Can we have our cake and eat it too? Part 2

Can we have our cake and eat it too? Part 2

In looking at the compatibility between Capitalism and action of climate change, a look at Australia’s own predicament provides a good example of the sort of bear pit that is typical of such a difficult policy dilemma. With the election campaign rambling along, a brief reminder of the major parties’ climate policies is in order.

The Australian situation

On the ABC’s 7.30 Report last week, there was an interesting report about the climate change debate in Australia’s political scene over the past six years or so. In short, the initial alacrity has disappeared. It has deflated.

Yet in an international context, the resident galah of any pet shop around the world is still ferociously banging on about action on climate change. It is not at all off the agenda overseas. Contrast that to here in Australia, where I just get the sense that the general public has become bored witless with it all (maybe as a result of a general disillusionment with politics?).

The two major parties, however, still have their respective policies. Both have the same target. The current government’s policy commoditises carbon. Industry will face higher costs if they pollute excessively, and thus there arises the incentive to switch to low emission technologies for production. Households also will face higher costs, and much of the costs incurred by industry will be passed on to consumers.

The Coalition, on the other hand, thinks that the government’s current scheme is, in essence, an ‘electricity tax’. Their policy alternative, ‘Direct Action,’ is quite different to the government’s carbon pricing approach. Central to the Coalition’s policy is the Emissions Reduction Fund to support emissions reduction schemes. This is essentially a carbon buy-back scheme where they will buy back abatement. The Coalition’s Shadow Minister for Climate Action, Environment and Heritage contrasted it to the carbon pricing method:

 “Whereas the Carbon Tax tries to drive up the price of basic services in order to force down use, with a massive deadweight loss, we will not provide a dollar unless there is an actual reduction of emissions. Just like a contract for wheat, we only pay on delivery of actual abatement.”

In theory

With the two policy options open to the Australian voter at the upcoming Federal Election, it is useful to remind the reader of the three main ways of dealing with negative externalities, such as carbon pollution.

  1. Regulation can either mean restrictions to the supply of output or pollution, or technological enforcements. The former would initially distort prices, have an unequal impact on people throughout the economy, but create an incentive for businesses to be more innovative and reduce the externality.  The latter, however, reduces the incentive for businesses to innovate further from the standard that is set by government.
  2. Imposing a good ol’ Pigouvian tax on producers would have the effect of reducing the production of a good that emits a negative externality, like carbon. But what is the optimum Pigouvian tax for the negative externality of carbon emissions? There remain significant setbacks in implementing an optimal tax on a negative externality, such as how extensive the tax should be.
  3. Trading in externalities. The Coase Theorem has it that if transaction costs are low, property rights are well defined, and it’s possible to trade in an externality, then an efficient outcome is possible in overcoming an externality.

These three broad means available to us have their pros and cons. The major parties employ elements from all three of these options. Moreover, it is not a bad thing that different countries and regions around the world, as well as in Australia, are dipping their toes in the plethora of different policy options. Perhaps a star policy solution might arise somewhere, and then the rest of the world can follow suit if it is appropriate. The European Union’s Emissions Trading Scheme is not panning out as this star policy solution.


It will take a while before we see truly effective and efficient climate change policy. Averting dangerous climate change can only realistically come about by working effectively with the market, much less against it. The market is a wild, wonderful beast, and it presents the most promising way to make the big changes necessary.

In all of this, the danger will be that we take the wonders of Capitalism for granted; that we become impulsive, impatient, and spooked to blindness about climate change.

Yes, it is in the long-term interest for us to avert disastrous climate change. But surely it is also in the long-term interest to preserve a system that has unleashed the creative and productive potential of Man.

While putting a cap of carbon emissions might sound like a good idea to some, I doubt many would feel the same about putting a cap on human industrialisation and progress. Nobody wants to see us without having or eating our cake at all.