Mon, 24 Mar 2008 09:46:07 GMT

Garnaut takes the right stance.

For so long, the big issue with emissions trading was how permits would be allocated. This was an issue not because it would matter for efficiency but it would determine how the costs of dealing with climate change would be shared. This distributional issue looms large in most economic reform efforts.

Ross Garnaut has come out with a clear stance on this issue — there will be no free permits except where there is demonstrable international competition concerns. That means that the power companies will be on their own. That too has left them scrambling for arguments. The first is that they would not invest in R&D to improve carbon efficiency. Not true, the costs in that are fixed costs while the benefits are stimulated by having a carbon price to save on. (See Harry Clarke’s excellent summary). Now they are claiming there will be no new investment and so there will be power shortages. Again, this is nonsense. This move will devalue existing assets but let’s face it they should have been devalued years ago. Socially, it turns out, they had low value the minute they were commissioned. It has just taken a while for the private value to reflect that. (Although the NSW government who owns many of these assets surely already took the social value into account).

Having an alignment of private and social values is good for investment. It will mean that it will utilise the correct fuels while moving to satisfy any imbalances between supply and demand at new electricity prices. After all, the power companies may claim there will be shortages but higher electricity prices will reduce demand too so that spectre is very unlikely.

So I think the power companies have some work to do if they want to mount a convincing economic argument for some sort of payout. At the moment, I can’t see a legitimate economic argument there.

[CoreEcon]