Let me begin by saying that I still think the science that suggests anthropogenic carbon emissions are the major cause of climate change is anything but settled. Given the unpredictable nature of the climate and all the scandals involving the IPCC and other government-funded climate science bodies we would be foolish not to maintain some caution; I certainly don’t think we should be rushing into anything that could adversely affect the living standards of many, many people. However – and this is a dilemma I’ve had for a while – it seems both political parties are set on “action”, so the billion dollar question is: which path will cause less damage?

“Personally, I find that the most objectionable feature of the conservative attitude is its propensity to reject well-substantiated new knowledge because it dislikes some of the consequences which seem to follow from it—or, to put it bluntly, its obscurantism. I will not deny that scientists as much as others are given to fads and fashions and that we have much reason to be cautious in accepting the conclusions that they draw from their latest theories. But the reasons for our reluctance must themselves be rational and must be kept separate from our regret that the new theories upset our cherished beliefs” – F.A. Hayek

First, apologies if I have the details of either policy a bit muddled; I honestly haven’t had the time to trawl through them so there might be some parts I have wrong, please correct me if that’s the case. With that said, first up on the chopping block is Labour’s Emissions Trading Scheme.

• Schemes of this nature have enormous administrative costs
• Government allocates emission permits sector by sector, industry by industry
• Government auctioning permits for businesses to continue to do business is a huge tax hidden in a bureaucratic black box
• The government has even more power to pick winners and losers, all of whom will no doubt commit huge amounts of capital to lobbyists to influence the government

Now as someone who is generally very sceptical about giving the government any new authority, I could certainly see how billions of dollars could go “missing” under this scheme. At face value, while it will cut carbon, it will expand bureaucracy and crony-capitalism to even further heights.

As for the Liberal’s “direct” approach, again correct me if I’m wrong, but it looks like, quite simply, “$10b worth of handouts for businesses and farmers to reduce emissions.” As with the above – although this may be more transparent and cost less – it’s almost a certainty that the creation of a new body to simply hand out cash for farmers to plant trees and so forth will reek of pork barrelling and waste. I’ll examine it a bit more in the coming days (honestly, I really don’t have the time – this entire post is being rushed, mainly so I can get the following point out. I will comment on this post at a later date after reading up on both schemes).

So, with both schemes looking rather rubbish, why hasn’t anyone considered a (fully rebated) direct tax on carbon itself as an alternative (I’m only raising this as I feel – with action guaranteed – that it’s the most sound option)? It would avoid the shortfalls of the above options as:

• It would be a straightforward tax on fossil fuels based on each fuel's carbon content
• It avoids the uncertainties of the cap and trade – a carbon tax would provide a clear and candid incentive to adopt energy-saving and carbon-minimising technologies
• The market will be left to determine how to most efficiently order affairs under those new prices (i.e. windmills, solar, hydrogen, whatever – the market will pick the most effective)
• It has a known cost and taxpayers could demand a commensurate reduction of other taxes (e.g. income tax)

That final point is the biggest reason why I would support “action” in the direct taxation of carbon over a cap and trade or Abbott-style scheme. The amount collected from it could be directly transferred back to the taxpayer in the form of a tax reduction elsewhere. The last thing we need is another black box for the government and banks to play with (hello carbon trading bubble!).

Now, let me end with something I think needs to be addressed more urgently, and will do more good for the environment than any of the above schemes: the removal of state-granted monopolies in power generation.

The carbon tax scheme I mentioned above will not work unless there is a free market in power generation (currently as there's no incentive to cut emissions utilities can just absorb the loss – their performance isn’t measured on profitability – or pass on the extra costs in the form of higher prices without even a glance at alternatives. It is also very difficult/impossible for a competitor to enter the market.). It's clear that state-sponsored public utility monopolies and the bureaucratic regulation of their pricing structures and investment options greatly limits the freedom of power markets...consumers lose the ability to choose their provider and the utilities lose their freedom to determine what to charge and what infrastructure to invest in.

If power was returned to the free market we would see more competition, better pricing, more cost-saving (more resources conserved) and more money flowing into green power.

It’s ironic that the government today spends money on adverts telling people NOT to use power during a period of high demand (e.g. a heatwave)...when if markets were in charge, a heatwave would not be looked at as a problem but as an opportunity. Entrepreneurs would be itching to meet demand instead of making excuses, just as they do in every other sector that is controlled by markets.

