“The data paint a bleak picture. The economists find that pharmaceutical companies conduct 30 times more clinical trials for recurrent cancer drugs than for preventive drugs (the effect persists even after adjusting for market size). The authors also show that firms divert their R&D expenditures away from more curable, localised cancers and focus on incurable metastatic and recurrent cancers instead. The patent system encourages pharmaceuticals to pump out drugs aimed at those who have almost no chance of surviving the cancer anyway. This patent distortion costs the U.S. economy around $89 billion a year in lost lives.
A one-size-fits-all patent system does not cater to the specifics of innovation in the pharmaceutical industry. But tailoring patent law may encourage lobbying and corruption. A careful reform of the patent system is necessary: outright abolition of patents will not be enough to save cancer patients’ lives”.
The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded—which, as evidence shows, has no correlation with measured productivity. Both theory and evidence suggest that while patents can have a partial equilibrium effect of improving incentives to invent, the general equilibrium effect on innovation can be negative. A properly designed patent system might serve to increase innovation at a certain time and place. Unfortunately, the political economy of government-operated patent systems indicates that such systems are susceptible to pressures that cause the ill effects of patents to grow over time. Our preferred policy solution is to abolish patents entirely and to find other legislative instruments, less open to lobbying and rent seeking, to foster innovation when there is clear evidence that laissez-faire undersupplies it. However, if that policy change seems too large to swallow, we discuss in the conclusion a set of partial reforms that could be implemented.
This is a preposterous, improbable Australian movie. A young American women gets a group of young aboriginals to do a performance of Shakespeare’s Hamlet. Based in Redfern, Sydney. The movie is not even going to be released in conventional cinema. But I loved it and scenes moved me to tears. A great Australian film that trounces Hollywood and the garbage we are delivered via the mainstream cinema. Entranced and moved by this gorgeous Australian-motivated and Australian-made movie. (117)
Low interest rates that are unlikely to increase any time soon and property as well as equity markets that are growing strongly, both in Australia and overseas, create the basis for gearing up and taking high levels of risk. People ask me – as an economist – how it will all end. I confidently predict it will end in tears with many people losing everything and margin calls driving asset prices to levels where those few smarties with plenty of cash will make a killing. This matters a lot for older people who are either retired or about to retire and for whom a 20-year wait for market values to be restored would be a disastrous possible outcome.
What I don’t know is when the disaster will impact. Selling out now might leave investors missing good gains. My best advice however is to cut back gearing and not to overextend. Indeed holding a fair bit in cash or short-term bonds makes sense – even if, as Christopher Joye points out, after-tax returns on these assets are negative at present. The fear is that if another crash occurs soon it will be a doozy. Of course I may be wrong or suggesting precaution too early in which case investors will forego gain. There are no guarantees despite what the spivs currently flogging red hot property deals all over town are suggesting – indeed their raucous noises make me less confident about the future rather than more. But this strategy does provide insurance against a real possible asset market meltdown short-term.
Please don’t take any of this as financial advice but don’t consult your paid financial advisor either. I don’t know but they don’t know either and, like Socrates, I am superior at least to the extent that I know I don’t know.
The Australian unemployment rate has hit a 12-year high at 6.4% – the highest since 2002 and higher than the US unemployment rate for the first time since 2007. Good market for equities markets this means the RBA will almost certainly not increase interest rates any time soon and may cut them further. Of course disastrous for people such as myself who will probably soon be on the job market. While the Treasurer has argued that these figures provide motivation to pass the budget – they do no such thing – the obvious candidate for policy is our immigration intake.
Currently Australia is taking in net 240,000 immigrants annually – it adds nearly a million people to our population every 4 years. 709,000 immigrants have arrived since the beginning of 2011 and 380,000 of these have got jobs. During that period 400,000 jobs were created net.
There are Ripley Believe-it-or-not economic theories (often propounded by ANU economists) that these immigrants create jobs by adding more to aggregate demand than supply but this clearly is not the case at present. What can be expected is that as unemployment increases the demand for immigration will weaken a little.
