I don’t want to, and certainly will never intentionally use my blog to impose my political beliefs on those who visit, interested in my investment views and in our performance. If a certain philosophical viewpoint shines through, it is unintentional. Dave and I have historically tended toward opposing ends of the political spectrum, I don’t believe differing political views should stand in the way of friendship. They definitely need not play a part in your choice of fund manager. In my view, you should choose someone to steward your money based on your assessment of their historic performance and your view of their likely future performance.
I will do my best to make the assets of our investees perform at their optimum level irrespective of political allegiance. Whether you voted for an extreme left-wing party such as the Greens or the Communist Party, or an extreme right-wing party such as the Christian-Democrats or Family First, is purely a matter for yourself. Even if you voted for Rob Oakeshott or Tony Windsor, if you entrust your assets with us, we will do our best to make your assets grow faster than the benchmark.
That said, when a political policy which I believe adversely affects the likely future prosperity of all Australians is proposed, I will feel moral bound to comment, and I will do so regardless of the flavour of the Government that proposes it.
This brings me to the reason for my mid-week post. I believe the Carbon Tax as it has been proposed is a horrible misstep that not only will not achieve the ends it is purportedly the means to, but will negatively affect this end.
It is my truly held belief that the Australian Carbon Tax in its current form will drive global emissions higher, and that any developed economy adopting a similar policy will do the same.
However, unlike a lot of the carbon-sceptics in the media and within politics, instead of just pooh-poohing an idea, it is my preference to develop and state a viable alternative.
So with no further ado, I provide my Carbon-Tax Alternative. Feel free to criticise and improve on it, I am sure there is much that could be done to make it better still, but whatever you do, don’t pretend the current proposals are anywhere near as viable. Enjoy your Easter-Break – Tony Hansen 21/04/2011
I am having issues with the link, so here is the text of the Carbon-Tax Alternative:
The Carbon Tax Manifesto, a Carbon-Inefficiency Levy
By Tony Hansen
I am an accountant by profession and a professional investor by choice and as such, the imminent introduction of Carbon Tax measures in my economy (Australia) has suddenly brought the matter, much closer to my heart. I point this out only to demonstrate I am not an academic, with any particular expertise in carbon emissions or taxation implementation. What I am is a passionate Australian; Australia is, in my view, the best country in the world. When myriad factors that go to quality of life are measured, there would be few who have sampled the lifestyle who wouldn’t acknowledge how very lucky we are to live in Australia. We are a small (economically), but wealthy country and in my view, can afford to take up a leadership position in reducing global Carbon Emissions. What we cannot and need not do is handicap our economy to this end. We must develop a clever mechanism in taking this global leadership position in the reduction/reversal/minimisation of Human impact on the globe, which not only doesn’t handicap our economy relative to our peers, but preferably places our economy at a sustainable competitive advantage.
I have observed the escalating debate over Climate Change over the last 10 or 15 years with only a moderate interest. I would freely describe my attitude to Climate Change as fairly agnostic. I do acknowledge that it is almost a certainty that Human existence and most particularly the recent advent of industrialisation have significantly impacted the Earth. In the same way, I didn’t really need to see the large and growing body of scientific evidence that tobacco smoking is unhealthy, I could arrive at such a conclusion myself. I would imagine there are very few substances that you could burn and inhale over a long period that will not negatively impact your health. Still, the majority of people (particularly those whose vested interests were negatively impacted by that reality i.e. smokers/tobacco manufacturers) have required the snowballing evidence pile grow very large before acknowledging that which should have been intuitively obvious, some still won’t.
