and marginal benefit curves gives rise to the problem of how to combine a tax-like regime in the short term with a quantitative constraint in the long term. A rule is needed for updating the tax in the light of new information about costs over the long term and the ex post quantity of emissions.”
So, there you have it. A ‘tax-like regime’ is the key concern. The environmental concerns are merely a ‘beard’ to cover up the tax grab.
It’s rather like the phony environmental stance taken by supermarkets. You know the one, “We won’t give you plastic bags unless you ask for them” or “Why don’t you buy a reusable bag for $1 rather than using plastic bags.”
Yeah, well, if the supermarkets really are that concerned about the environment why don’t they sell the reusable bags at cost price rather than marking up the price? And if plastic bags are so bad, then just stop providing them for free to customers.
There’s a simple reason for that, Coles and Safeway have found a way to both make money and ’save’ the environment. That’s because they have a profit motive.
Private enterprise has recognized a profitable opportunity and they’re taking advantage of it. Likewise, the government has recognized an opportunity to raise tax revenue.
But guess what, the measures taken by supermarkets to reduce the use of plastic bags, and utility companies to reduce the use of fossil fuels are better measures than anything any government has ever achieved.
Private businesses have taken these steps despite government meddling, not because of it. Without high taxes and excess regulation businesses would be able to take advantage of other opportunities to make a profit and help the environment.
But before we go any further, just so we can’t be accused of committing the heinous crime of being a ‘CC denier,’ we’ll tackle it as though CC is a 100% proven phenomenon.
In fact, just to set the record straight and lay our cards on the table, being skeptical of the science and motives of CC activists doesn’t mean we aren’t fans of alternative energy technologies.
As it happens, at least half a dozen of the stocks we’ve picked in Australian Small Cap Investigator could be considered as environmentally friendly or alternative energy companies (solar, geothermal, natural gas, clean coal, etc…)
But anyway, back to our point. Let’s assume that the esteemed Professor Muggins of the University of Spurious Claims, has just proven that climate change exists and that Man is the direct cause.
Now we’ve got the proof, what do we do about it? Ideas anyone?
Well, according to governments, a tax is required on carbon emissions to solve the problem. Clearly this is a massive error. History will show you the mere taxing of something does not prevent its use – cigarettes, petrol, alcohol, gambling…
Are there any circumstances in which a government has imposed a tax in order to eradicate the use of something? Even cigarettes which were advertised with endorsements from doctors in the 1950s are still being taxed to garner revenue for the Australian government.
Why should we suppose that a carbon trading system, or a carbon tax will necessarily reduce the emission of carbon dioxide? Maybe it will increase the output of carbon dioxide.
Well, why don’t we just ban it then? Again, that doesn’t work either. Guns, illicit drugs, prohibition in the US… None of those has worked and there would be hundreds or thousands of other examples.
You see, here’s the problem with trying to use taxation as a disincentive – if you believe it really is supposed to be a disincentive rather than a tax raising ruse – it’s that, as per usual is merely distorts the market.
As with any tax, the ultimate payer of the tax is the consumer – the individual. Even company taxes aren’t paid for by the company, they are indirect tax impositions on the consumer. Without company taxes the cost of goods would be lower, which means the consumer would pay less.
Without company taxes, share investors would receive more income.
So it’s no surprise that in all the horse trading about credits and subsidies for an emissions trading scheme that it is the consumer who will be left to pay the cost of companies reducing their emissions.
But even so, as with any tax imposition, any company executive worth their six-figure pay packet is going to try and reduce their tax liability. What will that mean?
Well, as far as we can tell, a carbon trading system will allow companies that produce too much carbon to buy credits from those that don’t produce ‘enough.’ It has to, otherwise it’s not a ‘trading’ scheme.
The inevitable consequence is that this will create ‘Carbon Shelters.’ If the cost of changing your business processes is higher than the cost of the carbon tax then you’re unlikely to change. Unless…
You can pass these higher costs onto the consumer. Again, the individual gets it in the neck.
But isn’t the clamour for a solution for CC coming from the consumer? That’s what we’re told right?
