A carbon economy

| February 1, 2009
Carbon Economy

It is all too easily forgotten that the discipline of economics is as much an "art" as it is a "science", and we are hoping to develop a "society", and not just an "economy".

In my professorial days I used to tease my students, in an attempt to encourage them to think for themselves, to think beyond the text books, by asking them what particular conclusion they wanted to reach on some economic policy issue, and them claiming that I could build an economic/mathematical model to "prove" it!

I was particularly keen to ensure that their thinking was not constrained by any particular theoretical or model framework and to get them to understand the limitations of any particular models that they were working with.

In those days students, and their teachers, had become enamored with, if not addicted to, the "precision" or "science" of economics, and there was a danger that these "models" would become an end in themselves, rather than just a means to an end, simply a means to aid their thought processes. 

It was all too easily forgotten that the discipline of economics is as much an "art" as it is a "science", and we are hoping to develop a "society", and not just an "economy".

Against this sort of background, I am of course disappointed by the recent climate change debate, and in particular the discussion about the likely consequences of a sensible and responsible set of targets for emissions reductions by 2020/2050, and the introduction of an emissions trading scheme.

Today, almost everybody has their own economic model which they claim "proves", or at least "shows", the mostly negative effects of an ETS etc. But all they have really done is prove my point that you can build a model to substantiate your conclusions, to show what you want to argue. They still have to demonstrate that such conclusions are sensible, reasonable and responsible.

They all mostly start with the assumption (and a model’s outcome is always predetermined by the assumptions, provided of course that the model is internally consistent) that the introduction of an ETS, which if effective simply puts a market price on carbon, must have a negative effect on economic growth and employment, the key point of their exercise simply being to demonstrate just how much negative.

Carbon EconomyHowever, there is absolutely no reason why we should start with a negative assumption. And in saying this, it is most important to recognize that it is really beyond the capacity of Treasury-type economic models to properly capture the effects of the development of significant new industries in this context.

I don’t have the time or space to demonstrate by way of a new model, but let me develop the argument by way of anecdote and personal business experience.

I start with the proposition that in a true carbon economy, where everyone understands their carbon footprint and is working to reduce it, and where the government’s target is something realistic like a 40% reduction by 2020 towards a 90% reduction by 2050, the introduction of a relatively "pure" market based ETS will be substantially positive in terms of growth and employment. The debate and onus of proof should therefore concentrate on just how positive.

Being involved with the National Business Leaders Forum on Sustainable Development for many years, six years as Chairman, and that Forum having brought the likes of Al Gore to Australia some five years ago in an attempt to stimulate debate on climate matters (alas somewhat ahead of our time), I became frustrated with the paucity of the business interest and skepticism and decided to get involved with a number of New Age climate response industries to satisfy myself of the significant and profitable(in time) business opportunities that would inevitably flow from an appropriate national response to the challenge of climate change.

I was, and in some cases am still, involved with the early development of alternative technologies for the treatment of household waste, energy efficient lightbulbs, biofuels including  the building of the largest biodiesel plant in the world, and green data centres , as well with as a host of proposed new technologies and businesses. I am also presently involved with a large carbon credit trader that is in the process, even in this recessed economy , of hiring some 2000 new staff in relation to its installation of home efficiency packages.

In every case the economic growth and employment consequences were substantial, and my limited experiences are just the tip of the iceberg of what I firmly believe will be a technological revolution, which will lead to a substantially new and significant industrial base to our economy.

The opportunity is there for us to grasp, or lose!

There are interesting parallels with the protection debate of the 80s and early 90s. The "old guard" industries lobbied governments to sustain or increase their tariff and other forms of protection, threatening dire growth, trade and employment consequences if they weren’t listened to.

True, some of these protected industries declined and, in some cases, disappeared, but only to be replaced by new ones, to the extent that our economy went into probably the longest period of sustained growth with historically low unemployment.

