Climate change is a toxic process for our (or God's) planet, and is also a toxic subject in Australian politics which has brought down, at last count, three Prime Ministers. No aspect of climate change policy is more toxic than the idea of a carbon price.
Most economists will tell you that if you want to reduce the emission of greenhouse gases in a capitalist economy, the most efficient tool in our policy toolbox is a price mechanism. While the details of such mechanisms are complex and varied the concept is simple - companies that emit greenhouse gases (CO2, methane etc) need to pay a price for every tonne they emit. This price will give them an incentive to reduce their emissions, and provide an advantage for no- or low-emissions technologies to be developed and deployed.
As with so many things economists see as obvious, there are many reasons why this is not as easy as it sounds. Chief among them is the fact that companies which emit greenhouse gases don't want to pay. They are large, powerful and cashed up. They have convinced governments, and much of the public, that such a mechanism (a 'carbon tax', because taxes are clearly evil) would ruin our economy, driving up the price of everything and making poor people even poorer. It wouldn't - or at least it needn't if you do it right - but it would certainly make these corporations poorer and so of course they are fighting to the bitter end.
Australia's recent bushfires made it abundantly clear that we don't have a choice about whether we pay a price for emitting carbon. The price is a given. The only question is, who pays it? At the moment, the actual emitters (the large companies that dig up coal, oil and gas, run fossil fuel generators, operate in high-emissions industries or conduct large-scale land clearing) and indirectly their customers, are shielded from this cost. Instead, it is shifted elsewhere - in this example, to people living in vulnerable communities and to vulnerable eco-systems.
What is the cost of carbon emissions? This is an extremely difficult question to answer because economics is not an exact science, nor even close to being one. As some clever person once said, it's difficult to make predictions, especially about the future. Economists are spectacularly bad at predicting economic events - the wise heads in our central banks were taken by surprise by the Global Financial Crisis, for instance. This is because human behaviour is complex and frequently irrational, particularly in times of crisis, so orderly modelling often turns out to just be junk.
So depending on your bent, you can choose from a wide variety of global estimates. For instance, based on work by William Nordhaus and Richard Tol the 2014 IPCC report suggested the ongoing impact of warming of about 2C would be between 0.2% and 2% of global GDP. This in itself is a huge range - in 2018 global GDP was around US$85t, so the impact would be somewhere between US$0.17t and US$1.7t per year. This estimate has been roundly criticised by many as too optimistic (and not really by anyone who is not a climate denier as being too pessimistic). Kamiar Mohaddes of Cambridge University suggests that 'business as usual' emissions would result in a 7% reduction in global GDP by 2100 - around $6t per year. Others think the impact could be so catastrophic that dollar values would be the least of our worries.
In 2019 the Climate Council published some estimates of the impacts on the Australian economy. They were not foolhardy enough to publish an overall estimate, but they provided numbers for some sectors to illustrate the point. For instance, in the property sector they estimated a $571b loss of value by 2030, with increased insurance premiums driven by more frequent natural disasters, along with the effects of coastal erosion and inundation and increased flooding resulting from sea level rises. In agriculture, the cumulative loss is estimated at $19b by 2030, $211b by 2050 and $4 trillion by 2100, with losses of productivity resulting from more frequent drought and ongoing reduced rainfall in key food production areas like the Murray-Darling Basin and the WA wheat belt.
Just looking at natural disasters, an estimate in 2017 suggested that on average these had cost Australia $18.2b per year in the previous 10 years. If natural disasters become more intense, or more frequent, this cost will go up. And so of course, right on cue Australia has its worst bushfire season ever. An article in The Conversation back in January, while the bushfires were still in progress, suggested tangible costs (those that are reasonably easy to measure) could be in the region of $100b. This cost includes lost homes and businesses, health impacts, lost income for businesses and farms, the cost of fighting the fires themselves, and a rather grisly kind of dollar value put on each life lost. It doesn't include many other things, like the death of a substantial proportion of Australia's koala population, the loss of scarce habitats for endangered species, and irreparable damage to non-fire-resistant rainforests.
So, the precise scale of the costs is vague and variable, but even the most conservative economists agree they are real. They also agree that they do not fall evenly across the whole population. Here in Australia, drought and bushfire have bigger impacts on rural and regional areas, sea level rises affect coastal communities. Across the globe, the biggest impacts are likely to be in poorer communities, where economies and societies are already under huge stress. These are the people who are currently paying the carbon price (even though they may emit little carbon themselves), and who will bear an even greater burden from it in the coming decades unless we take steps to shift the cost back to where it belongs - with those who are causing the problem.