Maybe. Maybe not. As Money Morning reader Luke wrote to us in an email:
“When it’s pointed out that “most” people believe in climate change and think governments and society should “do more”, I like to challenge them by asking if most people really do believe in CC?”
“Because if they really did believe it, why would the government have to subsidise virtually every form of renewable energy? If people were really sold on the CC argument and on the benefits of clean energy, then wouldn’t they (operating in the free market) then choose, at whatever cost appealed to them, to buy clean, renewable energy?”
It’s a fair point. Is the public really that committed to CC? Why should it take the government to force you to do something if everyone is so convinced CC is real?
Let’s take ASX listed company JackGreen Ltd [ASX: JGL] as an example. This is a company that sources it’s power generation from ‘green’ sources – wind, etc.
In 2008 JackGreen Ltd had revenues of $43.9 million. It’s profit… was a loss. It lost $3.3 million. OK, not every business can be profitable.
But look at those numbers and compare them to AGL Energy Ltd [ASX: AGK]. Revenue for 2008 was $5.5 billion, and profit was $229 million. In percentage terms, JackGreen’s revenues are 0.7% the amount of AGL Energy.
Now, don’t get me wrong, I’m perfectly aware that AGL Energy also uses ‘green’ energy sources. But it shows you that in revenue terms, of all the households out there, only a fraction are truly interested in ‘green’ energy.
Even if we look at numbers supplied by JackGreen, as of December 2008, less than 7% of Australian households were using some form of ‘Green power.’ That may sound a lot, but it isn’t, not when you consider JackGreen basic GreenPower package only guarantees that 10% of your electricity is sourced from ‘green’ power generation.
The numbers are tiny.
And there’s a simple reason for it. It’s is the one reason why alternative energy hasn’t taken hold in Australia. Are you ready for it?
Government interference. You only have to look at simple examples such as solar energy and housing insulation. Why would any privately funded business risk getting involved in this sector of the market when it knows the government could change its plans at any moment?
It’s not by chance that some of the best alternative energy plays on the Australian stock market are small cap companies. The reason they are still small is that the potential for flip-flipping government policies makes it hard for them to plan.
And it makes it even harder for people to invest. Of course, that hasn’t stopped us from tipping them. I believe they’re a good punt, they are market leaders in their field, and they have that little extra something that gives them a competitive advantage.
Even so, it’s going to be a hard slog for them.
The only surefire way to encourage the use of alternative fuels is for the government to step aside and let the free market work it out. I mean, look at the effort involved in getting a barrel of oil or a cubic foot of gas out of the ground – is that really the most efficient way to fuel a power station?
If individuals didn’t have to pay half of their salaries in direct and indirect taxes – plus compulsory superannuation – and if companies didn’t have to pay one-third of their profits in taxes there would be a much greater incentive for companies to invest in the research of green technology.
That’s the only economics you need to look at. Forget Nicholas Stern and his 700-page UK Treasury sponsored tax-raising excuse.
It is irrefutable, if the government is raking in $300 billion per year to waste on feeding itself and providing expensive and substandard services, that is $300 billion per year that is not being invested in or spent on things people actually want.
If it turns out the people don’t want ‘green’ energy then so be it. The fact is, whatever the government does it will not provide any greater ecological benefit than the free market could have provided.
Whether it is solving climate change, running a business or providing a service there is no difference. Government is incapable of doing any of these better than the private sector – no exceptions.
If the science of climate change is valid then one thing is guaranteed, as long as governments globally insist on staying involved and trying to solve things, the problem – if it exists – will only get worse.
Other Stuff on the Markets
The S&P/ASX200 fell 1.04% yesterday, while overnight on Wall Street the Dow Jones Industrial Average dropped 39 points. In Europe the FTSE100 dropped 0.52% and the CAC40 slipped 0.51%.
The price of gold in Australian dollars is trading at $1,145.56, while in US Dollars it is trading at $963.30.
The Aussie dollar steadied versus the US dollar and Japanese Yen, trading at USD$0.8401, and JPY79.78.
Crude oil overnight closed at USD$71.64.
