The Federal Government and its faithful Opposition are falling over each other to say their own climate policy is market friendly.
On Lateline last week, Penny Wong and Greg Hunt each argued theirs was the most faithful “market mechanism” which could be devised.
Perhaps this should be taken as a positive – recognition by both sides of politics that voluntary trade in a free market is the most efficient way to allocate resources. A few decades ago this would have been a very different debate.
But a crucial distinction has to be made. A market mechanism does not make a free market.
Indeed, while market mechanisms like an emissions trading scheme are superficially appealing – it has all the buying and selling that we see in the most dynamic sides of capitalism – they can only ever be a crude approximation of the real thing.
Sure, it looks like a duck. It quacks like a duck. But it swims like a robot which has been engineered to swim like a duck.
Ducks and robo-ducks are different. So are genuine and artificial markets.
Genuine markets emerge, spontaneously and dynamically, to meet demands or to create them. The market order which develops seems harmonious – balanced, as if, by an “invisible hand”.
But of course there is no invisible hand guiding the marketplace. Ideally, the market is only limited by general rules: private property, protection against fraud, and enforcement of contracts.
There are just billions of people working to produce things for other people to buy, and buying things which other people have produced for them.
It works. The efficiency, wealth, and increase in living standards that results from this capitalist dynamic have been recognised, implicitly, by every side of politics.
An artificial market like the proposed emissions trading scheme is a completely different beast. It has a very visible hand indeed.
Every side of the market is created by legislation. The Government nominates the product. The Government nominates the customers. It nominates the producers. The Government controls the supply and restrains the demand. Then it regulates the whole thing over the top.
Someone has to design the rules of the game, the limits, and write the laws which govern them.
The contrived structure of an emissions market leeches away much of the dynamic efficiency it is supposed to encourage.
Markets out in the wild have booms and busts all the time. Artificial markets are even more flimsy and prone to failure. No planner could predict ahead of time the negative consequences of every single line of legislation which will construct this artificial economy.
On The Drum on Friday, the ABC’s Chris Uhlmann speculated how soon the first great crash of this huge artificial marketplace would occur. He could have added these crashes have precedent. Two of the most dramatic corporate collapses in the United States in the last decade have been deeply involved in artificial markets and were pioneering carbon trading.
Enron was an energy company, sure, but its main business was broking – it wasn’t producing much energy, but trading a lot.
And when it traded energy, it was gaming the regulatory environment created by the inconsistencies of Californian electricity “deregulation” in 1998. The opacity of Enron’s business operations mirrored the opacity of the law which created the energy commodity market. And as the firm got increasingly comfortable trading commodities which were for all intents and purposes fictitious, it started trading emissions credits.
Unsurprisingly, Enron was one of the biggest advocates of the Kyoto Protocol.
Enron specialised in markets which were created and managed by governments and regulators. (They also traded in broadband, another highly regulated, imitation market.) Those markets were artificial, the corporate collapse in 2001 was not.
So too that other iconic implosion of recent time: Lehman Brothers. Collateralised debt obligations weren’t the only complex financial instruments Lehman Brothers was buying and selling at a far remove from their underlying value. The financial services firm was looking to be “the prime brokerage for emissions permits”. Like Enron, Lehman too wanted a price on carbon, because then there’d be money to be made selling carbon derivatives.
Much goes on in the dark regulatory complexities of market mechanisms.
Nevertheless market-based schemes are still, on a theoretical level, an interesting way to resolve a public policy challenge.
If you ignore the emissions trading scheme’s crippling complexity, the inevitable exemptions, the free and subsidised permits, the compensation to lower- and middle-income households, the politics, the rentseeking, and the possibility of bureaucratic or regulatory error distorting the framework even further, then perhaps a market is better than no market at all.
Well, it would be, if anybody thought it could work.
The idea behind carbon trading is to neatly arrange a regulatory framework, then let the profit motive and competitive pressures choose the most efficient suite of energy policies. Set and forget.
But there’s been no suggestion that the substantial subsidies and regulatory requirements for renewable energy will be lifted once an emissions trading scheme is implemented. The Renewable Energy Target, for one, will stay. The Government plans one of the biggest economic changes in Australia’s history, but not even they have any faith in it.
A future emissions trading scheme will feature lots of buying and selling, sure. But while it will have all of the risks of a marketplace, it will confer few of the benefits.