carbon trading
3 Sep 2008
The Myth of "Carbon Leakage"
The business lobby is telling the country that an emissions price will just send polluters overseas, and cost us dearly. But their argument is full of holes, as Ben Eltham discovers
In 2007, the ABC screened the British documentary, The Great Global Warming Swindle, perhaps the best known popular explanation of the various untruths and conspiracy theories that go by the name of "climate scepticism" or "denialism". The screening of Martin Durkin's documentary achieved two things. Firstly, the fact that it was screened at all (reportedly over the protestations of the ABC's own science department) demonstrated how afraid the ABC had become of the small cadre of right-wing columnists who had built substantial, if intellectually negligible, careers out of red-baiting the national broadcaster. Of course, this was never going to appease the ABC-bashers like Connie Fierravanti-Wells or junior Liberal Party staffer Alexander Deane.Secondly, it showed Australians, in graphic televisual detail, just how paranoid, nutty and fringe the adherents of climate denialism really are. It's hard to present climate change denialism as objective science when your spokespeople are followers of Lyndon LaRouche. Durkin himself was forensically dissected by Tony Jones in an embarrassing interview which quickly uncovered Durkin's history of fraud and the many deliberate distortions or errors of fact in his documentary.
The debate on the reality of climate change is over, on any scientific level. While there a few hold-outs among the more scientifically challenged commentators on the right, in Australia the special interest groups and the big corporations that fund them have instead shifted the battle-ground to making sure they can extract the maximum government patronage to luxuriously cushion their long-delayed shift to paying for the climate-changing pollution they emit. So far, this is a battle they have been winning handsomely.
The latest installment from the business lobby over carbon emissions is the Business Council of Australia's paper Modelling Success: Designing an ETS that Works. This paper was commissioned by the BCA and authored by consultants Port Jackson Partners. It draws on confidential operational and financial data from 14 "facilities" that are likely to be affected by Penny Wong's Carbon Pollution Reduction Scheme.
The paper argued that many of these facilities and/or businesses would go broke at a carbon price of even $20 a tonne. Further, it cast considerable doubt on whether Australia could actually meet a 20 per cent reduction in greenhouse gas emissions by 2020. Indeed, it argues, it will be tough for Australia's electricity generators to build enough new renewable electricity generation to even meet a target of 10 per cent.
The paper was roundly criticised by many analysts, economists and environmentalists. Bernard Keene criticised it as "junk economics". Ross Gittins called it a "disillusioning plea for special treatment". Even the Chairman of oil giant BP, scarcely a disinterested observer, "expressed frustration" at the BCA's paper and argued that Penny Wong's emissions trading scheme was "sound".
The story of the BCA's paper is more evidence that big business in Australia doesn't really "get it" when it comes to climate change. Rather than seeing global warming as the existential threat to the climate that humanity evolved in, Australia's business lobby sees climate change in the prosaic and simplistic context of a threat to profitability and jobs.
The BCA: a history of pollution
The Business Council of Australia is one of Australia's best-funded and
most influential pro-business lobby groups. Officially, it represents
the CEOs of Australia's 100 largest companies. As it says on its website,
"the BCA was established in 1983 to provide a forum for Australian
business leadership to contribute directly to public policy debates".
But despite claiming to be committed to an Australia that "remains the
best place in which to live, to learn, to work and do business", the
BCA has been resolutely hostile to unions, environmentalists and
progressive politics in general.
The BCA's politics are reflected in its people. Previous presidents include climate arch-skeptics Michael Chaney and Hugh Morgan, the virulently conservative mining magnate who spent much of his career attacking Aboriginal land rights and native title, the Kyoto Protocol and the science of greenhouse, not to mention the rights of workers. Morgan founded the Lavoisier Group of climate denialists as well as the H.R. Nicholls Society of radical industrial relations reformers.