The point is that our present industrial structure and lifestyle is unsustainable. The challenge is how we most effectively make the transition to a "carbon economy" and maximize our long tern economic, business and lifestyle opportunities.

We simply must reduce our dependence on fossil fuels, dramatically improve our energy, soil, water and transport efficiencies, reduce our carbon emissions wherever possible, by developing new, more carbon efficient ways of doing things.

In these terms, we can learn much from the protection and other past debates particularly, I believe, about the most effective ways to cushion and facilitate the essential industrial transition with appropriate financial support, re training, etc, where perhaps it wasn’t done as well as it could have been in the past.

We also have a significant opportunity to lead the world in the development of some of these technologies with considerable export possibilities, the most obvious being clean coal technologies- but to refer back to my own experience, we are already doing it with alternative waste technologies.

The transition must be made. Time is of the essence! It’s not an issue where we can hope to play catch up! It’s not an issue that can be fobbed off to someone else’s watch!

Unfortunately, the climate change debate to date does not adequately reflect this inevitability, this urgency. Indeed, it’s dominated by blatant, short term vested interests and political game playing of the worst kind.

We all have an economic, social and a moral responsibility to do better!

Dr John Hewson is an economic and financial expert with experience in academia, business, government, media and the financial system. Dr Hewson’s business career, before entering politics in 1987, was as a company director and business consultant, including a role as Executive Director, Macquarie Bank Limited. Dr Hewson’s political career included seven years as a ministerial advisor and a further eight years as the Member for Wentworth. He was Shadow Finance Minister, Shadow Treasurer, Shadow Minister for Industry and Commerce and Leader of the Liberal Party and Coalition in Opposition for four years. Since leaving politics in 1995 Dr Hewson has run his own investment banking business and was, until December 2004, Member, Advisory Council of ABN AMRO, having previously been Chairman of the bank. He is Chairman to Osteoporosis Australia and KidsXpress. He is also Director of a number of other public and private companies. Dr Hewson also writes a regular opinion column for the Australian Financial Review. In February 2009 he will take on the role of Chairman of the GAP initiated Carbon Economy Taskforce.

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  1. MikeM

    February 2, 2009 at 9:39 am

    Does modelling matter?

     John, you are right but I don't understand what solution you are proposing. The costs of responding to climate change can be modeled to the extent that consequences are foreseeable and while the eventual outcome might be catastrophic, we can't really say that we foresee it. Opportunities for innovation and wealth creation may emerge and may far more than counter the costs. But we cannot foresee them to the extent where we can model them.

    By way of analogy, suppose the good townspeople of London got tired of their streets being littered with horse dung and in 1905 put in place a horse dung trading scheme, where horse operators were required to own an emission permit for each hundredweight of dung that their horses shed each year. Suppose further that the quantity of dung permitted per permit was to reduce by five per cent each year. Great would have been the wailing and gnashing of teeth amongst carters and cabriolet operators. We could forsee modest new industries sprout: perhaps street urchins paid a penny an hour to walk behind a horse with a bucket and catch any dung before it hit the ground. Economic modellers (if they had existed) could have offset the modest economic benefit from such industries against higher transport prices.

    What they could not model would be what would happen three years later in September 1908 when the first Model T Ford rolled off its Detroit production line, paving the way for phasing out horses altogether as metropolitan transport (except in New York's Central Park).

    A number of greenhouse gas abatement technologies are about at the point where the automobile industry was before Henry Ford: technically proven but not yet, as he said, so “low in price that no man making a good salary will be unable to own one”.

    As it turned out, the automobile revolution took off without the aid of a horse dung abatement trading scheme though that would have given it further impetus. Our problem today (to which, ironically, Henry Ford's innovation has contributed) is larger than London's in 1905; rather than London knee-deep in horse dung it is the possiblity of Sydney CBD knee-deep in sea water.

    John, you say that there is no reason why we should start with a negative assumption. In point of fact there is no reason that we should start with an economic model at all although once a course of action is chosen, models can clarify some of the consequences.

