Property rights and the ETS

Emissions trading schemes are a regulatory imposition to achieve reductions in greenhouse gas emissions, not a free market solution built on private property.

In Wednesday's Climate Spectator Tristan Edis suggested I helped clarify his thinking about the merits of an emissions trading scheme over a carbon tax:

''On ABC television he [Tim Wilson] said he concurred with Abbott that an emissions trading scheme wasn't a real market.  According to Wilson, it's just a regulatory impost dressed up in drag to look like a market.''

The statement certainly reflects my sentiment;  but more on that below.  Mr Edis went on to write:

''The IPA is a champion of the concept of property rights ... [and] thinks development of these property rights was a fantastic thing.  But they seem to forget it involved government regulating ownership of land, instead of just allowing a free-for-all.''

He is certainly right that my bedfellows at the IPA, and I, believe private property rights are a wonderful thing.

But before columnists attack critics of emissions trading for abandoning their free market principles, they should understand what free market principles are, and how they apply to ETS.

Without wanting to give a long economics history lesson, physical private property can be owned and traded without government.

Before government recognised modern property titles, people owned property.  It was just through customs where others recognised each other's territory, someone literally squatted on it, or someone just had the biggest stick and could beat others away.

Peruvian development economist Hernando de Soto's The Mystery of Capital provides a quality discussion on the nature of property rights when formal title systems do not exist.

The role of government is to make transactions easier by creating clear and tradable titles, not the creation of property.

Emissions trading is not equivalent.  Emissions trading schemes establish a regulated tradable title to emit into the commons.

If we are going to be all pure about it, the free market solution to addressing the tragedy of the contemporary atmosphere commons is not to establish emissions trading;  it is to privatise the atmosphere.  That isn't realistic or achievable.

In response, advocates for cutting emissions have looked at what was achieved in the sulphur dioxide trading scheme where permits are allocated and progressively decreased.

But the lessons learned from sulphur dioxide trading cannot be simplistically translated to greenhouse gas emissions.  The externality of sulphur dioxide (acid rain) occurred close to the source of emissions.

The ‘global' in global warming suggests that isn't the same in this case.  That's why only an international regime to mitigate emissions will be effective.  That doesn't exist, and is unlikely to any time soon.

More importantly, emissions trading is not a free market solution.  It is a technocrats solution.  In their efforts to dress up carbon cutting regulation in the language of free markets, advocates for emissions trading have conveniently confused ‘free markets' and ‘market-based'.  They are not the same thing.

The term ‘market-based' merely means something is traded, and in the case of the ETS it is an emissions permit.  A ‘free market' is a market with light, or no, regulation.  They are entirely different concepts.  In a free market, emissions permits are unlikely to exist.

Unlike traditional (or even intellectual) property, emissions permits only exist because government created them, even though they can be traded.

Before anyone screams that intellectual property acts like emissions permits and does not exist without government, I shall clarify that is not correct.  Natural intellectual property exists — it is called a secret.  Whether policy should trade the veil of secrecy for an exclusive right, and on what terms, is another article entirely.  But carbon permits and intellectual property are not comparable.

Without the government there is no viable market for regulating greenhouse gas emissions through permits, as evidenced by the collapse of the now defunct voluntary Chicago Climate Exchange.

To be fair, there is a free market for carbon dioxide, it even has a price.  The free market price for carbon dioxide is about $6 — $10 per kilogram ($6,000 — $10,000 per tonne) and can be purchased at your local service station (price may increase if you don't have a refillable cylinder).

In an emissions trading scheme the government creates a market and sets the volume of permits (supply) and those that have to purchase them (demand).  Without the government doing so, people are highly unlikely to buy them.  A floating price carbon tax is essentially just the financial reflection of government-imposed climate regulation.

And that market is then heavily influenced by how the government changes the supply or demand, including being influenced by political considerations.  The gaping, structural flaw of emissions trading is that to be effective to drive investment the permit has to be very high (arguably in the hundreds of dollars) with certainty and predictability it will stay there for a long period of time.  But because the supply and demand of permits is always open to political considerations that confidence struggles to exist, despite the best efforts to achieve it through ''independent'' authorities.

