November 2007

                                                                 Howard: enter stage dry, exit stage wet

Unlike many commentators, ranging from Alan Ramsey to Imre Saluszinsky, we don’t think Saturday’s election result is a foregone conclusion. Even though every poll since Kevin Rudd became Labor leader has strongly favoured the ALP, a substantial but not unprecedented last-minute swing to the conservatives, combined with their (grossly unfair) buffer of about two percentage points (which would get the Coalition over the line with barely 48 per cent of the two-party-preferred vote), may still be enough to save Howard’s bacon.

We also don’t subscribe to the view that should Howard lose, it will be down to voter ennui: that the Government’s economic record over their 11 years in office would somehow entitle them to feel electorally hard done by. As we argued in March and September, the Howard Government’s economic performance has been patchy and often downright irresponsible. It has enjoyed and capitalised on considerable good fortune on two fronts: inheriting an economy that previous Labor governments had reformed and modernised, and enjoying the fruits of an unprecedentedly long and strong resources boom.

John Howard came to power in 1996 on the back of voter disenchantment – much of it in Labor’s traditional heartland – with the Keating Government’s social and cultural agenda. Howard, like Ronald Reagan before him, presented himself successfully as the true friend of the battlers who had been deserted by their ‘natural’ party, and for a while he lived up to the image. In this he was helped in no small part by the reluctance of the party he had defeated to face up to the implications of their defeat (see our colleague Michael Thompson’s vain attempt to influence the findings of the Hawke-Wran review in 2002).

However, his last – and probably, though by no means certainly, his final – three terms have seen him revert to form: a big and reckless spender in pursuit of social and cultural ends that are in some ways as much at odds with the mainstream as were Keating’s.

This election campaign has become something of a reprise of 1983, with Howard as Prime Minister on the same frantic and desperate vote-buying spree in 2007 as he was as Malcolm Fraser’s Treasurer 25 years ago. In the past, when challenged privately about this previous chapter, Howard has responded that Fraser refused to listen to his advice – a claim that is given some credence in the 2002 memoirs of the tinder-dry former Federal Liberal MP John Hyde:

‘By the time of the [1982] budget, Howard had been placed in an extraordinarily difficult position. It had become apparent to the backbench that fiscal management had been taken out of his and Treasury’s hands by a Cabinet determined to “buy the election”. He could have resigned in protest, but if he had removed his voice from Cabinet, not only would he have been blamed for the forthcoming inevitable defeat; the budget would have been even worse. My opinion, which I voiced, was that he should not resign’ (p 206).

However, given Howard’s behaviour this time around, one is entitled to question the candour of his disavowals, to Hyde and others, of responsibility for Fraser’s profligacy.

Annabel Crabb quipped that Rudd’s honest answer to Rove McManus’s staple ‘Who would you turn gay for?’ question would be Reserve Bank Governor Glenn Stevens. It sounds right at several levels: (1) Kevin comes across as a bit of a nerd (not that there’s anything wrong with that); (2) Stevens did what Costello swore blind wouldn’t happen and raised interest rates in the middle of an election campaign; (3) Rudd says that he, unlike Howard and Costello, will take seriously Stevens’s blunt and repeated warnings to rein in fiscal policy or face the interest rate consequences.

On this last score, Labor’s modest election spending commitments relative to those of the Coalition (about $10 bn less if tax expenditures are included, as they should be) are an encouraging sign that he means it.

It is of course fair to ask, as Howard has done, just what should be done with the huge Commonwealth budget surpluses that have been racked up in recent years as a result of the booming economy. There are only three possibilities: save them, spend them or give them back as tax cuts. The first is less of an imperative now that Commonwealth debt has been pretty much retired, and the third – as Stevens and others warn – risks overheating an economy already operating at or beyond capacity. This pretty much leaves the second option.

So how to spend the surpluses responsibly and without overstimulating the economy? The answer lies in a dispassionate analysis of the medium and long-term challenges we know this country will face.

The immediate and medium-term challenge is persistent skill shortages. They constrain innovation and business development, and threaten our industries’ global competitiveness. When the resources boom starts to peter out, our exposure in world markets will be manifest. We will sink or swim on the quality of our products and services relative to those of our fierce competitors.

The Howard Government has neglected education and skills development. They talk about the additional skills investment they’ve made during their years in office, but other developed countries have mostly invested more strongly over the same period (and much of the Howard Government’s investment has calculatedly avoided the State and Territory TAFE systems), so we have slipped sharply relative to them. Labor has committed to tackling this issue responsibly, with an investment of $600 million over four years to allow employers to tender for the training they need through industry skills councils, resulting in an estimated 450,000 additional training places that will be concentrated heavily at the higher skill levels, including an extra 65,000 traditional apprenticeships.

