Does anyone, really, understand this carbon tax thing? Superficially it makes sense. Put a price on carbon to incentivise a move to a ‘low carbon economy’ and voila, pollution drops. That’s the plan. But how will it unfold in reality?
Climate change Minister Greg Combet said the other day that ‘millions of households’ would be better off under the carbon price. Presumably, that means millions more will be worse off. Probably much worse off.
The big polluters – industry – will pay a tax on their carbon emissions. Where possible they (electricity generators, for example) will pass this tax on in the form of higher prices. In turn, the consumer of electricity and all sorts of other manufactured goods will pay higher prices.
But the government has said it will use 50 per cent of the revenue raised from the tax to redistribute to households, presumably lower and middle-income households. These households, according to Mr Combet, will actually be better off following the introduction of the tax.
We’ll believe that when we see it. But such a stance is hardly incentivising households to reduce their ‘carbon footprint’. Taking from the manufacturers to give to the consumers will hardly help reduce emissions in a meaningful way.
The political imperative is already getting in the way of carrying out the intended reform. The result will be some half-arsed policy that has massive unintended consequences and fails to achieve its goals.
We can pretty much guarantee job losses will occur in the manufacturing sector. Take steel makers, for example. Bluescope Steel competes on the world stage. High labour costs, a strong dollar and stringent production standards means Bluescope is already struggling to remain competitive. Its return on equity is not even 5 per cent. When a company’s cost of capital is far greater than its return on that capital, things are bleak. It means value destruction.
A carbon tax on steelmakers is hardly going to improve the situation. The government says the carbon tax will only add $2.80 to the price of $800 tonne steel. Bluescope’s Paul O’Malley reckons it will be closer to $8.
Either way, steel prices will rise and Australian steel will become more uncompetitive than it already is. Steel making is a global industry. Countries willing to emit the carbon will get the contracts.
In another case of unintended consequences, Brickworks piped up yesterday with its own example. Because the company has taken steps to reduce its emissions over the past few years, it will not be eligible for heavy emitter assistance. That means the price of bricks will go up.
And the company argued that it could also encourage the use of substitutes. Meaning that over the long term, houses may be more energy intensive, defeating the purpose of the tax in the first place. This is because non-brick housing requires more in the way of cooling and heating.
Obviously, companies are talking their book when arguing against the need for a new tax. They always will. But the problem is simply that thousands of unintended consequences will flow from it. It always happens.
Will the price of these unintended consequences be worth it? We doubt it.
Here’s a radical solution that requires no new tax. Get rid of central banks.
The genesis of this carbon tax came about in 2007 when climate change was a major political issue. It still is an issue (and the tax is a derivative of climate change) but the electorate has cooled in its support in a big way.
Is it any coincidence that climate change was such a concern when the global economy was booming, asset prices were sky high and people everywhere felt wealthy? It’s far easier to care about the environment when you feel financially secure.
Central banks had a major role to play in this whole dynamic. Easy money provided the illusion of wealth. Easy money also put a strain on the earth’s resources through the huge amount of purchasing power it created.
Put another way, central banking policies brought forward and concentrated a huge amount of global demand in a short space of time. While it provided the illusion of wealth for many, it also highlighted the fragile state of Mother Nature in its attempt to cope with the credit boom.
So, why not just get rid of central banks and put monetary policy in the hands of the market? Moving to a system built on sound money would ensure credit is only created where it’s genuinely needed for productive purposes.
The current system means central banks create reserves for the banking system to try and force them to lend. And where they don’t lend, they speculate, driving up asset prices to create more phoney wealth.
Most of the world’s economic problems are the direct result of central banking activity. To the extent that these policies create a mis-allocation of resources, we would argue that central banks also contribute in a big way to the climate change debate.
And if you don’t believe that line of thinking, there’s plenty of others reasons to bring central bankers to heel. This article about Fed handouts to the well connected will make your jaw drop.
Or what about the fact the Libyan rebels, in what seems like an unprecedented move, created a new central bank in the midst of the uprising. It just goes to show how political and economic power is err, centred around a central bank.
Mother Nature is a tough cookie. She constantly evolves and adapts. That’s not saying we idiot humans haven’t treated her poorly. But she can handle us all living within our means.
The Daily Reckoning Australia
PS: In the latest issue of Sound Money, Sound Investments I warned readers:
“As an Aussie-based investor you’re at the whim of the big boys – Japan, the US and China. Loose monetary policy from the US and Japan versus a slow but sure tightening from China.
The influence of Japan and the US is winning out and pushing our market higher. But as fears about inflation grow, even they might need to pull their heads in soon.
When the situation is complex and confused you’re better off doing nothing. Right now, having a large exposure to both gold and cash seems the prudent thing to do.”
I should have added silver, too.
Over the last few years gold has moved 4.67 higher, from around $312 to $1,458. But silver has risen even more…from $6 to $40 – a rise of 6.67 times.
Why is silver rising faster than gold?