The BCA's current president is Greg Gailey, the former CEO of zinc miner Zinifex. In 2007 he stepped down earlier than expected after overseeing a tenfold increase in Zinifex's share price. For his efforts he received a thankyou in the form of a $15 million payment. Since that well-timed exit, Zinifex's share price crashed back to earth, falling by more than 50 per cent off its 2007 high, leading to a merger this year with Oxiana to form OZ Metals. The merger also cast long-term doubt over who would pay for the extensive contamination of the Zinifex (formerly Pasminco) lead works in Port Pirie.
The BCA, in other words, is run by miners who know how to sell the politics of pollution.
Modelling Success — brought to you by the greenhouse mafia
If you dig deep enough into the BCA's Modelling Success
paper, you discover that much of the actual modelling was carried out
by two other consultanices: ACIL Tasman and CRA International (since
renamed Concept Economics).
ACIL Tasman, in particular, has been widely commissioned by the
fossil fuel industries to issue warnings about the supposedly dire
consequences of a strict emissions cap.
But just who are these consultancies anyway? None other than the notorious "greenhouse mafia" that Guy Pearse investigated in his PhD thesis and subsequent book, High and Dry.
The ACIL Tasman consultancy was formed via the merger of consultants ACIL and the neoliberal think-tank, the Tasman Institute, by the Tasman Institute's founder Michael Porter. Porter made the move after his previous think-tank, the Centre for Policy Studies, lost its funding. Porter's Tasman Institute had earlier teamed with Des Moore's Institute for Public Affairs to create the "Project Victoria" campaign, a set of radical deregulation and privatisation policies that Jeff Kennett largely put into practice.
Emo - carbon moguls
ACIL Tasman is the consultancy supplying most of the modelling to the big electricity generators and aluminium smelters in Australia, who regularly employ the the consultancy to argue their case for favourable treatment.
It's not surprising Guy Pearse calls ACIL Tasman one of the two "main fossil-fuel-friendly consultants". The other is CRA International/Concept Economics.
No methods, no bibliography
The BCA's paper Modelling Success: Designing an ETS that Works
is not what most economists would describe as a rigorous piece of
research. It's unlikely it would be accepted for publication by a
respectable economics journal. It contains no discussion of its
modelling methodology. The formulas used to construct the graphs are
not published. There is no discussion of relevant studies worldwide —
in particular the experience of European emitters following the
introduction of their emissions trading scheme. There isn't even a
proper bibliography.
Further, as Ross Gittins pointed out in his recent column, the assumptions that the paper proceeds from are questionable, to say the least. "All modelling is only as good as the assumptions on which it rests," wrote Gittins, "and you can get pretty much any result you want by choosing the right assumptions".
In fact, Modelling Success doesn't list its assumptions anywhere. The careful reader has to deduce them from the wild claims that the paper advances. As Gittins points out, three of its most important assumptions are: "businesses have no scope to pass to customers the cost of the emission permits they'll need to buy, no scope to eliminate wastefulness in their present use of fossil fuels and no scope to reduce the need for permits by improving their technology."
When I spoke to Rod Sims from Port Jackson Partners, he vigorously defended these assumptions, particularly the first. Sims insists that the truly trade-exposed industries really don't have the ability to pass on their costs. "The price for these commodities," he told me, "is set at the London Metals Exchange".
But how true is this? BHP Billiton is Australia's biggest greenhouse gas emitter. But even BHP only sells 15 per cent of its iron ore on the world spot market. The reason? Spot markets are highly volatile. They can go down as well as up. Both miners and customers prefer the stability of a contract price. In fact, big miners and commodities exporters deal with price volatility all the time.
In contrast to the hugely volatile markets at the London Metals Exchange, both Penny Wong and Ross Garnaut are proposing a stable, slowly rising price for carbon that may even be capped in the scheme's early years.
But Sims and Tarrant insist that even carbon at $10 per tonne will see whole industries pack up and leave Australia for foreign shores where they can pollute for free. This is the "carbon leakage" argument that business has found so useful as they argue for free carbon permits from the Australian Government. "Once it moves offshore, it's not going to come back," the BCA's Maria Tarrant assures us. "If you put $5 million or $10 million into infrasucture in Indonesia and you build capacity there now to deal with Asia and Australia, you're not going to come back [to Australia] 10 years later to replicate that infrastructure."