Rudd has also shown himself willing to invest in modernising our school systems (a sharp contrast with Howard’s preoccupation with winning the history wars), although we do question the value of investing in laptops as the key technological driver of improved educational performance.

The longer team threats arise from our ageing population. Declining workforce participation and sharply rising social security and health care costs as the older aged share of the population increases will impose a huge burden on future wage earners. There are three things we should be, but under Howard mostly haven’t been, doing now in anticipation of this challenge:

1. modernising our health care system, with particular emphasis on preventative and community care (as distinct from hospitals)

2. building workforce skills to offset the dampening effect on growth of falling participation (and indeed to some extent slowing the decline in participation itself – the higher a person’s skill level, the more likely they are to join and remain in the workforce)

3. increasing the compulsory superannuation rate from the 9 per cent it has been throughout Howard’s term of office to something like the 15 per cent rate that is necessary to enable the typical worker to fund their own retirement.

The world is dismissively critical of other countries – notably some oil-rich states – that squander their windfall wealth on gross (and usually highly skewed) consumption without a thought for the future. Australia today is to some extent in this position – we should be investing much more responsibly.

Kevin Rudd, if he wins on Saturday, will command enormous authority in the Labor caucus. He has already flagged that he, not caucus and the factions, will have the final say over the composition of his ministry, and in this we applaud him. We have every confidence that, certainly in his first term, he will have little difficulty staring down the spendthrift and social engineering elements in caucus.

A defeated Coalition will confront major problems – at least as severe as Labor has faced in the post-1996 years. The senior conservative office holder in this country will be (at least for a time) the Lord Mayor of Brisbane. The party will have been rebuffed for failing its self-styled key criterion for holding office: its status as the better and more trusted economic managers. And its second-most electorally successful leader ever will be remembered as the man who didn’t know when to let go; whose legacy will be pored over and picked apart for a few months, then all but forgotten. Hubris often exacts a terrible cost, in life as in the ancient tragedies.

 TNC  21 November 2007                                                                    Like to respond?                                                                                             Top

                                         Skills and collaboration, not WorkChoices, deliver economic success

If we weren’t the first to say it, we were certainly quick off the mark. In our March 2007 editorial, we said that compared to the prime years of economic reform and responsibility under Bob Hawke and Paul Keating in the 1980s and early 1990s, the Howard Government’s economic record has been patchy at best.

1. bailing out the Mersey Hospital in Tasmania – ‘a disaster’ that ‘should be closed’, according to the honest if indiscreet Tasmanian Liberal Senator Stephen Parry; ‘almost certain … to result in the death of north-west Tasmanians’ because it will ‘cement in place a system in which adverse events will flourish’, according to Professor Jeff Richardson, who chaired the expert advisory group on hospitals in Tasmania

2. offering to fund plebiscites in minuscule, grossly uneconomic Queensland local government areas threatened with amalgamation.

Both these decisions send the message to State premiers that correct and courageous decisions to address entrenched problems, based on sound technical and financial advice, carry too high a political price. This, mind you, from a prime minister who never tires of berating the Labor premiers for their ‘wastefulness’.

The most recent development in this regard has been the change of political tune at The Australian. In a startling editorial on 30 August, they stated that ‘set against the microeconomic reforms of the Hawke and Keating Labor Governments during the 1980s and ’90s, the Howard reform legacy is thin … The great legacy of the Hawke and Keating years was the conditions it set for sustained productivity growth. Labor has pledged to refocus on productivity growth if it wins office. Against this, there is little to indicate that Mr Howard and the Treasurer have used their time in office to set the country up for the decades ahead ... [The Howard Government] has been content to consume the fruits of the present economic boom and take the luxury of the soft option.’

The ALP has made up some ground on the Coalition in the poll question of which party would better manage the economy, although they still lag by between 10 and 20 points. There are good grounds for thinking that if the gap persists to election day, it may cost them victory.

This is perhaps the most compelling reason for Labor to campaign from the front on economic management. It becomes doubly important to ensure that shadow ministers and candidates – especially but not exclusively those on the Left – are given no leeway to present off-key messages about, for example, the need for expensive social programs to redress areas of neglect and injustice.

The biggest threat to the longevity of a Rudd Labor government comes from the likely post-election triumphalism that is already emerging in anticipation of a sweeping Labor victory among elements of the Left and the greens. Several commentators, including Phillip Adams, Hugh Mackay and The Age’s Catherine Deveny, see the coming poll as the electorate turning their backs on Howard for his ‘wedging’, authoritarianism and dishonesty. They’re licking their lips in anticipation of his humiliation.

But as Imre Salusinszky pointedly asks, where’s the evidence that the Left’s cultural warriors, who have been crying in the wilderness for 11 years, now suddenly have the ear of the voter?