    James Cook did not use an economic model to determine whether he should set sail to explore the world, nor to decide where he went. John F Kennedy did not use economic modelling to decide whether to send men on the moon. Bill Gates did no economic modelling to decide whether to license IBM to use an operating system – QDOS – that he didn't actually yet own.

    Addressing climate change is a problem like these ones: we can diddle around all we like about costs and benefits, but there is an up-side that might be astonishingly valuable, or again, might be worth nothing at all.

    One of Ronald Reagan's favourite jokes brings us back to where we began – dung:

    The joke concerns twin boys of five or six. Worried that the boys had developed extreme personalities — one was a total pessimist, the other a total optimist — their parents took them to a psychiatrist.

    First the psychiatrist treated the pessimist. Trying to brighten his outlook, the psychiatrist took him to a room piled to the ceiling with brand-new toys. But instead of yelping with delight, the little boy burst into tears. "What's the matter?" the psychiatrist asked, baffled. "Don't you want to play with any of the toys?" "Yes," the little boy bawled, "but if I did I'd only break them."

    Next the psychiatrist treated the optimist. Trying to dampen his out look, the psychiatrist took him to a room piled to the ceiling with horse manure. But instead of wrinkling his nose in disgust, the optimist emitted just the yelp of delight the psychiatrist had been hoping to hear from his brother, the pessimist. Then he clambered to the top of the pile, dropped to his knees, and began gleefully digging out scoop after scoop with his bare hands. "What do you think you're doing?" the psychiatrist asked, just as baffled by the optimist as he had been by the pessimist. "With all this manure," the little boy replied, beaming, "there must be a pony in here somewhere!"

    That's the thing about climate change. All the modelling in the world cannot tell us if there's a pony in there. To address it seriously we must believe that there is.

     MikeM does own a car but he mainly walks or catches the train.

  2. peter fritz

    February 4, 2009 at 2:33 am

    We live in a society not just an economy

    Thank you John, I very much enjoyed reading your blog and was particularly struck by your observation:

    "It was all too easily forgotten that the discipline of economics is as much an "art" as it is a "science", and we are hoping to develop a "society", and not just an "economy"."

    We are hoping to develop a society and not just an economy – that phrase should be picked up as a slogan and repeated often.

    It reflects one of the key differences between typical Anglo-Saxon and European attitudes to government intervention.

    When we deride the French for implementing farming subsidies as a way to protect the livelihood of villages we are losing the plot.

    There is value in things which don't have hard KPI's or can't be recognised in economic theories. There is an inherent value in humanity.

    For too long in Australia we have been focusing on the economy and the role of markets.

    We've forgotten that people are the life in an economy. The real needs of people should be at the centre of our economic planning because the function of an economy is to service society not the other way around.  

    This tendency to dehumanise in the name of economic rationalism is holding us back when it comes to arresting climate change and conserving the environment.

    By personalising the climate change debate, and putting ourselves back at the centre of it we can shift the sense of responsibility. Climate change will affect us all, but we all have the ability to act and bring about change.  But how? Personalising the climate change debate so that each of us can have a place and understand what we can do.

    It's difficult to see this when you're looking at the problem through the lens of an esoteric economic concept.

    We will be much more motivated to change our habits when we understand it in terms of how it is for our own benefit rather than for the benefit of some economic model.

    You can see how this works with simple things.  When the ACT council changed their hosehold billing system from listing a total amount to itemising water consumption separately, usage went down so significantly that a proposed dam no longer needed to go ahead.

    I commend your ideas to the Government and call on the Prime Minister to show leadership in encouraging us all as individuals to contribute personally.

  3. John Smith

    March 26, 2009 at 3:27 am

    Hello, Dr Hewson,I

    Hello, Dr Hewson,

    I appreciate your requirement that we should have an economic, social and moral responsibility.  With this in mind, would you care to comment on you role and experience in the collapse of Elderslie Finance Company?  Some of us would be fascinated to hear your take on it all.