For the biggest movers on the market yesterday click here…
{ 14 comments… read them below or add one }
3 CHEERS FOR THE “CORRUPTIS-CUNNTISS-GUBBERMENTISS”
What a great disertation and condemnation of government interference. Why can’t this be distributed much more widely so that informed citizens could make rational decisions as opposed to irrational “green emotional motherhood ill thought out irrational decisions.” Unless I hear from you to the contrary I will send it to as many sensible people as possible, starting with all the Talk back radio hosts.(Though it may be stretching the concept “sensible” in some of their cases.) Keep up the good work, a voice in the wilderness ,if you believe in chaos theory, may be all we need to start a storm of protest.
Regarding Govts never being good at doing things, I’m a little hazy on exactly how we stopped using CFCs?
The real issue is that no one has thought up a good scheme of accurately pricing non-renewable resources. The $10~$40 cost of “producing” a barrel of oil does not include the actual cost of waiting for millions of years for the plankton to actually produce the oil.
Using non-renewable energy is actaully the same as borrowing from the future to pay for current consumption. I suspect the upcoming oil crunch will look remarkably like the present credit crunch – except no one will attempt to fix it by creating “fiat oil”.
On the contrary, a completely unregulated market (this is how I translate your word ‘free’) can not solve all problems. A pro-free-market government must step in to ensure that individual players the private sector doesn’t erect barriers to the freedom of other players, or perform actions that cost the market more than they cost the player.
An accurate tax on externalities (ie, a properly implemented Carbon tax) will ensure everyone actually does pay the cost of their own actions. If I burn an extra gallon of fuel, I would have paid at the pump the extra cost to society of the pollution I’ve caused. The free market then takes over, and I decide, correctly, whether this is worth it.
Having said that, it is true that taxes in general distort markets, making them inefficient.
However, A well-implemented Carbon tax would return the money collected to those who suffer from the effects of Climate change. They would discover that this money is adequate to exactly compensate for their loss.
Having actually studied climate science as part of a broader Masters degree I unequivocally believe the science is right and has been settled for some time. In fact the notion that thousands of ernest scientists and hundreds of thousands of data gathering devices could be be tuned into creating a giant hoax is laughable, yet that is what lots of people believe.
Idiots!
So. What to do about it? In fact climate change is part of the far bigger and broader problem of energy generally. There is broad consensus that oil production has or is about to peak. This is a much more immediate problem than climate change and there will be no economic growth until our energy crisis is properly managed. And this will not be properly dealt with until we can talk about it.
The energy crisis is a subset of the much bigger problem of over population. Energy, food, water, deforestation, over-fishing, pollution, massive extinction – you name it we have problems, big problems. And they all go back to over-population. However it is even less palatable to consider curbing procreation. So we are going to suffer the effects of over shoot which will be horrible.
When a quantity of sugared water (grape juice) is combined in a bottle with some yeast, the yeast multiply rapidly, consuming the available sugar. Their population reaches a peak and then they begin to die from lack of sugar and because their environment is polluted with their detritus (alcohol). A metaphor for our own demise is literally under our noses, yet we do not see it. Are we any smarter than yeast?
Actually I’d dispute that banning something dangerous will never work. What about CFCs? Asbestos? If regulation of these substances had been left to the market we’d still be using them.
You are right – the latest CC vehicle is powered by money and driven by ignorance.
Carbon MONoxide comes out of the rear end of cars – not C’Dioxide.
Notice the sticker on the rear end of new cars has a CO2 efficiency rating (CO2 is a tiny gas just 0.038% of the atmosphere and it doesn’t come from cars) – BUT did you know that your car’s engine has at least one OXYGEN sensor which orders a richer mixture if it detects OXYGEN…they lost the plot years ago since the first car was made of wood and ran on hydrogen.
I’m glad I have a large store of incandenscent light bulbs to take me into the future…lol
Considering that climate change started back when “God Created” and history shows earth went through a climate HOT and a mini ice age during the period 1000AD to 1600AD and we survived .. whats new? Kris I couldn’t have put the current position better
I’m glad a semi skeptical friend sent me this link. First comment is how really badly informed you are. 2 years, or is it 3 now since Nicholas Stern and you haven’t even read it ? You pose as a financial “advisory” webpage and have no handle on an emissions trading scheme ? Don’t know why it’s being introduced so you mock up the old tax grab scam !