When economists talk about things like this they use the term 'externalities'. Investopedia defines it as follows.
An externality is an economic term referring to a cost or benefit incurred or received by a third party. However, the third party has no control over the creation of that cost or benefit.
An externality can be either positive or negative and can stem from either the production or consumption of a good or service. The costs and benefits can be both private—to an individual or an organization—or social, meaning it can affect society as a whole.
If you keep bees for their honey, and these bees fly around your neighbour's fruit trees pollinating their flowers so that they get a great crop of fruit, your neighbour has experienced a positive externality. She got the benefit from your bees without having to pay for them or care for them. On the other hand, if one of your bees stings her, she has experienced a negative externality. She suffers pain as a result of your bees without getting any honey.
Of course, if you are good neighbours you can convert these externalities into 'internalities' (this is also an economic term). Your neighbour can share some fruit with you in recognition of the services of your bees, you can share some honey with her by way of compensation for her stings. This action of sharing in turn produces positive externalities for the wider community - having neighbours who are on good terms makes the community a better place to live, and reduces the community costs of things like policing and social services. Everyone benefits.
But I digress. If you ever read an introduction to the concept of externalities, the chances are the example they will use to illustrate negative externalities will not be bee stings, it will be pollution. If your factory spews out smoke, other people breathe it and get lung disease without you having to pay a cent. If it pumps toxic liquids into the nearest river it will poison the water, either making the fish caught by those downstream poisonous or killing them so the fishers have none. Meanwhile the factory owner is disposing of their waste products for free - other people are paying instead.
You would think that the job of governments is to prevent such negative externalities, but you would often be wrong. The polluters are wealthy and donate lots of money to political campaigns. The poor fishers have none to donate. So all too often governments end up smoothing the path of polluters and letting their victims cope as best they can. As Bruce Cockburn sings:
...Like the coloured slicks on the English River
Death in the marrow and death in the liver
And some government gambler with his mouth full of steak
Saying, "If you can't eat the fish, fish in some other lake...."
This means that dealing with the negative externalities of big business is generally achieved through hard-won political battles - marches, blockades, sit-ins, law-suits, the whole works. Even then, you may only succeed in getting a fig leaf to cover the pollution, or a response that half solves the problem and leaves you sick rather than dead. Every gain is hard-fought and easily lost.
There are three basic ways to deal with the externalities of pollution. You can ban them or limit them by regulation, you can subsidise polluters to reduce them, or you can make the polluters pay for them.
Regulation internalises the externality by forcing the company to dispose of its wastes in ways that don't harm others. They have to work out how to do this - for instance by paying someone to store them, by treating them, by keeping them onsite, or by developing a process that does not produce toxic wastes in the first place.
There are three keys to successful regulation.
We also see the subversion of the third element in some of the recent farcical regulation of the activities of the Adani Corporation. In 2017 the company was charged with allowing a large amount of contaminated water to leak from its Abbot Point coal terminal, and fined just under $13,000. It appealed the fine, and eventually made a deal to have the fine withdrawn in exchange for installing water monitors - something they should be doing as a matter of course. In May 2019 it was fined just over $13,000 for releasing contaminated water again. Then in February 2020 it was fined $20,000 for inaccurately reporting tree clearing activity on its Carmichael Mine site.
This means that in practice what economists are looking to is the second supposed effect of a Pigovian tax - it provides an incentive to companies to reduce pollution, or for their competitors to come up with ways of making the same thing without pollution. For instance, a price on carbon emissions gives an advantage to renewable energy sources like wind, solar and hydro which do not emit carbon.
Most economists will tell you that if you want to reduce the emission of greenhouse gases in a capitalist economy, the most efficient tool in our policy toolbox is a price mechanism. While the details of such mechanisms are complex and varied the concept is simple - companies that emit greenhouse gases (CO2, methane etc) need to pay a price for every tonne they emit. This price will give them an incentive to reduce their emissions, and provide an advantage for no- or low-emissions technologies to be developed and deployed.
As with so many things economists see as obvious, there are many reasons why this is not as easy as it sounds. Chief among them is the fact that companies which emit greenhouse gases don't want to pay. They are large, powerful and cashed up. They have convinced governments, and much of the public, that such a mechanism (a 'carbon tax', because taxes are clearly evil) would ruin our economy, driving up the price of everything and making poor people even poorer. It wouldn't - or at least it needn't if you do it right - but it would certainly make these corporations poorer and so of course they are fighting to the bitter end.
