Modelling based on pure fantasy

Treasury modelling has placated many politicians' concerns about the adverse effects of a carbon emissions cap-and-trade tax.  Treasury puts Australia's gross domestic product loss from cutting 80 per cent of CO₂ emissions at about 5 per cent by mid-century, a loss it forecasts will be dwarfed by projected underlying growth.

Economic models distil demand and supply responses estimated from many known relationships between products.  We can be certain, for example, that a 10 per cent tax on coal would see some shift to other energy sources, some reduced production of end products using coal and some expansion in demand for products that use little coal.

We also have experience of massive energy cost changes.  The quadrupling of the oil price in the 1970s caused economic dislocation but people turned to coal, natural gas and nuclear power.

We can be confident of outcomes from even more severe policy shocks.  Thus, a prohibitive tax on, say, oranges would lead people to choose alternative goods.  Overall long-term loss to the economy would be minor.  Substitute that with a tax designed to eliminate consumption of all known foods.  Clearly there would be mass starvation, and considerable loss of income.

The question about a carbon tax designed to reduce Australia's CO₂ emissions by 80 per cent is whether the better analogy is a tax on oranges or a tax on the whole class of foods.  Present-day energy consumption is highly reliant on carboniferous fuels.  Energy itself is, second to food, the basic building block of all human activities.

Nuclear power is the only substitute for carbon-based energy but the government rejects it, and, in any case, it would be costly and inadequate to achieve the 80 per cent required reduction in CO₂ emissions.

New technologies may also emerge.  Treasury envisages its recommended tax regime would result in 80 per cent of electricity coming from exotic renewable and from gas and coal incorporating carbon capture and storage by 2050.  Yet the new technologies are unproven.

Assistant Climate Change Minister Greg Combet has cited Treasury modelling to argue that the coal industry would continue to grow under the government's emissions trading scheme.  But the economic modelling behind such forecasts is pure speculation.  Acknowledging this, the Intergovernmental Panel on Climate Change calls them "storylines and scenarios".

The projections simply assume the new technologies will develop.  Without this, the costs of forcing emission reductions would be astronomical, causing rapid reductions in living standards.

But economic forecasts based on radical technological change are pure fantasy.  Policy cannot be formulated on the basis of these projections, and should avoid locking in measures that could prove unworkable and desperately expensive.

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