I would also acknowledge that a peaceful and stable Middle East would be of great benefit to global society generally, but I had frankly thought both these matters too hard to deal with until now, as a consequence, had not given them much thought. Now that a Carbon Tax is on the cusp of implementation, and the current format will clearly have an enormous negative impact on Australia’s International competitive position, it is now so important to the future prosperity of my country, that I must instead propose a viable alternative. I will formulate a solution to peaceful Middle Eastern relations at some future point…
It is most important to even the most ardent Climate Change advocate to acknowledge that without an impartially measured and quantifiable scientific measurement of how much Human behaviour adds to the natural movements in Earth’s temperature, it will be hard to convince, particularly citizens of those countries coming lately to the lifestyle improvement inherent in an advanced economy, that they should forego further advancement for ‘the greater good’. To draw on the ‘tobacco’ analogy above, you should think of the wealthy (economically advanced economies) as big tobacco and those that are less economically advanced, but with burgeoning middle classes as the smokers. The advanced economies have grown wealthy and powerful through unimpeded carbon emissions and the less advanced economies have become addicted to carbon emissions and are at present unlikely to consider the negative long-term impacts of their addiction.
Absent clear scientifically measured proof presenting some fairly precise measurement of Human impact, more specifically how much changes in Human behaviour (pertaining chiefly to Carbon pollution reduction) can impact the Earth’s temperature downward. It will be hard to get the required ‘Global’ buy-in to the idea. With my alternative, you don’t need people to buy in; you make it their economic best interests to do so.
Now, I believe that it can safely be assumed that despite a growing body of evidence, there will, for the foreseeable future be sufficient credible dissenters as to keep the shadows of doubt about Human impact in the mind of the majority. Faced with this state of doubt, people will understandably not be willing to sacrifice their standard of living to an unproven concept. We must acknowledge this and understand (rather than disdain) this hesitance. In designing a system to reduce our carbon emissions, we must consider how this can best be done without impacting the quality of life of the proletariat.
The mechanics of the introduction of a carbon tax in recent years globally has concerned me as being an enormously short-sighted method of dealing with the problem at hand. Invariably the thinking seems to be ‘put a cost on carbon and people will reduce their consumption of carbon’. Returning to the tobacco analogy for the final time, and we are globally every bit as dependant on Carbon as a smoker is on tobacco. Even more-so I would say, I have no intention whatsoever of giving up the comforts that are provided to me by emitting carbon, such as lighting, power, air-travel etcetera. I accept that raising the cost of heavy carbon goods through taxation will have an approximately cause/effect reduction impact in the short term. Probably something in the quantum of the reduction in smoking that comes when the tobacco tax is raised. Some people will cut back somewhat, but many, many people will work an overtime shift here or there, or forego some other pleasure in order to feed their carbon habit. The incentive proposed is poorly structured and in my view will lead to sub-optimum carbon-reduction over the longer term. The only result of a carbon-tax in its current form is that we will all live a little worse as a consequence of its introduction.
Wouldn’t it be better if instead of forcing a new tax onto a sceptical public, we developed a system which in conjunction with natural market forces, dramatically forced down the carbon emissions of our economy with only a negligible impact on the prices of the majority of goods and services.
I believe such a concept exists and is remarkably simple, drawing on an important human driver once described by Benjamin Franklin - “If you would persuade, you must appeal to interest rather than intellect”. We could certainly force a tax onto a sceptical populous, by trying to appeal to their intellect, we can ‘persuade’ that carbon emissions are dangerous and the cost of inaction will be borne by not only our generation, but every future generation. This view will be (and in my view has been) met with the blank stares of a largely disinterested population. The alternative is a taxation incentive system based on rewarding best practice, or more specifically disincentivising worst practice. What I like to call a Carbon-Inefficiency Levy.
If we want to reduce Australian carbon emissions, whilst at the same time enhancing Australia’s global competitive position, we must develop a carbon reduction scheme, which instead of taxing all carbon emissions, taxes only those emitters who are excessive or inefficient emissions producers. Absent this distinction, it is my view that all that is likely to happen is that we export high-emission industries. In all probability these will go to countries producing the same goods at higher emissions than we were and then exporting them back to us, thereby causing still further damage through the transportation emissions. That is what’s known as a Lose/Lose/Lose situation, no one wants to get involved in such a situation, let’s not.