The danger is that these elements will gain sway in the corridors of power – that hard Left and inexperienced ministers, egged on by their advisers inside and beyond parliament, will pursue agendas that are socially and culturally at odds with the views of mainstream voters, and will chip away at the macroeconomic responsibility that Rudd continues to display.

We saw it in 1993 – though on that occasion it was Prime Minister Keating himself who led the triumphalist band – with catastrophic results for Labor three years down the track.

Fortunately Rudd seems to understand this danger all too well. He told Salusinszky several months ago that he thinks voters support him because they grew tired of the Howard Government some time back, but wouldn’t support in sufficient numbers either Beazley (seen as too soft) or Latham (too volatile), whereas they see him as ‘every bit as conservative, temperamentally cautious and safe-handed as Howard’.

There’s no joy there for those on the Left who are eagerly anticipating a reprise of 1972.

We also said in March that WorkChoices can be presented as a detriment not just to fairness, but also to our economic future. The Government and its business allies are engaged in concerted advertising campaigns that are as dishonest (the business campaign, which slyly knocks over a straw man) as they are outrageous (how dare the government make us foot the bill for such blatantly partisan propaganda).

It’s hard to know whether the advertisements are working as intended – some think they’re turning the industrial relations issue around, others that they’re just drawing attention to the elephant in the room (why all the fuss if there’s nothing to worry about).

In fact there’s now not much difference between the parties on industrial relations as Ross Gittins, for one, points out. In a nutshell, the ALP wants to trade off a little flexibility for a bit more fairness. The differences between the parties boil down to these:

1. Labor would abolish (over five years, for those earning under $100,000) Australian Workplace Agreements and restore collective bargaining, with or without unions, for those who choose it

2. Labor would reinstate substantially watered-down unfair dismissal provisions for employees of small businesses

3. Labor would restore a modified award system as the basic safety net, against which all agreements (except for those earning more than $100,000) would be tested for fairness – however, the awards would be constrained to cover just 10 ‘allowable matters’.

Three points need to be made about these differences.

First, they bear almost no resemblance to the nightmare scenario portrayed in the deceitful business advertising campaign. Contrary to the picture presented of burly union thugs storming into hapless small businesses and shutting them down, union officials are and will continue under a Labor government to be ‘legally required to have a permit and must give notice of their intention to enter business premises, must have valid reasons for entering, and an employer may impose conditions on how they carry out a visit’ (Colin Fenwick, director of Melbourne University’s Centre for Employment and Labour Relations Law).

As for the alleged costs of ‘scrapping workplace reform’ documented in the EconTech report commissioned by the Australian Chamber of Commerce and Industry for the campaign, these are derived from a model into which ‘so-called facts’ have been fed that ‘have absolutely nothing to do with the ALP’s industrial relations policy’ (Colin Fenwick again).

The second point is that – yes, it’s true – Labor’s modest industrial relations reforms will come at an (even more modest) price. Other things being equal, businesses will hire more workers if they are allowed to sack them on a whim, and (particularly during economic downturns) if they are given leeway to cajole, intimidate or con workers out of hard-won entitlements in return for inadequate offsetting pay increases.

It’s an old argument: where’s the ideal balance between fairness and flexibility; between giving relatively powerless individuals collective rights and giving business a free hand to thrive.

The balance we reached before the introduction of WorkChoices was in fact far closer to the United States end of the developed countries spectrum than the Western European end. There’s substance to the charge that Howard wants to push us right to – indeed, as far as bargaining rights are concerned, beyond – the US extreme.

The final point to make is that WorkChoices, in its philosophy, its message and its impact, works directly counter to the other, far more pressing, industrial imperative: to build the workplace skills that are critical to this country’s long-term economic competitiveness. Roughly speaking, 80 per cent of Australian jobs have a clearly defined educational and skills pathway (tertiary or vocational), but below 50 per cent of workers have the qualifications and/or recognised skills that attach to these jobs.

We muddle through at present – as we have for decades – but the skills gap (one manifestation of which is widespread skill shortages) will continue to widen, particularly under the impact of the ageing population and falling labour force participation rate.

In time – particularly when the current resources boom peters out – we’ll find ourselves scarcely able to compete in the global marketplace unless we’ve quite radically transformed our skill formation patterns.

Unions can and should be a vital partner in this process. (As we noted in March, Australia’s robust apprenticeship system owes everything to the past strength of our unions.) They are critical to encouraging workers, particularly blue-collar workers, to participate in training and skills development, and to reassuring those who understandably find this threatening. They can and will ensure that collective agreements adequately provide for, and appropriately recognise and reward, skills acquisition.

Workers themselves need the reassurance that their employer values them sufficiently to make skills acquisition a desirable option. Small business overall lags sharply behind large and medium firms in its investment in and commitment to training – this discrepancy largely accounts for Australia’s generally poor skills profile. It is essential that we restore the element of partnership between business, workers and unions that was so carefully built up during the Hawke years.