Come on, get with the programme or you’ll be completely embarrassed when a cap and trade is introduced next year. Oh yes, the “purpose” of the ETS is to reduce carbon emissions into the atmosphere, that’s why they’re “capped” and then the total amount “reduced” next year.
I suggest you find out how Deutsche Bank think about this by Googling “know the number”. It will take you to a website partnered with the Massachusetts Institute of Technology which displays the TOTAL amount of emissions ALREADY in the atmosphere, currently 3,645,689,550,000 metric tonnes and INCREASING at the rate (globally) of 800 metric tonnes PER SECOND.
I also suggest you track the McKinsey Report on just how Australia can make the necessary 95% cut in emissions by 2050.
In case you hadn’t heard, Prof R Garnaut was an economist too, Austalian as well.
The sooner you get real about this “externality” the better for you and those to whome you ‘offer’ advice. You’d better be praying nothing happens in Copenhagen this December ……….
Of course we are going through a change of climate. Anyone can see that we have been in drought mode for ten years or so. The planet does this all the time going through its natural cycles BUT to try to claim it is our fault is where the argument starts. Yes, one very sound idea is to follow the money. Who is going to profit? Who is going to pay? Not very scientific but more often than not a very good guide.
Another is to try to find scientists who don’t stand to make any money either way. I went to a meeting held by Professor Bob Carter. He backed up his presentation with more hard data and rational than I have heard from any politician or grant bound scientist to date.
Try this site: http://www.youtube.com/watch?v=hgaeyMa3jyU
Don’t bother if you already have fixed and highly emotional ideas.
Oh dear. Kris,
Markets aren’t going seriously work for solutions to climate change until people are suffering severely from it’s effects. By then it will be way too late for action. Markets don’t have 50 year foresite. Governments, when guided by enlightened leaders, can have. What? Enlightened leadership in government? Impossible maybe but I still reckon government action will have a better shot at doing something in time that Mr Market. There are just some problems the market ain’t good at solving.
Climate change has existed since human inhabit the earth. Only that very few of us ever live long enough to witness it. Those who does managed to experience it has ever just a touch on it. What comes arround goes arround. Do we ever know !
re comments by R Laverack:
It’s mindless comments like these that leave thinking people flabbergasted.
There is no science in an ETS, only a blatant tax grab, and a lot of Alarmism by well meaning but misinformed individuals.
I dont have to be a scientist to know that this ETS idea is stupidly flawed, and besides there are 30,000 + scientists out there who put their names on the internet in opposition to this CO2 hoax, unlike the ipcc whose scientist are hidden behind cloaks of secrecy or they show only the very few that will not dissent in public.
Quoting CO2 figures of 3.5 tt is neither here nor there as it is the overall figure of 385 parts per million which in cold hard facts is so small as to be laughable as a concern, considering the earth has seen higher levels in the past as shown by ice core studies, and inspite of these higher levels ( up to 10,000 times higher ) still went into ice ages.
Present day being another example of CO2 levels at it’s highest point since pre industrial levels and yet the worlds temps have plummeted to pre 1979 levels.
This planet originally had very little or no oxygen in the first billion years until certain biological factors went to work. Can you imagine Co2 was the norm and then these little creatures started creating a pollutant called oxygen which is 21% of the earth’s athmosphere today.
Can you imagine how much CO2 there was to have created a lot of this oxygen, There was no dangerous runaway green house affect then was there.
The earth did not cook in it’s own CO2 juices did it.
Whatever system the earth uses has worked well in the past and will continue to work well into the future until our sun expands even more and cooks most of the planets in the solar system, somewhere in the distant future. We should be enjoying the pleasant weather we are now experiencing because the next move will be to an ice age, admittedly it wont be in our lifetimes, or could it. LOL
I agree that sustainable initiatives are much more effective if they are profitable! Then they are both financially and environmentally sustainable.
I also think we should stop polarising the community for & against the environment with the climate change debate. There are many more things that need our attention as well – overfishing, pollution, salinity, acid rain, deforestation, etc!
Here is a bigger list of issues: Environmental Issues
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