The only relevant matter for free marketeers in defending the property rights of emissions permits is that if the government establishes them, requires them to be purchased, and then they are significantly devalued by government action, there should be compensation to owners.  Sadly, protection of private property in the Australian Constitution makes compensation unlikely should a government do so.

In that context, emissions trading and Direct Action are different sides of the same regulatory coin.  Both are undesirable solutions.  On that basis the criteria to assess the relative merits of each is long and would require another article.  For example, emissions trading schemes are arguably more efficient, but ‘Direct Action' is more proportionate to comparable action in other countries.

The free market solution to cutting emissions is innovation of low-carbon technologies that can stand on their own two feet.  Necessity is the mother of invention and there is already global demand for abundant, cheap, renewable energy that doesn't require fossil fuels.  The problem is that despite the cost of extraction, fossil fuels remain competitive.  The challenge is how to bridge the gap.

For many that gap should be met by taxing existing technologies out of competitiveness through emissions trading to spur innovation.  But I'm in rare agreement with Kevin Rudd's former chief economic adviser, Alistair Jordan, who argued in an essay:

''Unfortunately, both the political rhetoric and the conventional wisdom are wrong.  Emissions trading schemes will find the most efficient way to reduce emissions from existing technology (his emphasis), but they are not particularly effective in bringing forward the technologies of the future.''

It's illogical to use taxes and regulation to deploy technology that is nowhere near standing on its own two feet.

The most important factor to ensure success in innovation is keeping markets open so capital continues to flow and investors have the confidence to put their money down for worthy projects.  Similarly, barriers for free trade for low-carbon technologies should also be opposed.  That's why I've aggressively defended open markets and the importance of intellectual property rights for low-carbon technologies in the past as the best solution to cut emissions.

Innovation is the best, free market way that uses property rights to drive sustainable economic and environmental change, not trying to tax uncompetitive technology into competitiveness.

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Score one for retail super

Even a casual observer of the superannuation sector would notice huge tension and jockeying for position between the industry and retail funds.  That tension has now stepped up a very big notch.

Industry funds are primarily run by unions and hold around $240 billion of workers' money.  They consistently claim they operate with lower fees, offering higher returns than the retail funds.  The retail funds have about $350 billion under management.

With the claim and counter claim around comparative performance the issue that's always struck me is the near zero transparency offered by the funds.  I've been a consistent critic of both the government and the funds on this issue.

That criticism is heavily based on evidence from my 2010 report.  It's an eye opener and worth a read.  For example, the alleged comparative performance of the funds is based on tables produced by the Australian Prudential Regulation Authority.  But it transpires that APRA only reports what the funds report to APRA.  No verification of performance claims is done by APRA.

My report demonstrates that there's near no capacity to investigate and verify performance because transparency and disclosure is so poor.  I rate transparency between funds, with industry funds performing much worse on average than retail funds.

The problem of performance truth is demonstrated in a simple example.  A young fellow currently working overseas showed me his industry fund statement for the last six months.  As he's not having compulsory contributions to his account made, its true performance is apparent.  With an opening balance of $2,775, he's investment earned $22.53 but $81 in fees came out.

This 23-year-old says the negative trend has been consistent.  It's no wonder he thinks the entire superannuation scheme is a con.  In some respects it could almost appear like a giant Ponzi scheme.  It only looks financially viable while workers are forced to make contributions.  But who knows the truth?  The facts are hidden by limited disclosure!

The poor transparency was examined in Cooper Review into superannuation.  The 2010 report recommended major disclosure requirements be imposed on the funds.  This should have been easy to implement through legislative disclosure requirements.

But the Gillard government, under then Assistant Treasurer Bill Shorten, responded with ''supports improved disclosure requirements but will consult with relevant stakeholders on design and implementation issues''.  Now approaching two years on, nothing has been done on the government's side but talk.  Meanwhile transparency and disclosure remain appallingly low.

On this, the Gillard government is exposed to accusations that it's compromised by its close association with unions that have vested interests in and control of industry funds.  In many respects the broad Labor machine looks like it has become a powerful new establishment network in Australia.  It's an integrated grouping involving political, industrial (union), legal and now (most importantly) financial power through the industry funds.

This has been partly exposed in Senate hearings detailing (now withdrawn) court proceedings against ex-Electrical Trades Union boss, Bernie Riordon.  According to the hearings Riordon, who's recently been appointed as a Commissioner of Fair Work Australia, received in excess of $1 million from multiply directorships of superannuation and related funds.