Australia's recent bushfires made it abundantly clear that we don't have a choice about whether we pay a price for emitting carbon. The price is a given. The only question is, who pays it? At the moment, the actual emitters (the large companies that dig up coal, oil and gas, run fossil fuel generators, operate in high-emissions industries or conduct large-scale land clearing) and indirectly their customers, are shielded from this cost. Instead, it is shifted elsewhere - in this example, to people living in vulnerable communities and to vulnerable eco-systems.What is the cost of carbon emissions? This is an extremely difficult question to answer because economics is not an exact science, nor even close to being one. As some clever person once said, it's difficult to make predictions, especially about the future. Economists are spectacularly bad at predicting economic events - the wise heads in our central banks were taken by surprise by the Global Financial Crisis, for instance. This is because human behaviour is complex and frequently irrational, particularly in times of crisis, so orderly modelling often turns out to just be junk.
So depending on your bent, you can choose from a wide variety of global estimates. For instance, based on work by William Nordhaus and Richard Tol the 2014 IPCC report suggested the ongoing impact of warming of about 2C would be between 0.2% and 2% of global GDP. This in itself is a huge range - in 2018 global GDP was around US$85t, so the impact would be somewhere between US$0.17t and US$1.7t per year. This estimate has been roundly criticised by many as too optimistic (and not really by anyone who is not a climate denier as being too pessimistic). Kamiar Mohaddes of Cambridge University suggests that 'business as usual' emissions would result in a 7% reduction in global GDP by 2100 - around $6t per year. Others think the impact could be so catastrophic that dollar values would be the least of our worries.
In 2019 the Climate Council published some estimates of the impacts on the Australian economy. They were not foolhardy enough to publish an overall estimate, but they provided numbers for some sectors to illustrate the point. For instance, in the property sector they estimated a $571b loss of value by 2030, with increased insurance premiums driven by more frequent natural disasters, along with the effects of coastal erosion and inundation and increased flooding resulting from sea level rises. In agriculture, the cumulative loss is estimated at $19b by 2030, $211b by 2050 and $4 trillion by 2100, with losses of productivity resulting from more frequent drought and ongoing reduced rainfall in key food production areas like the Murray-Darling Basin and the WA wheat belt.
Just looking at natural disasters, an estimate in 2017 suggested that on average these had cost Australia $18.2b per year in the previous 10 years. If natural disasters become more intense, or more frequent, this cost will go up. And so of course, right on cue Australia has its worst bushfire season ever. An article in The Conversation back in January, while the bushfires were still in progress, suggested tangible costs (those that are reasonably easy to measure) could be in the region of $100b. This cost includes lost homes and businesses, health impacts, lost income for businesses and farms, the cost of fighting the fires themselves, and a rather grisly kind of dollar value put on each life lost. It doesn't include many other things, like the death of a substantial proportion of Australia's koala population, the loss of scarce habitats for endangered species, and irreparable damage to non-fire-resistant rainforests.
So, the precise scale of the costs is vague and variable, but even the most conservative economists agree they are real. They also agree that they do not fall evenly across the whole population. Here in Australia, drought and bushfire have bigger impacts on rural and regional areas, sea level rises affect coastal communities. Across the globe, the biggest impacts are likely to be in poorer communities, where economies and societies are already under huge stress. These are the people who are currently paying the carbon price (even though they may emit little carbon themselves), and who will bear an even greater burden from it in the coming decades unless we take steps to shift the cost back to where it belongs - with those who are causing the problem.
***
When economists talk about things like this they use the term 'externalities'. Investopedia defines it as follows.
An externality is an economic term referring to a cost or benefit incurred or received by a third party. However, the third party has no control over the creation of that cost or benefit.
An externality can be either positive or negative and can stem from either the production or consumption of a good or service. The costs and benefits can be both private—to an individual or an organization—or social, meaning it can affect society as a whole.
If you keep bees for their honey, and these bees fly around your neighbour's fruit trees pollinating their flowers so that they get a great crop of fruit, your neighbour has experienced a positive externality. She got the benefit from your bees without having to pay for them or care for them. On the other hand, if one of your bees stings her, she has experienced a negative externality. She suffers pain as a result of your bees without getting any honey.
