Despite frequent criticism, Ross Garnaut is no cold-war warrior for the left. On the contrary, he’s a committed pro-market economist with a deep understanding of the ill effects of unnecessarily interfering with free markets.
That’s why, as a pivotal figure at the centre of a historic macroeconomic reform, he must make a stand on the protectionism Labor is embracing en route to creating a carbon tax. Day after day, Labor is taking the moral high ground in parliament, boasting of its love of free markets, and pillorying the opposition for backing a carbon-reduction scheme that relies on a bureaucratic tendering process.
Up to a point the government is right — great swathes of economists back the idea that the market will find “millions of ways”, as Labor puts it, to innovate and reallocate capital to optimise the Australian economy once carbon has been priced. But what Labor is not saying is that it has unnecessarily committed itself to a form of protectionism that could easily be avoided with a little help from the global trade umpire, the World Trade Organisation.
To understand how it works, one only has to look closely at the call made yesterday by Bluescope chairman Graham Kraehe for carbon “border adjustments” to be set up alongside the carbon tax.
In a speech to the National Press Club, Kraehe said that under a border adjustment scheme “Imports would be taxed with the same carbon tax that is applied to Australian-made goods, while exports would receive a rebate. This would be fair and equitable.”
A spokesman for Senator Christine Milne, who recently had a heated public exchange with Bluescope over compensation for emissions intensive trade exposed businesses (EITEs), told me the Greens were open to the idea of border adjustment “though we’re not vigorously pursing them”.
And they certainly aren’t backing Kraehe’s other demand — that EITEs be exempted from the carbon tax locally until similar carbon prices are in place abroad.
Kraehe’s border adjustment call has real merit — and it was hasty, and wrong of Trade Minister Craig Emerson to rule out “carbon tariffs” two weeks ago. For a start, Emerson must ditch that language — a carbon tax border adjustment is no more a “tariff” than the goods-and-services tax border adjustments that Australia already has in place, and that exist in most countries imposing similar value-added taxes.
Emerson’s argument, that a carbon “tariff” was in some way a return to protectionism could not be more wrong. By ruling out border adjustments, Labor is forced to rule-in direct subsidies to EITEs — the compensation packages now being negotiated by Labor in closed-door meetings with the directors trade-exposed companies.
Economist Richard Denniss, executive director of progressive think tank The Australia Institute, yesterday told me that border adjustments rely on a very simple principle — the differential price applied to carbon emissions between trading partners.
While most nations are yet to set formal carbon prices, the Productivity Commission has been asked by the government to calculate the “effective carbon price” imposed by our major trading partners — through, for instance, public investment in renewable energy or mandated use of renewables by power companies.
Taking China as an example, the Productivity Commission is expected to return a figure of about $A16/tonne.
Australia’s direct carbon price is expected to be about $26 a tonne, but supplemented with our own RET scheme impost — which is pushing power retailers into sourcing 20% of their power from renewables by 2020 — we might come out with a starting “effective carbon price” of, say, $36.
So in doing business with China, Australia overall faces a $20/tonne additional cost for its CO2 emissions.
Thus, under Kraehe’s plan, every tonne of steel brought into the country would be taxed for the number of tonnes of CO2 emissions that went into its manufacture. And every tonne of steel Bluescope exported would attract the same value in export rebates. (I am leaving aside, for the moment, Bluescope’s claim that its operations are much more carbon-efficient that most steel mills in China).
Under this proposal, trade is free in both directions. There is no protectionism at all as long as Australia’s border adjustment price is set correctly for each of its trading partners — not difficult to do on an annual basis, particularly for trade-exposed bulk commodities such as steel, aluminium and alumina.
The political problem with setting up such a scheme would be the temptation to tweak the border adjustment prices to give Australian firms an unfair advantage — a slippery slope back into protectionism. That’s where the WTO comes in — with its oversight, a transparent set of carbon-tax border adjustments could be given a clean bill-of-health to prevent disputes with our trading partners.
The flip-side of this proposal — and the one that Garnaut needs to speak out on more forcefully, and more often — is the subsidy-based approach currently under negotiation with the Labor leadership. As Denniss points out, there are two sides to protectionism — tariffs and subsidies. And Emerson has committed his side of politics to the latter.
It is not too late to save face and reverse this position. So far, Garnaut has obliquely criticised Labor for its behind-closed-doors negotiations — in his speech to the Press Club last week he criticised the Rudd government’s record on this, saying that during the CPRS negotiations the government was “getting back into a world where favours were negotiated by individual businesses where there weren’t disciplines on the policy process”.
That’s what’s happening today. While it might stick in his craw, Garnaut last week recommended three years of compensation modelled on the pre-lobbying version of the CPRS compensation, then a shift to “principle-based policy” after that.
This is a huge compromise. It does not send the right price signals to major emitters in the short term, but it also raises a longer-term risk — that future governments won’t have the political nerve to unwind the compensation.