I will try to clearly demonstrate this concept. Assume Australia is a world leader in widget manufacture, in carbon emission terms. Assume in manufacturing a widget, using the ‘Australian’ manufacturing technique, 1-tonne of Carbon Emissions are produced. Assume further that there are only 4 other countries in the world that produce widgets, they being Timbucktoo, Podunk, Loamshire & Tipperary. The 2010 world production of widgets looked something like this:
| Country | Total Annual Output | 2010 Widget output | CO2 per widget | Total CO2 output |
| Australia | 3.1% | 31000 | 1.0 | 31000 |
| Timbucktoo | 19.9% | 199000 | 1.7 | 338300 |
| Podunk | 11.7% | 117000 | 2.0 | 234000 |
| Loamshire | 24.1% | 241000 | 1.2 | 289200 |
| Tipperary | 41.2% | 412000 | 2.1 | 865200 |
| Global Totals | 100.0% | 1000000 | 1.76 | 1757700 |
Global 2010 total widget output was 1 million units. The average CO2 produced for each widget was about 1.76 tonnes. In order to discourage any excessive carbon production in the widget industry, we apply a Carbon-Inefficiency Levy, whereby anyone producing in the top quartile (top-25%) is not levied with any form of excess-carbon levy; Australian operators who are efficient on a global scale are in-fact rewarded (see below) not punished. Anyone producing in the next quartile is levied with a fairly heavy tax, much higher than the $20 - $50 per tonne I hear bandied about in the press at the moment as a likely carbon price. For the sake of the example, I will say $250 per tonne. The 3rd quartile would be levied with something harsher still, perhaps $500 per tonne and the last quartile with perhaps $1,000 per tonne. Now ideally, this would be levied on a sliding scale, whereby someone producing at the top of the 2nd quartile would pay less than someone at the bottom of that same quartile, using the levies above, the scales would look something like this:
| 25th | $ - |
| 30th | $ 76.90 |
| 35th | $ 153.80 |
| 40th | $ 230.70 |
| 45th | $ 307.60 |
| 50th | $ 384.50 |
| 55th | $ 461.40 |
| 60th | $ 538.30 |
| 65th | $ 615.20 |
| 70th | $ 692.10 |
| 75th | $ 769.00 |
| 80th | $ 845.90 |
| 85th | $ 922.80 |
| 90th | $ 999.70 |
| 95th | $1,076.60 |
| 100th | $1,153.50 |
In order to have a clearly demonstrated example, we would need to make further assumptions about International widget prices, shipping costs etc. The important thing to remember, the only sphere we are able to control is the Australian economy. The unique power of the Carbon-Inefficiency Levy, however, you can alter the behaviour of other nations in respect of carbon, you can make them play your game; force them to change their behaviour with your policy. For example, putting aside widgets, assume that a Podunkian mid-sized 4-door family car can be shipped to Australia for $20,000, and it carries with it 8 Tonnes of carbon-output in the production/shipping process, which is in the 25th percentile (of global mid-sized car carbon production emissions) ergo it attracts no Carbon-Inefficiency Levy. Assume further that the Loamshirian mid-sized 4-door family car is exactly equally desirable, can also be shipped to Australia for $20,000, but the production/shipping process generates 12-tonnes of carbon-output, which is in the 70th percentile (of global mid-sized car carbon production emission). Now the Loamshirians will find themselves levied with a $2,768.40 Carbon-Inefficiency Levy, and in order to compete with the equally desirable, but now far more reasonably priced. In this situation, every Loamshirian car not sold in Australia (because a Podunkian one is bought in its stead) has reduced global carbon emissions by 4 tonne (a direct cause and effect relationship). Now there is an idea the proletariat will buy, no-one is forcing them to buy a Loamshirian 4-door.
The above concept could be easily applied to a meaningful real-world example, such as steel production with a more meaningful pricing system; I only propose it to serve as a simple demonstration of the utility of a Carbon-Inefficiency Levy. The charge is genuinely optional – you do not have to pay it if you produce efficiently.
