Market failure: Wood demonstrates inadequacies of economy-based approach to climate change

The Australian's Economics editor, Alan Wood, is a champion of the free market. His latest article targets the issue of clean energy targets and how they contradict the philosophy of an emissions trading market. In the process, he demonstrates precisely why a market approach to alleviating climate change will not work if its sole ally is economic principle.

He first makes the common mistake of eliding Howard's clean energy and Rudd's renewable energy targets. Clean energy encompasses clean coal and nuclear. As Guy Pearse has demonstrated, the locked in funding for coal companies means that the entire Howard clean energy target is subscribed to clean coal. This mistake is equivalent to allowing cordial as a substitute for fresh fruit.

Wood then makes the claim that the chances of meeting Rudd's target of 20% renewable energy by 2020 without 'massive taxpayer subsidies or a technological miracle' are negligible. The current market share for renewables is a tick over 9%, mainly contributed by hydro. In reality, the required scale-up is then 11% over 13 years. My understanding of Rudd's definition incoporates natural gas, which could feasibly be scaled up to provide equivalent baseload power in the required time. That aside, I will assume that on face value emissions-laden coal power is significantly cheaper than renewables.

The key phrase being at face value. Wood's analysis assumes that coal operates without subsidies from government as compared to renewables. Greenpeace estimated that the average annual subsidy to coal, oil and gas companies is $9 billion, whereas renewables receive $330 million. Industry Minister Ian Macfarlane justified this state of affairs on the principle of proportional representation, saying that renewables did very well for the share of power they produced.

Wood's premise is that the coupling of emissions trading schemes with renewable targets amounts to triple taxation of energy consumers, paying first for the cost of carbon through trading, then through higher renewable energy costs and finally being hit by having their income tax spent subsidising the renewables. Renewable energy targets pick winners which is by definition undesirable.

First, an emissions trading scheme adjusts the price of carbon. Renewables produce lessening levels of carbon and hence become more competitive in such a scheme. Secondly, as renewable market share increases, the cost of production decreases for consumers. Thirdly, if the true subsidy position is considered, taxpayers get a much better deal from renewables with future potential compared to a coal industry which will inevitably contract. If anything, propping up an industry by reducing competition and innovation is uneconomic and ultimately counterproductive.

Wood then has two further objections to the policy framework. He questions the efficacy of emissions trading altogether and then, telling, suggests that haste is not desirable as emissions can be stabilised at 650-700 parts per million. He may well have a point on emissions trading, which is susceptible to problems such as an inconsistent or inappropriate carbon price and integrity in monitoring emissions.

However, the 650-700 ppm is a dangerous theory which smacks of an unawareness of his material. Although past emission records are imperfect, current carbon levels exceed those of any of the interglacial periods during the most recent geological era. The IPCC has estimated that they exceed anything seen since prior to the most recent pattern of Ice Ages (20 million years ago). Nobody is quite sure when the carbon levels were last at 650-700 ppm, but the dinosaurs might have done fairly nicely in those conditions and they were cold blooded.

The argument that abatement will cost 'trillions of dollars' fails to recognise the level of subsidies given to fossil fuels and the ability of renewable energies to do a lot when given a bit of support by governments. It merely takes government allocation of trading permits, calculates their monetary value and adds them together, then factors increased fossil fuel prices across the economy. In other words, it misinterprets the starting baseline, leaves out the benefits, manufactures negatives and then extrapolates them unreasonably.

It is bad science dressed up as bad economics. The market does not have all the answers, but it at least needs to have all the information at its disposal to work properly.