This dovetails perhaps with the long-running concerns over the management and performance of MTAA Super, now chaired by ex-Victorian Labor Premier John Brumby.  Brumby was brought in, it seems, to tighten up MTAA.

What's observable is an intricate Labor web around industry superannuation funds.  Refer again to my report for more detail.

This is where the retail superannuation funds are in such an interesting spot.  The retail funds threaten the financial muscle of this Labor establishment.  If workers shift their money from industry funds to retail funds the Labor establishment's financial power diminishes.  Hence industry funds need to maintain the impression that they offer lower fees and higher returns even if the experiences of our 23-year-old, for example, could call this into question.

But the retail funds have taken a sudden, unexpected and bold move.  They're not waiting for the Gillard government to require disclosure.  Through their association, the Financial Services Council, they've announced that they will impose on themselves new high disclosure requirements approaching that required of publicly listed companies.

It's welcome news.  This includes disclosure of directors and senior management salaries, independent chairs and prevention of holding multiple directorships across different funds.  It's not clear if the retails funds are implementing all of the Cooper disclosure requirements but it's a big step.

What the retail funds may perhaps now be able to argue is that they offer a ''safer' investment environment than industry funds.  If the retail funds go as far as fully implementing Cooper's disclosure recommendations they'd be able to argue that their claims of returns on investment are fully open to public scrutiny.  This is something the industry funds would have difficulty matching.

The retails funds initiative creates a dilemma for the Gillard government.  If there was any thought of creating the appearance of superannuation disclosure, without substance, this is now difficult.

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A throwback to union militancy

The television scenes last week of union members marching through airport terminals were arresting.  They wore vests, carried banners and were shepherded by union officials bellowing chants from the ubiquitous megaphone.  It appeared the chants were meant to convince travellers the delays they were to experience that day were justified.  To me it was further proof that Australia's union leadership is losing touch with the Australian community.  It was a throwback to the days of union militancy and arrogant union officialdom.

The federal government is today seen as disconnected from the issues and concerns of many Australians.  The disconnect apparently applies to those Australians categorised as its traditional heartland, the workers.

One frequently identified problem for the ALP is that too many of its parliamentary representatives are former union officials.  This predicament is now exacerbated as union officials themselves increasingly appear to be out of touch.

Both organisations joined in 2008 to leave Australia with an awful legacy, a fair work system that has major faults.  A system that is damaging workplace efficiency and the capacity to optimise incomes and jobs growth, while also entrenching union privilege, notwithstanding an alarming fall in union membership.

A major fault with the system is rapidly becoming registered in the public's mind.

Union officials are using the new bargaining rules to orchestrate protracted negotiations for an enterprise agreement.  Industrial campaigns involving bans, strikes and belatedly cancelled strikes are commonplace.  Qantas is the most recognised example.  Similar protracted campaigns are affecting Toyota, BHP coal mines, Customs, police and public servants, while campaigns are being planned for health and other areas of public sector employment.

Behind these campaigns, which target large employers, is a malaise affecting smaller businesses.  The new multi-layered system of National Employment Standards, awards and agreements is a disincentive to pursue creative agreements with workers.  Most take the easy option of paying the standard award or copping the union-endorsed agreement for their particular industry.

Union officials are also determinedly pursuing two other damaging strategies.  They are attempting to expand their rights of entry to workplaces.  Many workplaces that hardly ever saw an official are now logging numerous entries.  Clauses that expand the right are now commonly sought when bargaining for new agreements.

Independent contracting and labour hire are generally beyond union control.  As a result, unions now seek to limit the capacity of firms to engage contract labour on terms that suit the employer and help the business remain competitive.

Union militancy may have been tolerated in decades past.  But it is an economic anachronism in today's connected and competitive world.

Unsurprisingly, militancy is not helping the unions.  Membership remains stuck at very low levels, with coverage falling to 14 per cent in the private sector and 19 per cent overall.

Unpleasant outcomes are on the horizon as a short-sighted game is being played.  It will unravel when the economy deteriorates, if not before.