The real question is how can anyone be serious about helping the environment while these state granted monopolies are allowed to exist?

I was recently asked to do some work involving choice modelling as a method to calculate 'willingness to pay' for things such as job losses; wetland expansion; waterbird breeding; number of endangered species; and so on. What I do not understand[1] is why it is even necessary?

I'm a firm believer in subjective rather than objective values and that the nature of human beings is that values are constantly changing. You can measure values at a point in time – you can say that because I traded an apple for an orange at point x, I valued the orange more at that point in time (and the person I traded with valued the apple more at that point in time). But values change – an hour later I may prefer the apple. You also cannot prescribe a monetary value to that trade – money itself is an economic good, subject to the same changing preferences and diminishing marginal utility as any other economic good. It would be like trying to say the apple and orange transaction was worth a total of one pear.

Choice modelling does not measure past actions (exchange), it merely relies on a survey asking people to reckon their demand curves based on a few options…no doubt due to the impossibility of mapping a full schedule of preferences. But that means that, by necessity, a certain number of alternatives must be excluded from the menu of options over which a person can hypothetically spend their money. The result is that the conclusions about people's 'willingness to pay' will be misleading at best[2].

In the surveys, people are asked to choose between certain 'costs', but how can a choice be made, unless there is some common unit of measurement by which to calculate human vs. environmental vs. other costs? Value is subjective, therefore so is cost, meaning information about human cost is not directly observable…the only information we have about human cost is revealed through voluntary exchange; through trade. In a voluntary exchange, each person reveals that the thing they acquire is ranked higher on their personal value scale than the thing they give up.

For example, environmental degradation for one person may not be another person's degradation. A farmer viewing the encroachment of the wetland onto his cultivated field may regard it as damaging while another person may find it beneficial. Without reference to the impact on a decision-making individual the whole idea of an environmental cost is nonsensical. So if that’s the case, then we’re back to the problem of comparing human valuations.

The only solution that I can see – the solution that works elsewhere – is a price system, which implies private property rights and the freedom to voluntarily exchange that property. Anything to the contrary will lead to superficial or misguided claims and potentially damaging policy recommendations. To put it bluntly, we need a free market for water.

How about this as a solution: instead of the government forcing everyone to pay additional fees to create more wetlands, create a holding company (which owns the land) and auction off shares, say one billion shares at whatever price people are willing to pay, to anyone willing to buy. Then if the majority wanted to preserve the wetlands, waterbirds and endangered species, as owners of the land, they could reduce the amount they supply for irrigation. If the farmers value the water more than the residents value the wetlands, then they will outbid them for water. They are not going to drain the thing dry; and as with every good, water has a diminishing marginal utility. The first x amount of water has far more value to the farmer than the remaining y. It is likely that residents will value y more than the farmers and will therefore outbid them. This is just one of an infinite number of potential ways the market could fix the problem of water shortages and is the beauty of the market system; we can never know in advance how it will solve problems until it does.

Yes, market prices would probably end a lot of farmers, but it is the only fair way. Why is it that only government is allowed to buy up water – why not allow private citizens to do it as well (they are ultimately paying for it anyway). Under a private system of ownership – or even a quasi-private one in which water rights would be created then bought and sold freely between whomever was interested (if the government wanted to keep land ownership but sell water) – the water would go to the people willing to pay for it. If people actually had to pay market prices for water, and that water were privately owned, it is doubtful that the kind of waste that has occured and is still occuring would exist today. Government policies have resulted in misallocated resources and development that cannot be sustained. The solution, as with most things, is not more government involvement and 'choice modelling' to determine how much they can plunder from the populous without a voter backlash, but a free market in water.

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[1] I do understand: there are a lot of socialists in charge who will not even comprehend a non-governmental solution. As a socialist system cannot calculate, they are forced to resort to these 'second best' solutions.

[2] Not only that, but due to 'budget and time constraints', something called 'benefit transfer' has been developed, where preferences from prior surveys on different (but 'similar') issues are used to estimate 'willingness to pay' for a new scenario. The problem with this is that it makes little sense to talk about how much people value something independent of them being in a specific situation where they have to make their choice. How much people value things will always be contingent on the time and place and therefore 'benefit transfer' will be even more misleading than a normal choice model.