Important research in the neurosciences shows that people (indeed, animals generally) fail to learn when they are under stress, anxious and unhappy. John Merson, a senior lecturer in the School of Science and Technology Studies at UNSW, argues that this probably goes a long way to explaining why low socioeconomic status correlates so closely with inferior learning outcomes – it’s not just poverty per se; the anxiety and unhappiness that poverty engenders are as much to blame.

Merson draws several lessons from this research, one of which – that ‘the “right” balance is needed in students’ emotional as well as cognitive load’– is especially relevant in this context. ‘Optimum engagement with learning’, he writes, ‘lies in that zone where the challenge is demanding enough to be enticing, but not so great as to be daunting’.

This goes to the heart of the question as to what sort of workplace we need to meet the skills challenge. An insecure, antagonistic workplace that pits people against each other and individually against a much better armed boss, where work is a tedious routine and two-way loyalty is passé, is the very antithesis of what is needed.

 TNC  22 September 2007                                                                 Like to respond?                                                                                          Top

                                                    If housing depends on a vision for our cities, try ‘opportunity urbanism’

Suburbia: reports of its death are greatly exaggerated 

 June 2007

                                Value judgements, conflicting assumptions undermine Climate Institute ‘research’

On 28 May, ABC radio bulletins were abuzz with news of new research ‘showing power costs would rise less if the Government moved quickly to bring in a mix of measures, including emissions trading, than if it waited’.

The source of that research was not a university, research institution, industry association or government agency, but rather a ‘greenhouse lobby group’, as the ABC called it – the Climate Institute of Australia (CI). As a rule, the ABC isn’t in the business of promoting lobby groups. Why then was this research accorded such prominent coverage and presented as self-evidently true?

The habit of media outlets, particularly at the progressive end of the spectrum, to confer authoritative status on green lobbies is a fact of modern life. The point is made well by former British MP Dick Taverne in The March of Unreason:

Just as parties are a necessary part of democracy, environmental lobbies play an important part in making people and governments aware of environmental issues. But blind loyalty to the cause is just as corrupting as tribalism in party politics. In fact it is more dangerous, because the media subject the pronouncements of parties to ruthless criticism, but treat environmental groups like The Soil Association, Greenpeace and Friends of the Earth as independent authorities above criticism, as if they were a sort of collective Mother Theresa. There is a general feeling that since they are trying to save the planet, they must be right.

To those groups mentioned by Taverne, add CI.

Journalists would deny that their positive coverage of CI’s output is driven by shared ideological assumptions about climate change, if not the world at large. They would argue that it is more to do with the organisation’s independence.

According to a press release, CI was founded in 2005 ‘through a $10 million grant from the philanthropic group, the Poola Foundation’. One of CI’s directors, Mark Wootton, is also a director of Poola, which distributes the bequest of the late Tom Kantor, the brother of Mr Wootton’s wife Eve. The foundation disburses most of its money to environmental projects.

Another of CI’s directors is Clive Hamilton, better known as Executive Director of the Australia Institute, a progressive think tank. The Australia Institute is also funded by Poola. Hamilton is the author of numerous books and articles on the theme that material affluence is incompatible with wellbeing. CI represents an extension of Hamilton’s obsessions, since global warming is seen as the most serious of many negative by-products of the market economy.

For many observers, CI’s funding by a philanthropic trust attests to the integrity and impartiality of its work. In contrast, researchers funded by commercial concerns are routinely accused of bowing to their paymasters. This tactic is rife when it comes to debates about climate change. There is a knee-jerk tendency to dismiss anyone who questions the IPCC-Kyoto-Stern orthodoxy as being in the pay of some sinister interest.

Yet it may be reasonably argued that the type of grant made in this case, an up-front single capital sum, will inevitably confine CI’s field of vision to enquiries which happen to justify the grant’s purposes. These include ‘raising public awareness and debate about the dangers to Australia of global warming and to motivate the country to take positive action’. As we will see, this results in a tendency to fish around for worst-case scenarios.

A hermetically sealed trust like Poola isn’t subject to commercial or political pressures. Nor is it instinctively sensitive to the day-to-day reality of people who may be damaged by its purist agenda.

Nonetheless, it is rarely productive to prejudge the quality of research into the implications of global warming (or anything else for that matter) on the basis of who funds it. The public interest will only be served if all research, whatever the source, is examined on its merits.

Faking the switch

The CI paper that attracted so much attention on 28 May was Making the Switch: Australian Clean Energy Policies. The underlying assumptions and modelling methodologies are contained in a supplementary report by McLennan Magasanik Associates, ‘one of Australia’s leading electricity sector modellers’.