It is almost politically incorrect among the latte left to criticize anything relating to unrestrained high immigration but I do. The implications of high rates of immigration for the economy are modestly positive at best. With high international capital mobility most of the labour market benefits from a liberal migration program accrue to the migrants not to resident Australians. Economies of scale arguments are irrelevant in an economy that trades with the world. At the same time we must put up with more crowded cities and less people-free, biodiversity-rich landscapes.
I’d prefer a migration policy that stabilises the Australian population at something less than 30 million. I am selfish enough to prefer living in open, low density landscapes where nature is not extinguished. (261)
I have been working on this FTA over the past week or so and trying to get up to speed on ideas in this area. Some provisional notes – comments very welcome.
My interest in William Blake’s poetry dates back about 40 years to performances of his “Songs of Innocence and Experience” by Allen Ginsberg. They were on an 1969 LP I had that got nicked while I was living in Surrey Hills Sydney. Searching I found YouTubes of several performances from this album. I particularly liked the mantra like version of “The Sick Rose” recorded here:
IT is now widely understood (i) that current carbon pricing has fairly marginal impacts on electricity prices and that (ii) current electricity prices are high because of excessive investment in network costs which stems from the way electricity prices are regulated: Ross Gittins provides a simple explanation of this second issue. Australian electricity prices are very high and this electricity is largely generated in coal-fired power stations. Thus the inefficiency in transmission creates the high prices which reduces the quantity demanded of electricity. Indeed this quantity – along with associated carbon emissions – have fallen over recent years. Are we getting an effective carbon price as a consequence of the distribution network inefficiency? Not really since there is real inefficiency here because there is a waste of resources, particularly capital, in the electricity sector. In terms of resource allocation it would be preferable to provide households and firms with much cheaper electricity and then to tax the carbon emissions severely enough so that demand was significantly curtailed. In addition, high electricity costs in themselves do not provide the correct market signal to switch away from coal to less polluting sources of electricity such as gas although this switch has been occurring since 2008 well before carbon pricing came in operation. They do however provide incentives to switch towards solar energy by households and firms trying to insulate themselves from higher electricity prices. The interesting feature of the latter switch is that it increases the excess capacity of the electricity sector and makes more electricity price increases likely. This virtuous “downward spiral” accentuates the decline in demand for carbon-based electricity supplies and does have positive although imperfect effects in addressing climate change.
For these reasons I strongly favour retaining incentives for solar and wind energy because of the effects this will have on the conventional power sector. On the other hand, as Ross Garnaut has pointed out to us, the effects of growing excess capacity in the electricity sector are likely to undermine the effects of the Emissions Reduction Scheme subsidies proposed by the Coalition Government. Power stations with excess capacity are likely to draw on carbon reduction subsidies by closing down plants with uneconomic excess capacity and then by operating remaining plants at closer to full capacity. This might mean that the carbon reduction subsidies might have very limited effect in reducing emissions – they will simply provide subsidies to the uneconomic (and often privately foreign-owned) power firms.
I was one of the 50 economists who signed a letter urging the retention of carbon pricing. Keeping limits on carbon emissions is the most severe environmental problem the world has ever faced. Not controlling greenhouse gas emissions possibly threatens the survival of human and non-human life on our planet but, at the minimum, will change our lifestyles in drastically costly ways – these costs will increase the longer action to address climate change is delayed. Australia is one of the world’s wealthiest countries and cannot ignore its obligations to address this issue.
Every basic economics text – even those written by those on the right-wing of politics, such as Gregory Mankiw – endorse carbon pricing as the cheapest way to address climate change. Over the last week Ross Garnaut has proposed a compromise which, while not ideal, would keep the architecture for pricing in place by setting a very low price (40 cents per ton CO2) and by enabling international purchases of emissions permits. This was promptly rejected by the Coalition but it should not be. The price of 40 cents is very low but would rise as other countries practice carbon emissions control. This is one way of meeting a key (though misleading) objection to carbon pricing that Australia is “going it alone”. Pricing would only become significant when other countries act.