In this way the BCA uses carbon leakage to crank up the anxiety over carbon pricing as a waste of time, and throws in the idea of jobs and economic growth leaving the country.
The myth of carbon leakage
But it is the last assumption that Gittins deduces from BCA paper —
the assumption that affected businesses won't invest in new technology
to lower their emissions — that is the most glaring. This is because it
conveniently ignores the international literature on "carbon leakage",
which is all about what economists call "induced technological change".
The best available new technology is less emissions-intensive than that used in older, dirtier plants. As the European economists Carrado Di Maria and Edwin Van Der Werf argue, if technology "spills over" from developed to developing countries fast enough, carbon leakage could actually be negative. In other words, developing countries could actually reduce their emissions, even without a carbon price.
This is not mere speculation. Although there is little empirical
data on the whole issue yet, the early evidence in Europe offers little
if any support to carbon leakage alarmists. As the authors of a March
2008 paper entitled The European Carbon Market in Action: Lessons from the First Trading Period wrote:
"we have not found empirical evidence demonstrating a correlation
between European carbon prices and a loss of competitiveness in the
industrial sectors included in our analysis."
The authors also point out that a decommissioned aluminium smelter actually re-opened in Germany in 2007, despite a rising carbon price.
It's important to remember where this BCA report fits into the carbon price issue. Industries that are emitting carbon to produce exports like aluminium and steel are only a small part of the economy, and of total carbon emissions. Even if they did suffer from the introduction of a carbon price, the amount of carbon leakage and the effect on the rest of the economy would be relatively small.
As the authors of the Peterson Institute for International Economics paper Levelling the Carbon Playing Field note, protecting these relatively small industries actually makes it harder for the rest of the economy to function. Remembering that Australia is going to cap its total carbon outputs, any move to give these industries free permits to pollute means that every other activity in the country is forced to emit even less so we stay beneath that cap.
This is another reason why giving away free permits is such a bad idea.
What this all means, in a nutshell, is that this notion of carbon leakage is not a valid reason why Australia should wait for the world to act on carbon emissions. We are certainly in no danger of acting too fast on this. As John Quiggin notes, by the time we get our act together, we may well be bringing up the rear.
A flair for hypocrisy
The carbon leakage "debate" reveals the hypocrisy and self-interest
that often masquerades as genuine contributions to the climate change
policy debate. While big business and their associated web of
think-tanks and consultancies have long argued that we should wait for
more scientific certainty that climate change is really happening
before imposing a price on carbon (or taking any other action), they
have happily demanded enormous hand-outs based on flimsy and skewed
"research".
In comparison to the vast body of peer-reviewed, statistically sound evidence that our planet is warming, the jury is still very much out on the phenomenon of carbon leakage. Indeed, as we have seen, companies leaving Australia to set up new, low-emissions plants may even reduce the world's long-term emissions trajectory.
That's an argument we haven't heard from the Business Council of Australia yet. The evidence suggests that Australia's business lobby will continue to fight sensible efforts to mitigate climate change in the interests of expediency and greed.
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Let’s look at the real threats of climate change:
1) Sea level rises with losses of low lying land at an economic costs of billions of dollars
2) Rainfall and other weather changes threatening arable land loss, again threatening billions of dollars and threatening our water and food supplies
3) Violent storms creating unknown damage with unknowable costs
4) Political and economic destabilisation as countries war over water, food and living space (remember the sea level rises)
None of these threats are addressed with the government’s plan, which is essentially administrative and financial.
The emissions ‘scheme’ results in higher taxation, bigger government and larger payments to industries.
When planetary temperatures can be shown to be lowered with a new tax, I’ll start believing. Until then I suggest that we need to see the governments ‘scheme’ as just that…a scheme.