Workplaces with diminished employer-employee engagement will be less efficient.  Inflexible agreements and rules constraining employment options will limit responses to tough trading conditions and employers will respond by driving down labour costs, employing fewer people and transferring jobs offshore.

An inquiry into the fair work legislative framework is scheduled and it has the hallmarks of a whitewash.  A thorough review is needed.

We have to urgently consider reforms to the labour market that will take up the opportunities of our current strong economy and consolidate the gains for future prosperity.

The features of the system that encourage arrogant union militancy must be changed.  Union leaders need to become more mindful of the aspirations of most Australians.

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Cursed by demographics

The persistent confusion of financial signals is perplexing at the moment -- particularly for those of us who might be categorised as small to medium investors.  Is the global economy recovering or are there more bad times ahead?  At stake are individuals' superannuation and investment assets, which have already declined sharply.  It's increasingly likely that government will struggle to support retirees.  Raising the pension age to 67 is an early sign of this process.

I'm not an economist.  But I've run businesses, mostly small- to medium-sized ones for the last 13 years.  Like most people in small business, I'm drawn to concepts that are easily understood and seem to make common sense.

One idea that fits the "common sense" category is an understanding of demographics and how that impacts on economic trends.  Early this year I read The Great Depression Ahead by HS Dent.  He's visiting Australia soon and, no, I'm not promoting his tour and I have no association with him other than reading his material.

Dent's a non-orthodox economist.  He brazenly suggests that economists know very little and that they speculate using data that cannot ever be complete.  The global economy is too big and moving too fast for economists ever to grasp it properly.  Dent reasons, however, that demographics are one thing that is known -- and demographics determine all major economic trends in developed economies.

The core thesis is straightforward.  During every individual's life-cycle there are known behavioural and spending patterns.  These are well researched and documented in every developed nation's population surveys.  In an average 80-year life, the dominant trends are known.  In our 20s we enter our first income-earning phase and tend to consume our moderate incomes on personal life experiences:  travel, first car and so on.  During our 30s we establish a family and a home and there's not much discretionary income remaining.  In our 40s incomes improve (but we spend a lot on teenagers).  We borrow to extend the home, buy a holiday house or even an investment property.  We'll start a share portfolio.

Into our 50s:  the kids move out and we'll travel more -- but we'll begin to reduce our loans and spending, conscious of future retirement needs.  In our 60s we tighten our spending, aware that we need to conserve cash for our 70s and beyond.  These are life trends to which most of us can relate, even if there are variations.  Gay and childless couples, for example, have different patterns, but still within the same broad trends.

Dent says that combining these known lifestyle patterns with demographic knowledge can predict economic trends.  He claims that since 1988, he's been predicting the economic boom and bubble we've just seen.  He published books such as The Great Boom Ahead (1993), which predicted the boom would end around 2008.  Dent puts a strong focus on USA trends but his analysis is global.

Former Treasurer Peter Costello showed a keen interest in demographics, but mainly from the perspective of the impact on future government revenue and expenses.  I've previously looked at demographics from the angle of labour supply.  For example, between 2008 and 2012 Australia's available labour pool will drop by 490,000.

What we're experiencing, of course, is the ageing of the post-war baby boomers.  It's combined with the low birth rates of two decades ago.  The trends in the USA, UK, Europe and Australia are similar.  Japan moved into this cycle around a decade ago.

Looking at this in terms of government revenues and expenses, and labour availability, is one perspective.  Dent studies the trend from the angle of consumer spending and borrowing.  His observations make for arresting reading.

The post-war baby boomers induced the great boom until 2008.  Their movement into their retirement phase of life is creating the largest debt deleveraging and consumption drop witnessed since the 1930s.  Consequently, we are in a phase of an unavoidable, demographically induced, prolonged economic decline.  Dent labels it a Great Depression.

This is probably an unwanted thesis because it's not what most of us would want to hear.  It suggests that governments and economic regulators can't do much to stop the economic downturn.  This may of course be wrong.  But it would seem unwise to ignore Dent's analysis.

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A new kind of union muscle

One thing this week's ACTU Congress should remind all Australian's is that the union movement is a big and impressive organisation -- and combative.  Delegates at the 500 strong congress booed and hissed the Deputy Prime Minister Julia Gillard when she appeared on stage at the gathering, for not agreeing to an early shutting down of the construction industry watchdog, the Australian Building and Construction Commission (ABCC).