The principal paper’s headline story, the one that so interested the ABC, assumes a scenario in which the government introduces emissions trading with a ‘soft’ carbon price of $10 a tonne in 2012 and delays ‘full emissions trading’ until 2020. This is called the ‘wait and see’ scenario. If this comes to pass, says the paper, we will have electricity ‘prices around 20 per cent higher in the 2020s, 60 per cent higher in the 2030s and 90 per cent higher in the 2040s’.

‘This rapid price increase’, it is explained, ‘risks significant shocks to the industry and wider economy.’

CI urges the government to go for a ‘mix of policies’ option: full carbon pricing as of 2010, clean energy targets and comprehensive energy efficiency. ‘A mix of policies reduces carbon price increases by around a third and electricity price increase by around 20 per cent over the first two decades of action [sic]’. The precise meaning of this sentence (and many others) isn’t so clear. Apparently, prices would be 20 per cent lower than the ‘wait and see’ scenario outcome.

(ABC newsrooms wouldn’t have appreciated that this isn’t such a dramatic improvement, considering that CI forecasts prices rising by as much as 90 per cent in the 2040s under the wicked ‘wait and see’ scenario.)

As noted above, these findings were reported as pressing and self-evident. Closer examination reveals that the paper is built on a collection of gratuitous value judgments and conflicting or arbitrary assumptions.

Gratuitous value judgements

Making the Switch starts with a familiar premise: ‘No other conclusion can be drawn from the scientific assessments of Australia’s, and the world’s, premier scientific institutions that countries like Australia will need to reduce emissions by 60 to 90 per cent by 2050 [sic]’.

Some researchers and a few national and international agencies have estimated that global emissions need to be reduced by around half from 1990 levels if atmospheric carbon is to be stabilised at safe levels. This is not to say, however, that there are scientific grounds to suggest Australia ‘will need to’ do so. There are no scientific grounds for Australia to do anything. Extinguishing our 1.4 per cent contribution to global emissions will scarcely affect the world’s climate systems. If CI believes there are other grounds for Australia to act, they are not spelt out in the paper. The need to act now is asserted as obvious.

CI, like other green groups, insists the debate on whether Australia should take early action to cut emissions is over. The subject is far from closed, however. Considering our minuscule share of global emissions, and the severe impact such action would have on our fossil fuel dependent, energy exporting economy, the issue ought to be subjected to continuing scrutiny. A model approach is found in the Productivity Commission’s submission to the prime minister’s task group on emissions trading, which contains critical examination of various rationales for early action like avoiding climate change, meeting the Kyoto target, being a good world ‘citizen’ and influencing others, reducing investment uncertainty, and facilitating the transition to a lower emissions economy.

In contrast, CI prefers to indulge in gratuitous value judgments.

‘It is inevitable’, says the paper, ‘there will be winners and losers in the transition to a low carbon economy …’ CI, unlike other green lobbies, concedes that ‘certain greenhouse intensive trade exposed industries such as aluminium production and iron and steel may suffer disproportionate impacts from domestic carbon pricing’. But CI claims the right to decide that some industries deserve to flourish at the expense of others, without any consideration of alternative policy frameworks. The prospect of losers ‘should not be an excuse for inaction across the wider economy’, it says.

CI is cold on nuclear energy because, amongst other things, of ‘public opposition’. On the other hand, public opposition to the closure of power stations or steel and aluminium plants doesn’t rate.

Conflicting assumptions

The modelling behind CI’s benign ‘mix of policies’ assumes there will be emissions trading as of 2010 and a concurrent, if transitional, clean energy target (CET) scheme. This flies in the face of most other commentary on emissions trading.

The paper explains that CET is a market-based mechanism that ‘operates like the Government’s Mandatory Renewable Energy Target (MRET) through tradable permits to drive the lowest cost technologies to market’. However, national emissions trading is advocated by many, including the Commonwealth Treasury, precisely because a single all-embracing scheme will eliminate economic distortions produced by piecemeal state and federal abatement measures like MRET. The paper itself says an important purpose of carbon pricing is to ‘create a level playing field for business and consumers’. That message is delivered by several submissions to the PM’s task group, as well as their final report.

Neither Making the Switch nor the supplementary report, however, comments on the potential for emissions trading and CET to cancel each other out. Nor do they attempt to quantify this possibility. Perhaps CI is just ideologically committed to renewable energy and doesn’t trust the market forces generated by emissions trading.

At any rate, this represents a significant rupture in the logic of CI’s argument.

Arbitrary assumptions

As noted, the ‘wait and see’ horror story assumes the government will impose a ‘soft’ carbon price of $10 a tonne from 2012 to 2020 and aim to reduce emissions by 80 per cent from 1990 levels by 2050. The paper was timed to pre-empt the PM’s task group’s final report, and these figures reflect speculation about the report’s recommendations. In the event, the task group didn’t specify a carbon price or target, so CI’s exercise is purely hypothetical. It can be consigned to the category of political tactics rather than economic analysis.