What we need is effective action to protect ourselves from the threats, coupled with actions defined by climate scientists rather than economic puff pieces that fantasise that economists can correct the earth’s climate.
douglas jones
Yes indeed the countries to which our industry flee in the hope of continued profit at others expense might well incorporate the measures currently availble to reduce poluution at no or a cost recouped in finite time, thus makinmg larger profit.
Europe has to some extent done this see Green Budget in Europe Springer 1999.
What has to change is cooperation for competition even Morgan may come to realise that rather than a dictatorial power grab by greenies it is biological limits of the environment that are causal. Still I expect he still mines ore to totally unprofitable levels!
As industry has had many aids from government and society perhaps we might think of making a charge for polluting in the past at least to the extent that such might have been avoidable had technology of pollution reduction been implemented rather than displaying the behaviour of spoilt children.
On current form I would say the Federal Government will roll over and hand out free permits.
If I am wrong I will promise to stop slagging off Labor for at least 6 months and send my local member a congratulatory letter.
I know my state member monitors this site, I wonder about Anthony Albanese. What’s the goss Anthony?
Well done Ben.
But mbolan neesds to recall the CFC treaty. Was that successful or what?
Why is it that journalists thunder from the pulpit when it comes to climate change? No such passion for other political issues!
I recently drove from Berlin to Calais and noticed huge numbers of windmills in Germany and a few nuclear power stations in France. I then looked at the EU ETS figures for state carbon emissions and noticed that France have reduced theirs over three years and Germany has increased theirs over the same period. France is a nuclear power economy and Germany is removing their reactors. A clue!
Now this country’s ignorance of nuclear energy is legendary; we have consistently ignored any serious debate on the technology but we spend mega bucks and mega column inches on CC.
The EU will not meet their carbon targets. We all know that unless Kyoto misjudged basic international self-interest and policy incompetence.
When, yes when are we going to get a journalist thunder about a nuclear energy debate for this country. I don’t mean adopt it. I mean at least lets discuss it. I recently heard Marn Fernson the Minister for Elocution say we didn’t need to discuss nuclear energy in Australia coz we had plenty of other existing energy. Coal? Isn’t that the problem? (the coal I mean not the Minister)
Ben, the next time you climb to the pulpit with the steam pressure gauge in the red zone maybe nuclear energy is a subject worth discussing. Probably shows some balance as well!
Firstly, a style issue:
What does it mean to be "fringe"? Surely you mean to be a fringe dweller, or the above case to be ‘fringe dwelling.’
Secondly, to the logic:
Please explain how ‘big business’ can acknowledge an ‘existential threat’ if they just don’t ‘get it’? Please tell me why they would invest the vast resources they control into something they think is going to at best restrain their expansion and at worst eat into their profits.
Also it is tiresome to have to point out again and again that global warming being a fact does not mean that emissions reduction via a property rights mechanism is a forgone conclusion. One does not beget the other. In fact one has nothing to do with the other: actual greenhouse gas emissions are about as materially distant from certificates of emissions equivalence as apples are from tuna fish
Thirdly, to the rationale:
I must reinforce that the Anthropogenic Global Warming Phenomena (a fact beyond dispute) is not a blank cheque for the inquisition like mentality advocated by Mr Eltham. I do recall another simple mind (this one unfortunately in control of a vast global war machine) making a similar exclusive distinction between those who were ‘with us’ and those who were ‘against us.’
But more to the point what is the aim of this carbon inquisition? Well, Mr Eltham (perhaps feeling inflated from his use of warlike metaphors) has been brazen enough to provide the answer: induced technological change. Of course, this is what the ancient greeks called a ‘deus ex machina’ - a fantasy concept used to untwist plots that could not be resolved by ‘realistic’ means.
There is nothing new about the concept of ‘induced technological change.’ It is as least as old as the concept of capitalism. And, more to the point, there has never been any conclusive ‘empirical evidence’ of property rights being a sufficient means of achieving this change. There is, however, a mountain of anecdotal evidence that market ‘forces’ actually inhibit technological change - anyone remember GM’s electric car?