Of course I would prefer a much higher price than this and a firm commitment on the part of Australian policy makers to enforce a switch away eventually from the use of all carbon-based fuels but at a minimum the Garnaut proposal should be considered.
The heading “holds out” is strong but economics staff do think the proposed staffing cuts are not in the interests of the university. This is not only an issue of self-interest. The School of Economics needs to be restored to the strong, growing school that it was up to 2012. This would not be difficult though it will be very difficult to carry out such a restoration if proposed cuts go through.
These are views of the Economic Society of Australia (Victorian Branch). My only qualification to these views is that they do not stress strongly enough that this attempted downgrade economics will be self-defeating from the viewpoint of the University’s own objectives of improving its financial viability and attracting higher ATAR students. It is difficult to understand how a research focus can be sustained in the business studies without a strong economics component.
I have been listening to recorded versions of Cormac McCarthy’s Blood Meridian (abridged) and All the Pretty Horses (unabridged, read by Frank Muller). Enjoyed both immensely – McCarthy evokes vivid images and his writing is intensely poetical. I enjoyed reading both these books but hearing them read adds an extra dimension. They become a poetic yarn as well as attractive literature. I regret not getting the unabridged version of Blood Meridian which can be obtained from Audiobooks. These listenings are about my fourth successful attempt at recorded books – I have enjoyed William S. Burroughs, James Joyce (Ulysses, Dubliners but Finnegans Wake remained incomprehensible to me).
Audiobooks is an interesting business, allied to Amazon.com, with over 100,000 recorded books available. If I cannot borrow further titles from local or university libraries I’ll subscribe to AudioBooks. It offers a spoken novel per month for $14-95. The works are available to you permanently and are accessible from the Cloud.
The Prisoner’s Dilemma is a key idea of modern game theory. It describes the difficulties of sustaining cooperation when individuals have reasons to defect from a cooperative agreement. This paradigm has even been used to define ethical behaviour. Kant’s Categorical Imperative requires that for a moral maxim to be ethical (for an individual) it must be both universalizable (everyone must, in principle, be able to live in accord with it) and the individual must will (want) to live in a world where the maxim obtains. Thus, if there are two moral choices: act non-selfishly (to achieve a good social outcome) or act selfishly (to gain individual benefit) then the CI is generally consistent with acting non-selfishly. It is certainly universalizable (everyone could live with this maxim) and individuals would want to live in a world where everyone acts non-selfishly (even if, in fact, they did not act non-selfishly).
For example, the citizens of the world would be better-off if all countries mitigated climate change-inducing carbon emissions. Individually, however, each citizen would be better off if they didn’t mitigate irrespective of what others do. Libertarians and Australia’s IPA advocate the immoral action of non-mitigating - it is the self-interested “defect” option in this Prisoner’s Dilemma. More moral citizens advocate addressing climate change because we would all be better-off if every country mitigated so that, even if they didn’t in fact mitigate, the moral stance is to mitigate because we would prefer to live in a world where everybody did. Indeed the difference in viewpoint here is that the moral citizens see the Prisoner’s Dilemma as an obstruction that limits worthwhile action whereas the immoral, self-interested libertarian types see it as a sound reason for doing nothing. The libertarians don’t see game theory strategic interdependencies 0- individuals make choices which suit themselves without adverse social consequences emerging.
In negotiating situations, where agents are confronting some evil, one can either act with courage (and everyone gains) or be a silent coward (and hope that others will act courageously in the face of your cowardice). The ethical stance, according to the CI, is to act courageously. Of course it is difficult to put your neck on the line when you see widespread cowardice around you. Indeed acting courageously in the face of widespread cowardice might convey to others that you are a bit of a crazy and that might be true. In other situations the courage required simply reflects the risk that others will not act morally and you will find yourself stranded. That the moral stance is to be courageous is true even if the cowards discreetly praise your moral behaviour and make discreet, constructive suggestions on how you should stick your neck out further. They gain possible advantages at your cost. Such cowards are typically non-repentant and see their self-interest as simply human nature whereas those who see part of the reason for existence as arising from collective goals see such inaction as cowardice.