The proposal doesn’t end there, because I would demand that such a scheme would be revenue neutral to the end consumer. The government must make no profit out of such a tax as once they come to rely on it, they would distort its purpose. To achieve this, 97.5% of the revenues generated by the levy must be returned to the industry from whence they came (To absolutely no other, weak industries will not be supported by strong. In industries where there is no Australian participant efficient enough to earn the rewards, an application for the revenues would need to be found, perhaps a CSIRO type organisation with a purely scientific focus on carbon-reducing production technologies). The remaining 2.5% of the revenue represents the annual budget of the tiny but efficient (preferably private) body enacted in order to collect & distribute the levies. In order to return the revenues, a sliding scale, effectively inverting the above levy would show the manner in which the revenues are returned to. My sliding scale would look something like this:
| 1st | 20.00% |
| 2nd | 16.00% |
| 3rd | 12.80% |
| 4th | 10.00% |
| 5th | 7.87% |
| 6th - 10th | 20.00% |
| 11th - 15th | 7.50% |
| 16th - 24th | 5.83% |
So efficient operation would be substantially and handsomely rewarded. The top vigintile (5%) of Australian operators in any industry would earn 2/3 of all revenues generated by the Carbon-Inefficiency Levy in their industry returned to them. The smart operators among them will use this funding for R&D to ensure that they continue to lead their industry in low-emission production.
Assume further, in the widget example given above, that due to a global enacting of a policy similar to this one, Tipperary & Podunk as high-emission, carbon inefficient producers of widgets, are by 2015, no longer able to compete due to the widely adopted policy. Assume they cut back to producing only their own countries consumption of widgets (112,000 units and 17,000 units respectively), and no longer contribute to global supply (or demand). We further assume that global demand was flat over the next 5 years, and that the 400,000 units no longer produced by the 2 least carbon-efficient producers are split proportionally among the 3 most carbon-efficient producers (in reality the 2 most efficient, Australia & Loamshire would likely pick up the lions share of the lost global production under such a Carbon-Inefficiency Levy scheme, widely adopted) the result would be:
| Country | Total Annual Output | 2015 Widget output | CO2 per widget | Total CO2 output |
| Australia | 5.7% | 57400 | 1.0 | 57400 |
| Timbucktoo | 36.8% | 367800 | 1.7 | 625260 |
| Podunk | 1.7% | 17000 | 2.0 | 34000 |
| Loamshire | 44.6% | 445800 | 1.2 | 534960 |
| Tipperary | 11.2% | 112000 | 2.1 | 235200 |
| Global Totals | 100.0% | 1000000 | 1.49 | 1486820 |
So, global market forces dictate over time, a more than 15% reduction in global carbon emissions (assuming the industry itself did not improve in that period). The Carbon-Inefficiency Levy, over time would force improved carbon-efficiency onto any industry it was applied to. The end result in all likelihood would be minimal change in consumption levels (as I said, we’re addicted to Carbon), but massive reductions in the average carbon produced per unit in any affected industry.
We have no need, nor any right to enforce our policies in any other economy than our own. To this end, if it happened that there was an Australian manufacturer of widgets who produced their units in a particularly carbon-intensive manner, but could export them to a country with no Carbon-Inefficiency Levy, then that would be their right. What they could scarce hope to do is compete in Australia.
Now there will be several criticisms of such an example, to save people the effort, let me point out the key ones to begin with, these obviously must be addressed in the incentivisation format.
- If a Podunkian widget requires (as per the table) twice the carbon emissions to produce, but safely operates for twice as long as an Australian widget, due to its outstanding quality, why should the Podunkian manufacturer be handicapped at the initial sale point, or more to the point, how can the playing field be levelled so as not to disadvantage the higher-quality higher-emission producer.
- Running costs. If a Podunkian widget requires (as per the table) twice the carbon emissions to produce, but during operation, produces only half the per annum of CO2 of alternatives, we must ensure the Podunkian manufacturer is not handicapped at the initial sale point. Again the playing field must be levelled so as not to disadvantage such a producer. In the case of this example, as the annual emissions would fall to the widget owner, they would presumably consider this prospect in their purchase decision, as otherwise the goods produced using the widget would be subject to a Carbon-Inefficiency Levy in their own industry.
- One industry member being so carbon-efficient that a monopoly is created with price-inefficiency replacing carbon-inefficiency.