Of course, if you are good neighbours you can convert these externalities into 'internalities' (this is also an economic term). Your neighbour can share some fruit with you in recognition of the services of your bees, you can share some honey with her by way of compensation for her stings. This action of sharing in turn produces positive externalities for the wider community - having neighbours who are on good terms makes the community a better place to live, and reduces the community costs of things like policing and social services. Everyone benefits.
But I digress. If you ever read an introduction to the concept of externalities, the chances are the example they will use to illustrate negative externalities will not be bee stings, it will be pollution. If your factory spews out smoke, other people breathe it and get lung disease without you having to pay a cent. If it pumps toxic liquids into the nearest river it will poison the water, either making the fish caught by those downstream poisonous or killing them so the fishers have none. Meanwhile the factory owner is disposing of their waste products for free - other people are paying instead.
You would think that the job of governments is to prevent such negative externalities, but you would often be wrong. The polluters are wealthy and donate lots of money to political campaigns. The poor fishers have none to donate. So all too often governments end up smoothing the path of polluters and letting their victims cope as best they can. As Bruce Cockburn sings:
...Like the coloured slicks on the English River
Death in the marrow and death in the liver
And some government gambler with his mouth full of steak
Saying, "If you can't eat the fish, fish in some other lake...."
This means that dealing with the negative externalities of big business is generally achieved through hard-won political battles - marches, blockades, sit-ins, law-suits, the whole works. Even then, you may only succeed in getting a fig leaf to cover the pollution, or a response that half solves the problem and leaves you sick rather than dead. Every gain is hard-fought and easily lost.
There are three basic ways to deal with the externalities of pollution. You can ban them or limit them by regulation, you can subsidise polluters to reduce them, or you can make the polluters pay for them.
***
Regulation internalises the externality by forcing the company to dispose of its wastes in ways that don't harm others. They have to work out how to do this - for instance by paying someone to store them, by treating them, by keeping them onsite, or by developing a process that does not produce toxic wastes in the first place.
There are three keys to successful regulation.
- Design regulations that actually solve the problem - that stop the damaging waste, or limit it to safe amounts.
- Establish an effective enforcement system which reliably and quickly detects breaches and stops them.
- Impose penalties that act as an effective deterrent. The penalty needs to be worse than the cost of compliance - for instance shutting down the operation, or hefty fines.
Once an industry loses the battle over whether or not there will be regulation, they will generally shift to de-fanging this regulation. They will do so by trying to negate any or all of the three keys to success - making the regulations as lax as possible so they can continue to pollute legally, persuading governments to set up ineffective enforcement by starving regulators of resources or powers of intervention, and keeping penalties as low as possible.
We do, in fact, have some regulations that are supposed to limit greenhouse gas emissions. One of these is a process to limit industry emissions called the Safeguards Mechanism. This mechanism starts with a baseline of what polluters were emitting at the start date, and initially prevents them from exceeding that in the future. Over time, this limit should be reduced so that these enterprises gradually ratchet down their emissions. At least that's the theory. In practice, limits have not been progressively reduced and many polluters have simply applied to the regulator for an increase. None have ever been refused. So we have an expensive regulatory system (paid for by us) which makes it look like our government is making polluters reduce emissions but which actually does nothing.
We also see the subversion of the third element in some of the recent farcical regulation of the activities of the Adani Corporation. In 2017 the company was charged with allowing a large amount of contaminated water to leak from its Abbot Point coal terminal, and fined just under $13,000. It appealed the fine, and eventually made a deal to have the fine withdrawn in exchange for installing water monitors - something they should be doing as a matter of course. In May 2019 it was fined just over $13,000 for releasing contaminated water again. Then in February 2020 it was fined $20,000 for inaccurately reporting tree clearing activity on its Carmichael Mine site.
Adani is a multi-billion-dollar enterprise. These fines are a trivial expense for them. It is cheaper for them to pay the fines than go to the effort of complying. Once again, our mining lobbyists have succeeded in getting governments to enact an ineffective regulation. We, and the non-human creatures in the environment, are paying the cost, Adani is getting the benefit.
***
So, given that doesn't seem to be getting us anywhere, what about the second option - subsidising companies to reduce their pollution? Surely no company will say no to a subsidy!
Well it turns out they won't, but that doesn't mean the strategy will be effective. For a start, neoliberal governments like ours (Labor or Liberal) are chronically reluctant to spend money. Hence, the Emissions Reduction Fund, recently rebranded as the Climate Solutions Fund, has been allocated $4.55b so far over seven years, some of which is yet to be spent. It's a drop in the ocean compared to the billions of dollars that go to financing carbon emissions every year.