In short solidarity in seeking a worthwhile outcome facilitates an ethical equilibrium. Some may not judge that the objective as not worthwhile and need not be unethical. But those who understand that the outcome as desirable but defect for reasons of private self-interest are unethical cowards.
Blood on the floor in the dismal science: La Trobe economics professor Harry Clarke is calling it a “bloodbath”. The university is proposing to cut its economics school from 28 staff to just 10. And now everyone needs to bid for the positions that are left, including four professors battling it out over just one professorial position in the new structure. The news prompted sympathy from RMIT economist Sinclair Davidson who blogged, “There are some fine academic economists at La Trobe and there are tough times ahead for them. This is not a good time to be looking for an economics job. The public service is retrenching across highwired@theaustralian.com.au and sign up for the High Wired newsletter
An opportunity for rivals: The scale of the cuts and the seniority (three professors and three associate professors will be going) suggests La Trobe doesn’t seem to care much about maintaining its economics research profile. La Trobe economics rated a “3” on ERA, with only the Go8 and the excellent UTS recording better results. In Victoria, La Trobe is neck and neck with rival Deakin, which also scored a 3. La Trobe says its changes will ensure the discipline’s long term sustainability, but the danger is that La Trobe will end up with only a token presence and no profile, meaning students wanting the breadth that economics offers, as opposed to the more narrow utility of business and finance, will shun La Trobe as the natural alternative to Melbourne or Monash, and instead go to Deakin. On the positive side HW hears that Deakin, Swinburne and RMIT are all looking to build in economics, which is still the discipline that brings the most street cred to any business school or faculty. HW isn’t sure this is the best way for La Trobe to attract high ATAR students to its business faculty, but then maybe the target is vocationally focused students. Isn’t that Victoria University’s market? And aren’t they doing well. Not. It is the same market the fast moving privates will target come 2016. Gulp. (705)
Uneconomic inter-firm loans and rampant transfer pricing but massive subsidies from the Australian Government to a foreign-based multi-national. What a farce.
The suggestion that the ABC should levy pay-for-view charges on the TV shows that it records wouldn’t win top grades from the viewpoint of standard economics. To the extent that the marginal cost of supplying an extra copy of a show to a customer is zero the ideal charge for gaining an extra customer is also zero – it should be provided for free with costs being met from the public purse via taxes. It is a standard public goods argument. If it was sought to implement a “viewer pays” policy then the more sensible way of recovering costs would be to levy a fixed charge per year from gaining access to the recorded shows – then the shows are being treated as a club good rather than a pure public good. I do favour a fixed licence charge for gaining access to the ABC but never a per use charge.
The idea of charging per view is an instance of right-wing ideology and culture wars fanaticism dominating good economic sense. The same type of nonsense gets recycled periodically over proposals to use the private sector to provide weather/meteorological information. For general weather information the proposal is just as silly as the proposal to charge for individual TV shows.
Is the publicity given to this per view pricing policy yet another expression of the self-interest of The Australian newspaper? Its a major obsession to penalise the ABC presumably because the ABC provides a much better quality news and entertainment service than the trash Murdoch media does. Along with The Australian’s trash promotion of campaigns too limit plain packaging and to deny the reality of climate change the attacks on the ABC have become a repeated theme. The Australian might argue that the ABC gets unfair public funding which disadvantages those private media suppliers who must make a buck. There is some truth to this but The Australian anyway services a different market to the ABC. The Australian services primarily - the right-wing loony market of cretinous IPA/libertarian types. The ABC has a more balanced view of the world.