Fourthly, to the denial:
In the real world carbon leakage is a serious problem. It is a myth only in the abstract world of atomistic and mechanical economic theory in which all agents are deemed equal by assumption. It is governments that control carbon accounting, audit and assurance (it is not controlled by a pure mathematical logic). And governments are driven by political pressures not logical ones.
Aldeberan -
Just for the record, I’m not reflexively anti-nuclear. There are some arguments for nuclear power to cover base-load issues. It should be remembered however that the total carbon emissions over the nuclear power life-cycle are actually very substantial. For instance, there is an enormous amount of concrete required in a nuclear station for safety reasons. Wind is already cheaper than nuclear electricity generation on current prices.
By the way, I don’t think I’m thundering from the pulpit at all here. I’d argue my remarks are in fact much milder in tone than those published on this subject by several other commentators.
Bob - here we go again. I thought we’d settled our differences in previous debates. OKay, to address your points one by one:
1) "fringe" means "on the fringe", "far from the centre" "an outer edge, margin or periphery." I think that’s clear though; you are right to point out the inelegance of the phrasing.
2) I’m writing here about the BCA. It is the peak body for big business in Australia. I’m not arguing for big business to invest in anything if they don’t want to, merely that they shouldn’t be granted free permits to pollute, and the evidence they advance for deserving these free permits is scanty.
In terms of emissions property rights - you are correct. The owning of emissions permits doesn’t reduce emissions. It is the emissions *cap* that determines the amount of reduction. Obviously verification is the issue here. The CPRS envisages a fairly stringent level of auditing and verification of emissions levels.
3) I think you’re confusing market forces with the regulatory structure that frames those markets. If there is no cost of pollution then there is an over-whelming incentive to get a free ride by externalising those costs.
Once large, profitable corporations have a cost incentive to reduce pollution, they will. The GM car, and indeed the stagnation in investment in renewable technologies in the 1980’s and 1990’s in general, was driven by essentially one thing: very cheap energy. There were many reasons for this but among the most important was that the cost of fossil fuels did not include the costs to the environment of carbon emissions.
4) Bob, my whole article was about the lack of evidence for the existence of carbon leakage. If you have some convincing evidence that carbon leakage is a "serious problem", please advance it
Ben,
a) I am not ‘confusing’ market forces with the regulatory structure that frames those forces. I am actively disputing the very idea of imposing a distinction between the two. Markets (and that includes market forces as well) are political (or "discursive") constructs designed to express a certain way of doing things. Most economists that have actually spent time trying to apply "market based decision theory" would agree that in a very real way the theoretical conception of ‘markets’ is yet another manifestation of that old cliche of ‘art imitating life.’ By subscribing to the thesis of ‘induced technological change’ you asking us to believe Oscar Wilde’s aphorism that ‘life imitates art.’ Yeah right.
Ironically the real myth here is that ‘costs’ (like your ‘cost on carbon emissions’) can ever be a universal thing, and thus serve as means to of justified or "efficient" change. That’s what the big boys and girls call a "metaphysical commitment."
b) Carbon leakage is deductive proposition that follows from the application of a property rights regime to emissions. That’s partly why some economists don’t feel a need to explain it in great detail. The basic assumption that underpins the dynamics of this regime is that firms/producers will do anything to lower the costs of doing business. If emissions are ‘costed’ then it is logical to deduce that business will attempt to reduce costs associated with emissions too. These measures are more likely to include the moving of NEW industrial plants that use OLD emissions intensive technology to more favorable ‘regulatory’ environments, as opposed to the hypothetical counterfactual of "not investing" in NEW technologies. A more accurate description of this process would be "carbon flight" as opposed to "carbon leakage".
Of course, economists have had such great success in the last thirty years in (de)regulating global financial flows and taxation with negligible impacts on the industrial geography and national labour markets. Why wouldn’t it work for regulating emissions?
When will you lot just look at the facts, instead of all the irrelevant searching for conspiracies, and blaming industry!