- I am sure there are other potential disadvantages, but nothing in my view that could remotely compare with the ridiculous situation of levying a carbon-tax and then crediting back substantially all of the revenue to those individuals and industries that can least afford to pay the additional cost. If we only apply a tax to those who can ‘bear’ the cost, how will our behaviour change?
The format could be equally applied to virtually any industry, with only minor adaptations. Whether the unit of measurement is a mid-sized family sedan, a megawatt hour of black coal generated electricity, a megawatt hour of wind-generated electricity, a tonne of hot-rolled steel, a roll of newspaper or a widget, it should not be too difficult to establish an industry wide benchmark and to enforce the Carbon-Inefficiency Levy. The fact of the matter is, by focussing on say 10 industries, we could immediately affect substantially all of our carbon emissions in any case.
The key advantages, apart from the already stated avoidance of exporting our emitting industries to potentially less carbon-efficient countries and effectively contributing to a worsening of global carbon emissions problem are these:
- My very favourite part of the concept is not the optionality of paying the levy, nor its massive and immediate positive effect on carbon emissions. Best of all is within a few short years, many Australian industries (or any country that was an early-adopter of such a policy) would become world leaders in their field and as low-carbon production becomes more and more important; Australia would develop a massive industry exporting its expertise in low-carbon production to all the laggard countries.
- As industry becomes more efficient, the standard required to be a non-levied producer would necessarily improve. This creates a ‘virtuous’ circle of emissions reduction, where the only key downside is the (above-mentioned) potential for monopoly due to one competitor being significantly more carbon-efficient. Many people don’t realise, how rapidly even our most energy intensive industries have improved in what I consider a short time. For example, it was only 300 years ago that Abraham Darby developed a process of using coke in place of charcoal to fuel blast furnaces to produce pig-iron. Absent this fact, there are not enough trees in the world to produce the charcoal required for a single (current) years global steel output. Improvement didn’t stop with Abraham Darby, between 1975 & 2005, the average energy consumption per tonne of crude steel fell by about 50%. I would imagine if a thorough investigation were conducted into say the CO2 emissions generated in the production of a 1981 Holden Commodore, in comparison to the 2011 model, a similar story would arise. Given this ‘inbuilt’ self-improvement aspect to the carbon output of industry, applying the proposed Carbon-Inefficiency Levy would have a powerful effect on the speed of this process. Industries would become more carbon efficient at a more rapid rate.
- We eliminate a ridiculous (proposed) burden on our economy with no tangible benefit. If Australian electricity producers (and this may not be the case) are more efficient (i.e. generating more electricity per tonne of coal than their global counterparts), what sensible purpose is there in levying a Carbon-Tax on them, so then Australian production/consumption of electricity goes down and instead we export our coal to another country who will generate less electricity from it than we could have. The flipside to this is that if Australian producers aren’t at a globally acceptable standard, under my Carbon-Inefficiency Levy, they would soon be as otherwise, the proposed cost to that industry would be much greater than the current carbon-tax.
- I may be wrong, but I would hazard Australian industries broadly are mostly more efficient than the 50th percentile of global production. Although this would be an Australian carbon-initiative, we would be surreptitiously forcing other countries to consider their carbon-emissions at a company level. This is because in order to export to Australia, they would either need to bear a levy if Carbon-Inefficient, or improve their methods to avoid the levy (as pointed out previously, thusly improving global averages in a virtuous circle)
- Finally (in my assessment – there may also be further advantages I have not yet considered), can you imagine any business in this increasingly environmentally aware age idly standing by while their customers are choosing between a “Carbon-Inefficient” company and a “Carbon-Efficient” company. No-one wants to be thought of as inefficient and this whole idea would further augment the competition in the marketplace and accelerate industrial carbon-efficiency improvement.
That brings me to my conclusion. What possible benefit could there be in introducing a carbon-tax that makes our economy less efficient, and is coupled with a high likelihood of global carbon-emissions rising due to the least efficient producing countries and businesses being rewarded with extra production due to the short-sightedness of our current proposals. My alternative proposal above is a very simple idea worked up over a relatively short period, which will no doubt have some flaws, but could not have anywhere near the shortcomings of the horrid proposals floating around at present. Tony Hansen 18/04/2011.