I’ll wait to see if the wonky economics of Henry Ergas and Judith Sloan can latch onto this one.
La Trobe University’s “Future Ready” restructuring commenced over the last 2 days. My School of Economics was dished out its medicine today.
The current School will become part of a Department of Finance and Economics (the lack of alphabetical ordering in the 2 components is significant). Proposed staff cuts in economics are from 28 to 10 faculty. Is that a bloodbath or a restructuring?
The current four professors in the School will be reduced to 1, the 5 Associate Professors will be cut to 2 with smaller cuts as academic level decreases – the only faculty member guaranteed a position in the new structure is an “Associate Lecturer”. Everyone else must lodge a request for a position in the diminished structure.
This will certainly save money for La Trobe because cuts are concentrated among the more expensive top positions. Of course this also means discarding the strongest CVs and those with most teaching and research experience. I cannot understand however how a cohesive academic program can be developed with so few positions. In my view the minimum viable number would be 18 faculty but as staff are already fully employed in terms of the university’s own workload model the optimal figure is above that. How can a business area in Australia function effectively without a strong economics presence? In addition, in my view, the economics area should be a separate department. As there are still opportunities to revisit the structural changes proposed these changes to the proposed plans should be a target.
I am unsure how to respond myself. I currently supervise 2 PhDs and am supposed to teach two courses next semester as well as help with a third. The decisions today were a bombshell for me because my sense of the value of an economics qualification is strong and I see these moves as undermining that.
Here is a more recent article on the devastating cuts to economics at La Trobe. One question to reasonably ask is where the evidence is for a switch away from economics at other Australian universities? This is now an explicitly stated rationale for the cuts. There is a difference between a collapse in demand and a shift toward a service role for economics. This shift occurred at La Trobe 10 years ago. It is also difficult to understand how moves that have taken away core units from the economics curriculum after 2011, that have occurred at La Trobe, have anything at all to do with a collapse in demand. Finally, one can ask whether students at non-G8 universities are to be denied access to professional training in economics.
Henry Ergas is at it again! He follows the stable of extreme right commentators at The Australian (Judith Sloan, Sinclair Davidson, Christian Kerr, Adam Creighton) attacking the plain packaging legislation and providing support for big tobacco. The campaign seems timed to influence the adoption of plain packaging in the UK. It is of course exactly what the big tobacco companies seek. Interestingly Ergas links his critique to climate denialism! There is a link – Ergas has foolish views both on plain packaging and on climate policies.
Underlying all these claims is the view from a a tobacco industry (InfoView) sponsored data base that from calendar year 2012 to calendar year 2013 smoking volumes increased by 0.26% (that is slightly more than one quarter of 1%). Other industry sources (EuroMonitor) and the British American Tobacco report for 2012/2013 contradict this claim – both suggest volumes fell – the EuroMonitor data base suggests they fell significantly. BAT suggests higher Australian profits because higher prices offset the effects of reduced volumes. Yes, reduced volumes!
Given the events now unfolding at my university and the decidedly insecure basis of my continued employment I have problems responding to much at all these days but let me make three comments:
1. Suppose the strange claim by InfoView is correct. The increase in consumption of cigarettes at 0.26% was less than one-sixth of the population growth rate in that year. Per capita consumption of cigarettes apparently fell 1.5% on the basis of the data Ergas is relying on. There is no evidence at all that plain packaging is encouraging extra smoking as Ergas claims.
2. Why would you ever condemn a policy anyway on the basis of one years data (again assuming the data is correct and that the other two sources are wrong)? In 2010 there was a 25% increase in excise and a very striking reduction in consumption in the following year. In addition there were restocking effects and shortages prior to the introduction of plain packaging and smokers presumably increased their purchases in anticipation of the 2013 excise hike. In short lots of things were going on that might explain a moderation in the rate of decline in smoking in the particular year 2013. If I had to evaluate the impact of a tax cut by looking at unemployment effects in the year following the cut without accounting for other issues I would be ridiculed. Why the preposterous weight placed on a single negligible piece of evidence that does not show a per capita decline in smoking, is contradicted by other industry data and which does not reflect a lot of things going on in these markets?
