Why Would a Carbon Trading System Reduce Emission of Carbon Dioxide?

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…

Why Would a Carbon Trading System Reduce Emission of Carbon Dioxide?, 8.0 out of 10 based on 21 ratings

Tagged as: australian small cap investigator, climate change, economic impact, Nicholas Stern, stock market