(This may explain another gaping hole in the paper – at no stage does it nominate the appropriate carbon price for ‘full’ emissions trading.)

Nevertheless, it is striking that CI chose the high emissions reduction target of 80 per cent. This served to deliver the alarming figures, but positions CI way out on a limb. Almost everyone else, including the IPCC, Stern, the G8 and Labor, talk about 50 or 60 per cent.

Clearly, CI wants to exert maximum pressure on the government to take strong action now. Perhaps it fears the heat will go out of the issue if, over time, adverse climate predictions are modified or if giant emitters such as the US, the EU and China take matters in hand and let bit players like Australia off the hook. Stressing the need for urgent measures, the paper asserts ‘the costs of inaction through climate change are expected to far outweigh the costs of action’. The sentence bears a footnote to Sir Nicholas Stern's Review.

True to form, however, there is no attempt to balance the discussion by acknowledging the criticisms of Stern’s methodology. A cash sum will be worth less at some future date than it is now. In finance and economics, the discount rate is a percentage by which the current value is reduced to reflect that future lower value. Stern used a low ‘social’ discount rate of 0.1 per cent per year (virtually zero), so that any future costs of climate change emerge as more significant today in financial terms than if he used a higher (and arguably more realistic) discount rate.

Stern’s approach supports the contention that we should bear the costs of abatement action now rather than later. But he has many detractors. William D Nordhaus, Sterling Professor of Economics at Yale University, a foremost expert on the economics of climate change, is but one of those who have questioned Stern’s arbitrary choice of discount rate.

Therein lies a lesson for media outfits like the ABC. Early action is particularly unwise when ascribing authority to green lobbies like the Climate Institute.

 TNC  25 June 2007                                                                              Like to respond?                                                                                    Top

 May 2007

                                                                  Coal mining will outlast green hysterics

‘Not all jobs are good’, says former Liberal Party leader John Hewson.

That assertion, odd for an economist, fell from Hewson’s recent Australian Financial Review column lashing the Government and Labor for appeasing the coal industry over climate change. Neither, he says, will confront the ‘necessary transition’ to an economy without coal mining. ‘Some of those jobs, indeed some of those industries’, writes Hewson, ‘may not be able to be protected, nor should they be’.

More than anything, Hewson’s column encapsulates an important truth about our climate change debates – there is no absolute response; rather, it depends on your socio-economic standpoint.

Over recent decades university graduates engaged in professional or quasi-professional ‘knowledge work’ have grown from a small fraction to over 30 per cent of the workforce. Since this echelon controls the channels of ideas and information, it is hardly surprising that we are bombarded with policy prescriptions that promote, or protect, their interests at the expense of other socio-economic strata. The gentrification of social policy is a prominent feature of contemporary politics. John Howard, ‘the battler’s friend’ is not immune to it. The trend is apparent on issues like ‘work-life balance’, ‘diversity’, urban development, higher education and, last but not least, the environment, especially climate change.

When Hewson says some jobs aren’t good, he’s not thinking of his own. And nor does the whole herd of alarmists bellowing for an end to coal mining.

It’s fashionable to assert that ‘transition’ to a decarbonised economy will be relatively painless. Those peddling this myth tend to draw on a series of undigested, and often misunderstood, research papers and reports, starting with last year’s Allen Consulting effort for the Business Council’s Roundtable on Climate Change.

According to the report, greenhouse gas emissions cuts of 60 per cent from year 2000 levels by 2050 would only reduce GDP by 6 per cent less than otherwise. Then came the famous - or infamous, depending on your perspective - Stern Review estimate that ‘the expected annual cost of emissions reductions consistent with a trajectory leading to stabilisation … is likely to be around 1 % of GDP by 2050’. The figure of one per cent was widely described as a sinch. Now, the third instalment of the IPCC’s Fourth Assessment Report, released at the recent Bangkok conference, follows in a similar vein, stating that reducing emissions to acceptable levels will cost no more than 3 per cent of global GDP by 2030.

(The IPCC report brought on the inevitable Sydney Morning Herald headline: ‘It won’t cost the earth to save the planet’.)

Such pronouncements are commonly used to dismiss the understandable fears of energy sector investors and unions. One egregious case is the AFR’s Brian Toohey, who claims ‘Australian households and businesses will barely notice the cost of achieving deep cuts to greenhouse gas emissions by 2050’, and adds ‘we could adopt the 80 per cent target set by California’s Republican Governor, Arnold Schwarzenegger, and still find it a breeze to achieve’.