3. The Ergas claim that there has been a major switch to cheaper brands which are consumed in greater volumes because of price falls is exaggerated. Market shares of the major brands have remained stable despite caprice increases that exceed the 2013 excise price hike. Cheaper brands have also increased in price.
The initial evidence – short-term and inadequate as it is suggests that plain packaging is helping to reduce smoking in Australians. I’ll try to find time over the coming weeks to set these views out more fully. In particular I’d like to sort out why this campaign in The Australian is being implemented. Is it a disinterested search for the truth and, if so, why the trash methodology?
A friend I met in Cairns (who is a expert photographer with premium Nikon equipment and lenses) showed me his “travel camera” a relatively cheap “ultra zoom” made by Fujifilm. Ultra zooms are point-and-shoot cameras with a fixed lens that offer 50X and even 60X magnifications. These are equivalent to telephoto lengths in excess of 1200mm for a standard full-frame DSLR camera. The ultra zoom cameras sell in the US for less than $400 and weigh in total about 600 grams. Continue reading Ultra-zooms bleg (757)
There is a widespread misperception that the Emissions Reduction Fund (ERF) cannot, in principle, work to effectively reduce carbon emissions. An example is in today’s article in The Saturday. Basic environmental economics on the equivalence between taxes and pollution subsidy policies shows that this is wrong. It is also wrong to dismiss the ERF scheme as a “non-market” based scheme. It is just as much a market-based scheme as the carbon tax provided that subsidies are allocated to the low cost pollution abaters.
Economists look at carbon polluters and focus on the costs that these polluters face in cutting their last tonne of carbon emissions. To use jargon this is the marginal cost of cutting emissions (the marginal abatement cost or MAC). If a tax per tone of emissions t is imposed on emissions from a firm with a certain MAC then, if t > MAC, the firm will abate since it is cheaper to do so for these marginal emissions than to pay the tax. In fact firms will abate up to the point where t= MAC. If instead the government provides a subsidy on emissions reduction s and offers to pay this subsidy to those who offer to cut their emissions at a cost to the government of less than s then firms will offer to cut their emissions and receive the subsidy provided s > MAC. They make money by doing this because they pay less for abating than they receive from the subsidy. Again they will cut their emissions up to the point where s=MAC.
Comparing the tax and subsidy schemes it is clear that both are market based and that both yield the same level of emissions reduction for t=s. A tax of $25/tonne on carbon emissions will yield the same level of emissions reduction as a subsidy paid to polluters of up to $25/tonne.
That the carbon tax was fixed in amount where the pollution subsidy under the ERF is determined implicitly by the budget to be spent reducing emissions changes nothing in principle provided that, as is the case, those who seek subsidies are those facing the lowest MACs.
Why then the popular opposition among economists to the ERF in favour of the carbon tax? There are several reasons:
1. Fiscal. The emissions tax potentially yields large amounts of revenue to the government whereas the ERF scheme costs the government revenue. There are two responses to this claim. First the carbon tax scheme as introduced by the Labor Government was designed to be revenue neutral so consumers and many producers were offered benefits that compensated for the tax. Thus, as introduced, the carbon tax would not have yielded any revenue. One could counter argue that times have changed and that these offsets should not now be paid because of looming public sector deficits. That presumably was what Ross Garnaut had in mind when he claimed the other day that restoring the carbon tax and abolishing the ERF could deal with the Government’s fiscal woes if the Senate rejects its program of social welfare cuts and charge increases. Even doing this it is easy to show (joint work I have done with Rob Waschik and Iain Fraser does this) that the revenues paid under the ERF to firms are much smaller than the revenues transferred to government by a carbon tax for all but very high (exceeding 90%) levels of abatement. It doesn’t seem to me that the fiscal arguments against the ERF are compelling. Another possible source of non-equivalence could stem from double dividend benefits from a carbon tax.