Australia’s carbon reduction scheme should be aimed at reducing carbon emissions within our own borders, in the knowledge that failing to do so leaves us unacceptably exposed to future trade sanctions from, in particular, China, the EU and the US.
The beauty of a carbon-tax border adjustment is that is can encourage our economy to shift away from carbon-intensive activity, and harmonise our position with out trading partners’ efforts to do the same, as they arise.
Of course, Kraehe’s other demand — that EITEs be exempted from the carbon tax until formal carbon prices have been set overseas — would become unnecessary if border adjustments were put in place. And nor will it be granted if Labor ploughs ahead with its current compensation plans.
Garnaut is clearly irritated by the current round of EITE negotiations and if he is biting his tongue it’s most likely because he wants to see a market-based mechanism created — he may see the taint of subsidies, that risk becoming entrenched as carbon protectionism when other nations strengthen their carbon pricing efforts, as a necessary evil to achieve that.
But it doesn’t have to be that way. Border adjustments are fair. They are not tariffs. They are not protectionist. And Garnaut should publicly explain this to Labor before we get stuck with compensation payments that in a carbon-constrained trade environment will soon start to look like straight protectionism.
*This article was first published on Business Spectator
On the face of it, Graeme Kraehe’s recommendations appear reasonable.
What chance they will be implemented?
The thing that amazes me when I read commentary like this, is the complete certainty of the author that his neo-liberal economic (read “mad, blind faith in “free markets”) is the correct ……perhaps even the only view.
So sure is Mr Burgess of the correctness of his view, that he has no problem to declare whether or not the government is right, or even partly right. As though economics is a subject like maths, and he the maths professor assessing the work of diligent but imperfect student. In his conception of the world Ross Garnaut is a “warrior” “with a deep understanding of the ill effects of unnecessarily interfering with free markets.”
What gall these rationalist clowns have to use this voice on the rest of us. Surely they should be a little more circumspect after the global financial crisis….and the absolute necessity of a Keynesian style bail out? Surely they should at least use the language of investigative enquiry and declare their hypothesis and the assumptions that lead to that hypothesis.
Here’s a hypothesis for you Mr Burgess: I hypothesise that history will mock you for your assumptions about the rationalism of markets.
You have no notion at all that a carbon tax and an emissions trading scheme may be something more complicated than the push / pull lever of your economic fantasy do you? You cannot conceive, for example that the ETS itself might be a defensive response to our collective anxiety that helps us all to feel like we are taking action…..and enables us feel better by taking some limited action about the symptoms of the real problem ……plague of humans on the planet. I doubt that you have even critically analysed who will be the main beneficiaries. [ Bob Brown described it as a bonanza for big polluters].
People like Mr Burgess, as fawning fans of people like Ross Garnaut, are to blame for the lack of critique applied to the excesses of neo-liberal economics.
So sure are they of their world view that they seek to impose it on the actual world with all the zeal of religious bigots. If a market doesn’t exist then let’s create one artificially, and bully unquestioning governments into the logic of our case. Like Australia’s water market…..which probably added around 20% demand to an already fully allocated system…..and eventually gave rise to the need for a huge government funded water buyback. This same “market”, designed by economists and policy makers with a really small grasp of the complexities of water delivery saw companies like Timbercorp buy water allocations in places like Shepparton, then transfer that water right 100’s of kilometers downstream …..and guess what?……along the way, not one drop of each megalitre of water evaporated, seeped into the water table or was consumed by red gums. Timbercorp (and anybody else taking advantage of this magic market) could claim every drop. Even more amazing was the further magic of the market when Timbercorp’s entire water holding was sold to the Singapore government.
Or right now. The neo-liberals want us to believe that the merger of the Australian and Singapore stock exchanges is a good thing. We “must” accept the freedom of the market. Apparently the fact that Singapore is one of China’s closest allies is irrelevant.
We also must accept the sale of the AWB grain marketing assets to a company like Cargill as a sacrifice at the holy alter of the free market. Presumably the ACCC would risk ex-communication if they simply invoked Cargill’s corporate history of being fined for price fixing.
I think I only need to mention the word “Telstra” to make my point to any readers still with me at this point……
Have we all forgotten so soon that neo-liberal economic theory gave rise to the legal trading of “bundled mortgages” and other market instruments which leveraged investments in toxic debt …..and brought our whole financial system to its knees?
Drop the tone of your occupancy of the high moral economic ground please Mr Burgess. Australians aren’t going to abandon the advantages of markets in a hurry, but they will be more demanding about when governments have the right to create them where they didn’t previously exist. On issues like pollution, in all its forms they expect more direct action. Outside of Melbourne, Sydney and Canberra they are very cautious about the imposition of markets that seek to set up a tradeable right to compensate for such things as kangaroo farts (even the RSPCA protested this research!)…… no matter what “great swathes of economists” think.