Fact 1- Australia contributes somewhere between 1 and 3% of world carbon pollution, depending on whose statistics you believe.
Fact 2- A 20% or even 50% change in our emissions will have a negligible effect on the World’s climate. Simple arithmetic!
Fact 3- There never has been co-operation between all major countries in the World on any significant issue which will impact on them economically. India, China, Russia, European Union, US, all cut their emissions? Only a fool would believe that!
Fact 3- Australia is an energy exporting country, and a big chunk of our standard of living depends on it. Per capita carbon output is meaningless, given this fact.
So, stand back and look at the big picture -only a naive, stupid country would cut their economic throats for a symbolic gesture! It is a pity none of our politicians have the guts to point this out.
Engineer Ian
Engineer Ian -
I find your comments pretty depressing.
We hear your argument - that Australia represents only a small amount of global emissions and so therefore we shouldn’t reduce our emissions - all the time. It’s an intellectually lazy point, and it’s also morally duplicitous.
For a start, Australia’s the highest per capita emitter of all the Annex I countries in the Kyoto protocol. Secondly, Australia is the most vulnerable rich nation when it comes to the effects of climate change. Thirdly, action is needed from rich countries as rich countries are responsible for 80% of the existing CO2 pollution that has already been emitted since the industrial revolution.
Australia’s standard of living doesn’t actually depend on energy exports. As Ross Garnaut and many other economists have observed, Australia’s carbon-intensive industries represent a small part of the economy in GDP terms and an even smaller percentage of our nation’s employment.
And there is a moral point here. Australia should try and reduce its carbon pollution because it’s damaging the planet. We may only be responsible for a small amount of that damage but that doesn’t absolve us. It’s like saying that, because road accidents or skin cancers only cause a small proportion of preventable deaths in our society, we shouldn’t bother trying to prevent them.
Finally, the good old "realism" argument. It’s funny how "the facts" always seem to support the person who is using them in his argument. Last time I checked, "the facts" suggest that the planet’s climate is warming dangerously and uncontrollably due to human pollution.
Is it naive and stupid to try and stabilise the earth’s atmosphere before it warms out of control? Is it naive and stupid to try and save the Great Barrier Reef, the Murray Darling Basin, most of Australia’s wheat belt, Australia’s snow and skiing industries, not to mention thousands of lives likely to be lost to heat stroke and tropical disease?
That’s the "big picture" that I’m standing back and looking at. Looks pretty scary from back here.
To add a little to Ben’s response…
Engineer Ian said both that Australia contributes up to 3% globally for AGW, and that Australia exports a lot of energy.
The key point for me is that Australia exports energy (presumably in the form of uranium, and gas, and a little oil, and probably a lot of coal), along with things like bauxite, and other ores (most of which are quite environmentally damaging in the transition to their finished state).
All this mining profit is turned into CO2 emmissions elsewhere, which, presumably, we are aware of and hope for prior to it leaving Australian soil (because it means more business).
I once worked for a company which transported US military equipment (inc warheads), from which I left in protest. *I* wasn’t dropping the bombs on innocent Iraqis (or others), but I was inadvertently helping to co-ordinate that, even though my job role was very small and insignificant in the grand scheme.
I hope you can see the parallel. If Australia gets richer from mineral/gas exports which create CO2 in manufacture/burning, Australia is as equally culpable. We *know* they’ll burn the coal - that’s why we sell it. Only if Australia were to withhold all further damaging mining bounty until guarantees were made by potential recipients of best/cleanest practises (tricky, if not impossible for such as coal) would the facts clearly state that Australia contributed only between 1-3% to global CO2. And, that per capita Kyoto information from Ben’s previous post is quite illuminating, and something to be quite ashamed of, in my opinion. We need to get out of the rut of thinking nationalistically, and start, perhaps, thinking a little more like global citizens.
cheers,
Derek
So BCA stands for Big Carbon Australia, then? I wonder how much breathing space a catastrophic global economic slump will buy us.