A breeze to achieve? Toohey writes from his own secure perspective. What for him is a breeze, may well be a tornado for thousands of blue-collar families. While progressives call for drastic measures to save our common inheritance, there won’t be common consequences - some will win, others will lose.

In his book What it means to be a Libertarian, American writer Charles Murray addresses this subject of skewed perspectives with admirable clarity. ‘Most environmental measures represent class interests in disguise’, he explains, ‘and involve no public goods worthy of the name’. Writes Murray:

A thought experiment will illustrate what I mean by class interests. Imagine a Congress of the United States that is composed entirely of blue-collar workers and farmers …They identify with blue-collar neighbourhoods, blue-collar incomes, and blue-collar recreations. The rest of this Congress are farmers who know the environment not as an abstraction or an ideal but as a day-to-day reality of their working lives. Let us imagine this new Congress as it turns to the latest proposals for environmental law….

Who is right? The Congress we have now or the Congress of blue-collar workers and farmers? Neither. Many of the currently fashionable environmental positions are arbitrary, and the different rules set by a Congress of blue-collar workers and farmers would be equally arbitrary.

Obviously, some people will suffer dislocation from Kyotoesque emissions cuts, notably workers employed in fossil fuel related industries. On the other hand, most middle class professionals will emerge unscathed or benefit from the process.

Aggregate figures don’t tell the real story. First, there is no unanimity that the impact on GDP growth over time will be negligible. Last year the Australian Bureau of Agricultural and Resource Economics (ABARE) published a much overlooked paper on the economic impacts of climate change policy. The bureau estimated that if we met the Kyoto targets, GDP in 2050 will be 10.7 per cent lower than otherwise. That’s not so trivial. And some environmental economists have come out against Stern’s conclusions, Professors William Nordhaus of Yale and Sir Partha Dasgupta of Cambridge to name just two.

Second, aggregates, national or global, say nothing about the distribution of employment growth over time. Under the hammer of carbon abatement measures, some industry sectors will decline or disappear, while others will expand. In the same paper, ABARE estimated that if we took independent climate action, even in conjunction with global action, by 2050 our coal and ‘non ferrous metal’ industries (measured by output) will be respectively 32 per cent and 75 per cent smaller than otherwise. In contrast ‘services’, where most of our loud-mouth greenies are found, will only be 6 per cent smaller. Few displaced workers will manage the transition to expanding sectors.

That’s something you won’t hear from the assortment of ‘shut-the-mines’ zealots, including the Greens, Greenpeace, the Wilderness Society and the Nature Conservation Council, who assembled in Sydney for a coal crisis summit on 30 April.

It won’t be a ‘breeze’ at all. Our green-tinged middle class can afford to push the whole panoply of Kyotoesque measures like carbon taxes, emissions trading and renewable energy development. As Murray suggests, however, their choices are ‘arbitrary’. There are alternative perspectives.

The starting point, of course, is that domestic action will have no impact on global climate realities. Our population is too small. The coal question, though, has a particular twist. Hardline greens contend that, as a major coal exporter, we are morally culpable for the carbon emitted by end users.

This can only be judged in the overall context of global energy, and specifically, coal markets. Australia is the world’s largest single coal exporter, but we account for 29 per cent of coal exportation. The rest comes from various suppliers, ready to fill the gap created by our withdrawal. Many of these are developing countries with few qualms about carbon emissions. And our largest buyers are Japan and South Korea, not emerging giant emitters like China, India, Brazil and Indonesia or major contemporary emitters like Europe and the US.

Japan, which in 2004-5 bought 54 per cent of our steaming coal and 36 per cent of our coking coal, emits 5 per cent of the world’s carbon. By comparison, the US (24.3 per cent), the European Union (15.3 per cent) and China (14.5 per cent) together emit more than half the total.

The dynamic factor in this mix is China, which is set to overtake the US by 2009. The dimensions of China’s coal consumption are sobering. According to Steve Piper of energy information firm Platts, climate change has done little to spoil the world’s appetite for coal, and China, in particular, is voracious. More than 361 coal-fired power stations have been built by the Chinese since 2002, and 65,000 megawatts (MW) worth of new facilities are under construction. A further 100 stations are planned. About one coal-burning plant is being added to China’s supply capacity per week. Although China mined 2.2 billion tonnes of thermal coal last year, imports have had to rise from two million tonnes in 2001 to 31 million in 2006. The forecast is 36 million this year and 50 million by 2012.

Nor have other countries called a halt. The US has added 27,000 MW of coal-fired capacity since 2002 and plans to develop another 37,700 MW by 2012. In the meantime, Kyoto-signing Europe added 25,000 MW over the last five years and plans an extra 13,000 MW by 2012. And India has projects adding up to 38,000 MW. Overall, 37 countries have plans to build more coal-fired plants, says Piper. By 2012, the world will have 7,500 coal-fired stations in 79 countries.

