Economically sustainable markets are built on the back of secure property rights, but because secure property rights cannot exist for greenhouse gases, emissions trading has a structural flaw that will ultimately unravel.
In a speech to the Liberal Party's Menzies Research Centre think tank, Tony Abbott has warned businesses not to buy auctioned emissions permits to participate in the Gillard government's planned emissions trading scheme operating after 2015.
Abbott is correct to warn business, but not for the reasons he outlined. His motivation is to remove the stumbling block of compensation to companies that purchase emissions permits if he is in a position to scrap the carbon tax legislation after the next election.
The Gillard government argues that if the permits are diminished the property right paid for by permit holders will trigger compensation under the Constitution on the grounds that the government has acquired their property.
Ironically, it's precisely the same argument tobacco companies are running against the government's plain packaging plan.
In both cases the relevant legislation treats the property right as akin to physical property rights. In both cases the government isn't seeking to use the property for their own purposes, which has been a core argument of those who argue that plain packaging doesn't amount to acquisition.
But Abbott's instinct is accurate on a much deeper level.
Emissions trading is a beautiful idea in economic theory. However, it fails the practicality test.
Markets are built on credible, tradable property rights. Physical property rights are definable and can be isolated for the purposes of ownership.
These dimensions enable them to be traded.
Even intangible intellectual property rights meet these criteria through their design, but greenhouse gas emissions cannot meet them.
One person's emissions cannot be differentiated from another's. They are the same chemical compounds, whether emitted by another or created naturally.
As a consequence, imposing a local price in the absence of a global price, when the externality of greenhouses gases is also global, fails the test of economic logic.
It doesn't compare with previously trialled sulphur dioxide emissions trading, which created a local price mainly to address the localised externality of acid rain. And sulphur dioxide isn't a by-product of the energy engine of our entire economy.
The impossibility of identifying local greenhouse gas emissions in isolation to attach a technical property right provides the basis for the right being attached to the process of emitting.
But emissions permits carry the same structural flaw because carbon accounting standards aren't as accurate as traditional financial accounting.
In traditional accounting practices, dollars can be traced and accounted for retrospectively, but retrospectively calculating profiles for exhausted emissions relies heavily on manipulable assumptions.
Only a small number of centralised emissions can be calculated with a high degree of accuracy, such as electricity generation, which is based on the profile of fuels burned, and output.
So can air flights, by breaking down the share by passenger seat of the emissions calculated from the distance and height the plane travelled and the fuel consumed.
That's why they've both been big-ticket items in the European Union's emissions trading scheme.
But even then their exact emissions profile cannot be perfectly calculated.
The EU's planned carbon tariff on purchased tickets for inbound international flights will be based on assumptions for a plane's expected activity, but as soon as a plane is stuck in an extended holding pattern the cost will no longer reflect the emissions.
Because of the deep inaccuracy of carbon accounting standards, the government requires carbon taxpaying companies only to attain 95 per cent accuracy in their records.
The carbon cops exist because the opportunities for fraud are extensive, and the incentive for engaging in that behaviour by using generous assumptions in calculating emissions profiles increases as the carbon price rises.
Worse, if a long-fabled comprehensive international emissions trading emerges, made possible by governments establishing schemes equivalent to that proposed for Australia, they have a substantial incentive to cheat in their emissions reduction reporting to boost international competitiveness.
That's why international external monitoring, reporting and verification of emissions reduction has been a stumbling block in negotiations for a new international climate change pact.
A tonne of emissions in Beijing, Bendigo or Boston cannot be distinguished once it is in the atmosphere, and claimed reductions cannot be verified.
That's why emissions trading will unravel.
Buying and trading emissions permits requires an extremely high level of trust that participants are reporting accurately, under standards that don't require them to do so, because it is basically impossible.
Of most concern is that we are redesigning our entire economy on the basis of a known house of cards.
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