Citation: Sharon Beder, ‘Market solution won’t work’, Canberra Times, 15th July 2008, p. 9

This is a final version submitted for publication. Minor editorial changes may have subsequently been made.

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Why do we put so much faith in the market to solve environmental problems? Why do we assume that increasing the cost of fossil fuel emissions will reduce their use rather than just increase everyone’s cost of living?

Petrol prices have doubled in the past few years, causing much pain to individual and company budgets. Yet petrol usage has not declined significantly. There has been no mass shift to public transport, no major decline in car sales, no flood of affordable hybrid and electric cars onto the market. Why?

Because the market has not been able to provide the alternatives required. Large scale investment in public transport systems and cycleways, land-use planning, car emission standards, require government investment and intervention in the market.

Why then do we suppose that an emissions trading system will work? It hasn’t worked in Europe, why should it work here where the commitment to environmental protection is weaker? And where emissions trading has been used to reduce other pollutants, as in the US, the rate of pollution reduction has been far less than in nations that have used old-fashioned legislation.

An emissions trading scheme will see the price of electricity and manufactured goods go up but that is no guarantee that the market will invest in alternatives, especially if polluters can pass on the extra cost to consumers, buy up environmentally dubious offsets, or be compensated for extra costs that might damage their international competitiveness.

Take the example of electricity generation. Currently electricity generators offer quantities of electricity into the National Electricity Market for a particular price for each time period the next day. If they have to pay for carbon credits, their offer price will presumably be higher.

The system operator choses the cheapest electricity for supplying the predicted demand for the next day. It only choses electricity generated by renewable energy if it is cheaper or if there isn’t enough other electricity available.

For any significant switch to renewable energy, carbon credits have to be expensive enough to make coal and gas-based electricity more expensive than renewable energy. It is highly unlikely that the government will have the political will to do this.

What is more, this high price for carbon credits has to be stable enough over time to encourage long-term investment in renewables. However the price of carbon credits is to be determined by trading in the market and investors will be concerned that it will fluctuate as has happened in the EU scheme.

In contrast, some nations in Europe have a feed-in tariff for renewable energy, whereby any available renewable energy has to be bought for a fixed price. This provides certainty for investors and encourages investment in renewables. As a result, Germany, which has such a system, is now a world leader in wind and solar energy and the costs of producing renewable energy there have fallen dramatically.

Nevertheless there is a limit to what can be achieved in Germany because electricity has been privatised, which precludes direct intervention and investment by government. Consequently renewables still provide only a fraction of Germany’s electricity consumption. The only sure way to ensure that alternatives such as solar and wind energy are more rapidly developed is for government to invest in those alternatives.

We are fooling ourselves if we think there is a cheap solution to global warming. On the one hand we can pay through taxes for cooperative planned investment and suffer the higher prices that strong government regulation may result in. This way we will be paying directly for the changes we want.

On the other hand we can pay higher prices in the hope that the market will come up with the right sort of investments and changes. In this  case we are likely to be paying escalating prices as the price of carbon becomes a market commodity subject to financial speculation, but with minimal and uncertain environmental benefits. 

The fact that the Rudd government is pushing forward with an emissions trading system, despite the evidence that it won’t achieve much apart from higher prices for consumers, shows that it is not really interested in ensuring environmental protection. It is only interested in being seen to be doing something.

Emissions trading is a system that aims at keeping costs to Australian industries to a minimum rather than achieving the rapid and significant changes necessary to prevent further global warming.