Another claimed fiscal disadvantage of an ERF could stem from the fact that it does not yield the double dividend benefits of a carbon tax. The claim is that carbon taxes punish a bad activity and yield an additional benefit by permitting the reduction of more distorting taxes such as income taxes on labour. UI think now the consensus is that such double dividend benefits are either negligible or small. The difficulty is that extra costs imposed by a carbon tax in any event reduce real incomes which obliterates any benefit from improved tax efficiency. That said the ERF is funded by taxes on income so, even if the absolute scale of the ERF is not great, its “excess burden” (or deadweight loss) costs on the tax-payer should be accounted for.
2. Implementation. There are difficulties of implementing an ERF. Both tax and ERF schemes require monitoring of current emission levels to check that carbon emission laws are being met. But the ERF requires also that an emissions baseline be determined which determines the size of the subsidy payments to be paid. These will depend on the difference between baseline emissions and current emissions. The difficulty here is to make sure that polluters are not “gaming” the ERF scheme by exaggerating initial emissions in order to get higher subsidy payments. Even without gaming issues the issue is to determine the genuine level of emissions reduction that occurs as a result of the ERF. Emissions by coal-fired electricity generators have fallen in recent years not because of carbon charges but because of falling electricity demands. In addition generators switched to using less polluting gas even before carbon pricing was introduced. It would be unattractive if payments to carbon polluters were made for emissions reductions that would have occurred anyway. Such issues do not arise with a carbon tax since a firm’s tax liability depends only on its actual emissions – there is no benefit to a firm in fudging a baseline or gaining an unwarranted advantage from a switch to gas. While touch unwarranted payments to firms are unattractive I do not think that, again, they provide an overwhelming case against the ERF scheme given the comparatively small scale of aggregate subsidy payments.
Other issues of implementing the ERF concern selecting the least cost emitters too subsidise. This is proposed to be done by a reverse auction where those who can abate emissions at low cost will get the subsidies. Potentially it seems to me this can work provided firms do not collude and provided they bid a price for abatement that is close to their MAC. Again it seems to me a detail rather than an overwhelming criticism of the ERF.
3. Time frame. There are considerable difficulties in understanding the issue of whether firms will sustain emissions reductions. The current ERF is scheduled to run for 5 years and presumably the Government assumes emissions reductions made during this 5 year period will be sustained into the future. There are real issues here of the credibility of the ERF scheme. Will firms cut emissions now in response to an emissions subsidy which compensates them for the extra costs they will occur over such a short-term time horizon? At least the longer-term future for the ERF needs to be spelt out.
4. Non-equivalence arguments. Environmental economics texts such as the well-known work of Baumol and Oates (BO) point out that the model outlined above suggesting that tax and subsidy policies are equivalent (in the sense that if s=t the same emissions are produced) are wrong. BO point out that under a subsidy scheme there are reduced incentives for high polluting firms that would exit an industry under a carbon tax to in fact exit under a subsidy policy. The reason is that their value is boosted by payments for emissions reductions. BO also point out that firms may in fact enter an industry to secure ERF type benefits. Neither of these outcomes seems realistic in Australia where firms engaging in such behaviour would certainly expect a prompt regulatory response. I don’t regard this as a real problem.
5. Political. Many citizens distrust the Government on climate change. There are many climate change “skeptics” (more accurately, “delusionists”) in the Government and among its group of major advisors. This is probably the major reason for disbelieving in the ERF’s efficacy and it is reasonable given the Government’s track record.
In my view the problem with the current Abbott Government policy is not its use of an ERF rather than a carbon tax to reduce emissions to 5% below those of year 200 by 2020 but the fact that this target is so miserly. We are shamed by the intended actions of the Obama administration and by the intended actions in countries such as China and Indonesia. But to dismiss the ERF wrongly when it could potentially address climate issues is foolish.
Caution: I am working on this material. Subject to revision.
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