They were strong in applause for the Prime Minister, Kevin Rudd, however, who declared that the Fair Work Act would stand for decades as a Labor icon, a legacy of the stature of Medicare and compulsory superannuation.

ACTU President, Sharan Burrow's Congress speech ranged across a huge spectrum of economic, social, political, and environmental matters.

Unions destroyed the Howard government, she declared.  Let the coalition parties forever tremble in fear at the political might of the union movement she warned.

She turned on "unrestrained financial markets, the fraud of self-regulation ... the greed and stupidity of bankers and businesses ... casino capitalism ... and the dark side of private equity".  These, she says, are the cause of the global financial calamity.  She's in no doubt that "the corporate world has lost its moral compass".  She named the CEOs of ANZ and Pacific Brands as "shameful".

And more!  Unions will protect jobs by seeking a "green new deal".  She insisted that "major economic and social reform" is needed.  She said it's a "crime" when employers fail to secure 100 per cent of worker entitlements when businesses fail.  Employee entitlements should be above secured creditors, "that is, the big banks," she said, in cases of insolvencies.

Burrow called for workers to be on eight or nine day fortnights when businesses downsize due to a collapse in demand.  "Down days" are to be used for retooling and re-skilling.  She wants a European style "reinvention of the social insurance base".

In the same way the evils of business have wrecked the economy, "unsustainable economic development" has created a path to "environmental catastrophe" (climate change).

She turned on the coalition for opposing government debt saying that debt at around 14 per cent (of GDP) for around 15 years is "an extraordinarily good deal".

Agree or disagree with Burrow's assessments, the power of the union movement has to be recognised.  But it's a different power from the past.

With less than 14 per cent of the private sector being unionised it's industrial muscle is isolated to small pockets.  But with 41 per cent of the public sector unionised it has high relevance in public service delivery.  And with some 2 million members, its direct annual revenue easily exceeds $1 billion.

However it's real financial muscle lies in its close connection to the 70 or so industry superannuation funds managing around a quarter of Australia's $1.2 trillion superannuation sector.  These funds are ordinarily controlled by trustees appointed by both unions and industry associations creating common business interest.  The consequence is that the broad Labor movement has serious influence over the direction of funds management in Australia.

There's nothing wrong with this, as funds are managed according to strict prudential requirements.  But it demonstrates the new union reality of high level, sophisticated, executive management.  Unions have become capitalists.  They have intentionally become the very thing they so often appear to chastise.  Beware the marketing spin!

In this context, this week's ACTU Congress was really a re-branding exercise -- Burrow's was relaunching the unions' post-Your Rights at Work campaign.

And even though Julia Gillard was booed, she was assisting.  Gillard said "Like me, I am sure you were appalled to read of dangerous car chases across Melbourne involving carloads of balaclava-wearing people, criminal damages to vehicles resulting in arrests ... (this) must be unreservedly condemned ..."  She was referring to Melbourne's Westgate Bridge dispute which Business Spectator first exposed on April 6.

The modern union movement is eager to suppress this behaviour.  In the protracted wharves dispute, the violence may have added to union mythology but Howard won the following election.  Unions know the real prize is Labor controlling government.  Union violence that results in media exposure damages that objective.

There's a new union game in town.  It involves political, social and business activism run by a sophisticated, well resourced union marketing operation.  And they're very good at what they do.

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Back to the bad old days

Violence appears to have re-emerged on Victorian construction sites.  In the past few weeks, ordinary construction workers and their families have allegedly been threatened and several violent incidents have been reported -- the history of the construction sector makes it reasonable to suggest that this is just the beginning.

Late last month a building inspector was taken to hospital after a union official allegedly head-butted him at a site in the northern suburbs of Melbourne.

The current West Gate Bridge upgrade has virtually stopped because of violence and threats.  Correspondence to unions from contractor John Holland alleges a security guard has been threatened along with his family.  Workers say they have been followed home and photographed and abused.  Gates have been welded shut and vehicles smashed.  Workers have been surrounded in their cars by groups of people threatening them with violence -- one car allegedly being "pushed, kicked and rocked".

The same correspondence explains that the unions have court restraining orders against them which allegedly are being ignored.