Even then, it's not always what it seems. Companies are keen to get paid as much as possible for doing as little as possible, and corporate influence over our governments has ensured that this is how the Climate Solutions Fund works. For instance, you can be paid for literally doing nothing - for not cutting down trees on your property, allowing them to grow instead in order to capture carbon. This is not a bad thing, but it's hard to get excited about it as a solution to climate change.
Alternatively, you can get paid for doing something a little bit better than what you used to do it - like replacing a diesel generator with a gas one. It emits less, but it still emits. Why not go for solar panels and batteries and emit nothing? Because on a dollars-per-cuts basis you get more emissions reductions per dollar by going for the less ambitious option. If you spin the story cleverly enough you can even get paid for doing something you needed to do anyway - like replacing your old, clapped out diesel generator with a gas generator instead of a new diesel one.
Last year the government announced a review of this scheme. We might hope it would improve as a result, but it seems unlikely - the reviewers are a team of senior fossil fuel industry figures and their consultation list includes a bunch of companies and industry bodies. The fox is being asked to review chook-house security measures. What could possibly go wrong?
***
The final alternative is to make polluters pay to pollute. Economists call this a Pigovian tax, after the economist Arthur C. Pigou who came up with the concept. The idea is that the price paid stands as fair compensation for the negative externality, and the business can reduce their costs by reducing or eliminating the problem.
Your neighbour might consider a supply of honey fair compensation for the occasional bee-sting. However, pollution is more complex. What is the fair value of the ecosystems that are damaged by pollution? How are they, or the people who depend on them, effectively compensated for their loss? And when, as is the case with climate change, the pollution can make entire regions and even nations uninhabitable, in places far away from where the tax is paid, the equation becomes impossible.
This means that in practice what economists are looking to is the second supposed effect of a Pigovian tax - it provides an incentive to companies to reduce pollution, or for their competitors to come up with ways of making the same thing without pollution. For instance, a price on carbon emissions gives an advantage to renewable energy sources like wind, solar and hydro which do not emit carbon.
Of course the companies that run emitting industries want neither to pay the price, nor see their competitors given an advantage. This is especially the case for industries like oil extraction, coal mining and coal-fired electricity. These industries spend large amounts of money up-front on the promise of a long tail of profitable operation. If this tail is cut short, they go broke.
So they have pulled out all the stops. They have funded think-tanks to argue that there is no such thing as climate change, then when that became obviously untrue, that it's not caused by human activity. For those who don't buy pseudo-science, they have funded other people to say it won't be so bad, or that it will be too costly to do anything about it. Consistent arguments are not required. All that is required is to create doubt and confusion.
To aid this confusion they have bought shares in media companies to ensure they promote the confusion. The Kingdom of Saudi Arabia is a major shareholder in News Ltd, Gina Reinhardt once owned a 15% stake in Fairfax Media and now owns a slice of Channel 10, Seven West Media which owns Channel 7 also owns mines. You won't see any unbiased coverage on climate change from any of these companies.
Then to complete the victory, they have bought politicians. They haven't done anything so distasteful as actually bribing them. Instead, they have donated millions to the two major parties, and handed retired politicians plum positions as board members, executives and paid lobbyists. They have succeeded in insinuating themselves into our political system to such an extent that the office of our Prime Minister is stacked with former mining industry leaders who now direct government policy. As a result there is no carbon price levied on the companies that emit and neither of our major parties is prepared to propose one.
They haven't done this because they want to destroy the planet. They have made a 'rational' business decision to keep their businesses and industries profitable for as long as possible. Planetary destruction is just an unfortunate but unavoidable externality. Their well planned, well funded strategy has ensured that everyone but them will pay the cost.
***
You would like to think our multi-billion-dollar corporations had enough ethics (not to mention common sense) that they wouldn't actually destroy the planet to shore up their profits, but it seems you would think wrong. In the 1970s and 1980s, Milton Friedman and others convinced anyone with the power to do anything about it that the sole and sacred duty of companies is to deliver profits to their shareholders.
This means that for better or worse, we have to rely on our governments to look after the common good, including curbing the activities of business where needed. If we want our governments to do this, we have to stop letting them sell themselves to big businesses. If we don't stop them soon, then all they will be able to do for us is mop up the mess.
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