In short, coal powers 40 per cent of the world’s electricity production and the International Energy Agency projects demand to double by 2030.

Will any of this change if we pull the plug? Not much.

Recently, the prestigious Massachusetts Institute of Technology (MIT) published a wide-ranging study, The Future of Coal. The study points out that ‘in contrast to oil and natural gas, coal resources are widely distributed around the world’, and ‘coal reserves are spread between developed and developing countries’. One fundamental conclusion: ‘we believe that coal use will increase under any foreseeable scenario because it is cheap and abundant’.

While we are the leading coal exporter, moreover, according to US Department of Energy estimates we only have 8 per cent of the world’s reserves. The largest reserves are concentrated in the United States with 26 percent and the Former Soviet Union with 23 percent, followed by China (12 percent), Germany (7 percent), South Africa (5 percent), Poland (2 percent) and many other countries with smaller shares. Clearly, there are ample substitutes should we pull out.

What can be done? Despite reports that John Howard is negotiating an APEC linked regional emissions trading scheme, the Chinese government, for one, won’t kick the coal habit any time soon. The Communist Party’s hold on power depends on continuing growth at breakneck speed. As China specialist David Lambton pointed out in an article republished by the AFR (from Foreign Affairs), ‘Beijing’s priority is sustained, rapid growth, because growth is fundamental to the regime’s legitimacy - and most everything else’. Hence, last month’s National Climate Change Assessment Report, a document released by China’s top economic planning body, rejected ‘absolute and compulsory’ caps on the country’s greenhouse gas emissions.

Nevertheless, the MIT study expresses confidence that ‘carbon capture sequestration (CCS) is the critical enabling technology that would reduce [carbon dioxide] emissions significantly while also allowing coal to meet the world’s pressing energy needs’. The study estimates that a carbon emission price of $30 (US) per tonne would make CCS cost competitive. The crucial problem is whether the world’s major emitters can be persuaded to implement such an impost, and what form it should take. If, as we have argued, global emissions trading proves to be a pipedream, the only alternative is some type of international agreement - a sort of supersized AP6 - mandating cooperation in the development, dissemination and application of technological improvements.

For such an agreement to emerge, coal suppliers need to be backed by democratically accountable governments, prosperous wealth generating economies and technically skilled populations. In other words, by countries like Australia. Now there’s an alternative perspective for you. If we want to have a real, as opposed to just a symbolic, impact on stabilising atmospheric carbon, we should think about expanding, rather than contracting, our share of the world’s coal supply.

This editorial was republished by On Line Opinion, Australia's e-journal of social and political debate.
 

 TNC  22 May 2007                                                                        Like to respond?                                                                                         Top    
 

                                                   Carbon trading hasn’t worked – mandate clean technologies

Foggy weather   

A delusional fog seems to have descended on climate change policymaking in Australia. How else to explain the breathless urgency attending moves to carbon trading? It’s not just that carbon trading has a dismal track record. It bears repeating that we produce a puny 1.4 per cent of global emissions. Assuming global warming is mostly man-made, even if we were to adopt a national scheme, and even if we hit a drastic target – say a 60 per cent cut by 2050 – the impact would still be next to zilch. As we have argued, atmospheric carbon will be stabilised by the giants of the northern hemisphere or not at all. We could reduce or raise our emissions by 100 per cent and it would make virtually no difference.

Of course, environmentalists will always insist ‘we must play our part’. Speaking on the ABC’s 7:30 Report, for instance, Professor Graeme Pearman, Sustainability Science Coordinator at Monash University, recently delivered the stock reply: ‘If you look at the emissions of Australia, they’re not that different from the emissions of the UK or from France, or from Sweden. All of these countries have emissions that are approximately the same. So each of these countries could put up their hand and say, “We’re going to opt out of doing anything, because no-one else is doing it”. We have to share the responsibility for actually doing this emissions reduction.’

Australia can’t answer for Europe, and Professor Pearman ignores a host of factors distinguishing us from countries like Britain and France. Consider their longer industrial histories. Consider that their fossil-fuel reserves have already been substantially depleted or abandoned, spurring a decades-old switch – unrelated to climate change – towards energy alternatives like nuclear. Consider their status as powerful players in the European Union, a grouping of 27 nations with a combined population of close to 500 million. The EU emits about 14 per cent of the world’s carbon, ten times as much as Australia, population 20 million.

It’s premature to say we should do nothing. We shouldn’t, however, be rushed into an outcome that is wrong for Australia. And yet a wrong outcome is what we’re about to get. As the media repeats ad nauseam, ‘some type of carbon trading scheme is inevitable’. Every sensible person knows, for reasons alluded to above, that absent a functioning multilateral framework, independent a