What's happened in the last few weeks could almost be mistaken for a bikie-gang war.  The contractors doing the work on the West Gate Bridge are reportedly using an ex-army troop carrier to move workers into and out of the site safely.

Last week this vehicle was allegedly pursued by several cars driven by men wearing balaclavas who approached the vehicle when it stopped.  Police were called and five men have been charged with offences including assault related to the incident.

This war, however, is not between bikie gangs, but rather is an outcome of disputes between construction unions over who controls worksites.  Some laugh off the violence in the construction industry as a bit of harmless "biffo" between blokes.  It's no joke.  Under other circumstances it would be considered the worst form of workplace bullying.  The allegations raised suggest it may extend beyond this to criminal behaviour.

Several years ago I was debating with a construction manager why his company didn't stare down intimidation from unions and enforce their rights.  He looked at me and said:  "You haven't had your life threatened and your children followed home from school."  I conceded his point.

The situation changed when the Howard government bought in reforms to the construction industry about four years ago.  It was one of the most important reforms they initiated.  They established what is, in effect, a specialist standing royal commission, the Australian Building and Construction Commission.  It has wide powers to police the industry and has been hugely effective.  There has been a level of peace in the industry never before witnessed.

But the Rudd government is effectively closing the ABCC at the beginning of 2010.  The government says it will replace it with a "strong cop on the beat".  However the ABCC's powers have recently been watered down with the passing of the Fair Work Act.  Recommendations being made for the structure and powers of the new body, indicate that the "new cop" will have nowhere near the effectiveness of the ABCC.

The re-emergence of construction industry violence is consistent with this view.  Some unions believe they are about to be delivered a return to the old days where they can leverage control of construction through violence.  The people with the most to lose are the ordinary construction workers just interested in doing an honest days' work.

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Strangled by regulation

It is unfortunate that the first act of the new minister for deregulation was to enact the latest tranche of the federal anti-money laundering and counter-terrorism financing laws -- a major regulatory increase for the financial sector.

To be fair, the legislation's origins lie in the halcyon days of the Howard Government.  But it illustrates just how big the job of finance and deregulation minister Lindsay Tanner is going to be.  The Labor government inherits an Australian economy which is rife with Byzantine and often unnecessary regulations.

Federal and state governments have been legislating and regulating at an ever increasing pace.  Where less than 30,000 pages of Commonwealth legislation were passed during the 1980s, we are on track to pass nearly 80,000 pages this decade.

Regulation has accelerated similarly -- the Howard Government has the record for the most enthusiastic regulators and legislators in history.

It is hard to get a concrete grip on the consequences of such increasing regulation on the economy, but it is certainly having an effect.  The Business Council of Australia recently identified one example of this increase:  a total of 227 pages of documentation need to be given to a customer to open a simple cheque account with an overdraft limit and home loan, roughly five times the number of pages in 1985.

The Rudd government has rightly acknowledged high regulatory burdens as a major economic problem.  However, the fixation that the Labor Party had during the 2007 campaign on reducing "red-tape" -- that is, the paper-burden cost of regulation -- may prove to be a distraction from the real effects that regulation has on the economy.

Certainly, the significance of the paper-burden cost varies by sector -- in the food industry, most regulatory costs can be attributed to the paper-burden.  But for much of the economy, that paper-burden cost is dwarfed by the restrictions on economic activity imposed by the regulations.

For instance, the "chilling effect" of mandatory third-party access regulation far outweighs the paper-burden cost of those regulations by holding back infrastructure investment.  Focusing only on "red tape" in these cases is like focusing on the time spent filling out a tax return rather than the amount of tax paid.

If Tanner is to fulfil the promises of a minister for deregulation, it will be necessary not only to tackle excessive "red tape" but to seriously cut back the regulations which distort investment, divert entrepreneurial and innovative activity, and inhibit business flexibility.  His recent reaffirmation of the election promise of adopting a "one-in, one-out" approach to regulation is a positive sign, but his uncritical support for the Australian Competition and Consumer Commission is less so.

Tanner will be continually pressured by his fellow lawmakers, regulators and bureaucrats, activist groups and the community, and too often businesses to increase regulation.  Cropping back the regulations which restrain the Australian economy will require challenging nearly everyone with a political voice.