This is a sequel to my article from last week entitled The Fakel Report: Finkel’s Fake Economics. Since then there have been media reports that the Turnbull ‘flip-flop’ Government is already having second thoughts about the one-and-only solid reform recommendation from the Finkel Review, that is the so called “technology neutral” Clean Energy Target (CET). This is not surprising given that only when ‘hell freezes over’ will a CET result in “lower residential and industrial electricity prices”. It is unclear, however, if they are also backing off a new federal Renewable Energy Target (RET) of 42 per cent in 2030.
There are a plethora of problems with the Finkel Final Report, one of the main ones being the thinly-veiled worldview fuelling this Report, that is the all-too-predictable one of climate change alarmism (including wind and solar fetish) combined with favouring government central control over competitive market freedom. Evidence of this includes the following Report language:
“we need a plan”; “strengthened governance, system planning and an orderly transition”; “international commitments”; “do their bit for the environment”; “[p]olicy reversals … undermine”; “[t]here is no going back”; “commitments to a lower emissions future”; “take immediate action, or … Australia risks being left behind”; “energy and emissions reduction policy”; “need to agree to an emissions reduction trajectory”; “development of renewable energy zones”; “[a]s we increase our reliance on variable renewable electricity generators”; “better funded regulator with enhanced market monitoring capabilities”; and “[g]overnments … encourage”.
Furtherexamples of problems with this Report are:
- Since at least the 1970s in the former USSR, central planners have continued to suggest their plans will finally work if “supported by better data”. Government central planning in general, particularly at the national level, has a woeful record for 100+ years and counting. The record for central planning is also not great in electricity. Such planning at national level has been in place in Australia since 1996 and was significantly enhanced from 2004. Massive market transformations that are driven by greater government central planning almost always lead to higher prices, lower quality and lower innovation as well as chaos, division and conflict. The key example of this is wind and solar in the National Electricity Market (NEM) since 2007. Massive market transformations that are driven by lesser government central planning almost always lead to lower prices, higher quality and higher innovation as well as order, cooperation and peace. The key example of this is the Internet since the mid-1990s. Those in favour of central planning never question this approach and the worldview behind it. They only question the specific plan or people. Central plans always fail, and Finkel’s central plan will be no different. Odds are it will be failing within 3 years and thus the NEM will continue to be a significant “topic of discussion in the general community”.
- Very little genuine debate about the Paris Agreement was entertained last year in the mainstream media, by the Turnbull Government or in the Australian Parliament. Prior to ratification by the Government, this Agreement should have been subject to a proper and independent Regulation Impact Assessment (RIA) including a rigorous cost benefit analysis (CBA). Such an RIA and CBA should have included all climate related policies at federal, state and local levels. In the recent wake of the USA pulling out of Paris (not to mention the favouritism in this Agreement towards countries like China, Russia and India), RIA and CBA urgently needs to be undertaken by the likes of the Productivity Commission (PC) and/or Parliamentary Budget Office (PBO). Such an RIA and CBA should of course cover the Finkel Final Report and include a free market oriented ‘red team’.
- CBA, along with consumer experiments, studies and polls are needed to back up if consumers really value doing “their bit for the environment” given such high prices and low reliability of electricity. This is even more so the case given that the risks to the climate appear to be miniscule compared to the risks to the economy. Free markets and private charities are far better able to assist consumers who value doing “their bit for the environment” but not at the expense of taxpayers, producers and other consumers. An example of the former are airlines offering tickets at a ‘green’ premium.
- Government incentives for low CO2 emissions in the form of regulations, taxes and subsidies effectively amounts to prohibition over time. Unlike market ones, government incentives always reduce and redistribute wealth as well as reduce freedom for the many in favour of control by the few. The track record for yet more government incentives reducing real prices is terrible. The heavily regulated American utilities industry is typical of prices largely trending upwards over time. This is despite the fact that such regulation includes the regulation of costs, returns and prices. Such regulations have been in place for well over 100 years and counting. Sound economics and real history shows time-and-time again that economic costs and prices only trend downwards over time when markets are free and competitive and thus driven by the needs and choices of consumers, producers and shareholders. A common response, by those who believe in central planning, to the frequent failure of government regulators is that more powers and/or funding needs to be provided. The period of greatest price rises was under the watch of the powerful and heavily-funded Australian Energy Regulator (AER) – ie over the past 10 to 12 years.
- An emissions reduction policy is really just an energy reduction policy which, in turn, is ultimately a freedom reduction policy. It was the historic increases in freedom that drove the Agricultural Revolution of the 17-18th centuries that then drove the Industrial Revolution of the 18-19th centuries and in turn drove the Energy Revolution of the 19-20th The past 10 years has many economic parallels with the energy crisis of the 1970s. As Professor George Reisman wrote in his book Capitalism: A Treatise on Economics: “The energy crisis of the 1970s was purely political. In essence, it was the result of making it largely illegal to produce energy. … It is simply illegal for private citizens to produce these goods and thus their production has been restricted by all the inefficiencies of government ownership. … The substantial reduction in government interference that took place in the early 1980s, above all, the repeal of price controls on oil, made [this] energy crisis disappear. The achievement of a fully free market in energy would ensure a resumption of the growing abundance and declining real cost of energy that characterized the Western world in the two hundred years prior to the 1970s.” As energy economist Dr Robert Bradley of the Institute for Energy Research reminded: “Julian Simon coined the term ‘master resource’ to describe the resource-of-resources, energy. Energy is ubiquitous to modern industrial life. It is the fourth factor of production in addition to the textbook triad of land, labor, and capital. Energy has been recognized as a unique driver of economic activity and human betterment for almost two centuries – about as long as carbon-based energies came to be recognized as a sea change from the inherently dilute, unreliable renewable energies of before.”
- Government bureaucrats always get out-performed at lower cost by those in private competitive markets. Weather forecasting is not an exception to this law of economics and history. Rather than relying exclusively on the frequently inaccurate forecasts of BoM and CSIRO, weather forecasts should be outsourced to the private sector or at least subject to testing by a non-government ‘red team’ possibly including the likes of more accurate forecasters such as Piers Corbyn and/or Joe Bastardi.
- Australian electricity is subject to price controls throughout the supply chain, most notably price ceilings for distribution and transmission as well as retail. This tends to lead to frequent shortfalls between demand and supply. This in turn typically leads to calls for demand management (DM) to reduce demand, rather than allowing market prices to (more efficiently and effectively) manage the balance between demand and supply. DM arrangements have been in place in the NEM since 2004 and have been enhanced at least once in 2009. DM will not “help reduce consumers’ electricity bills”, certainly not for all nor for many. DM is essentially government rationing. Regarding rationing, Murray Rothbard wrote in Making Economic Sense that: “Socialists, indeed, always love rationing, since it gives the bureaucrats power over the people and makes for coercive egalitarianism. And so this means that the government, and its bureaucrats and underlings, will decide who gets what.”
- Rising prices and reduced availability for domestic gas in Australia is almost solely a government created problem through policies that restrict exploration, production and usage and thus supply and competition, competition and supply, ad infinitum. Professor Reisman in Capitalism wrote: “[U]nder the guise of ‘concern for the environment’, [governments have] closed off many of the most promising areas for oil and gas discoveries. … This is the only reason that there was an energy crisis [in the 1970s].” Price controls like price ceilings will only make shortages worse, as has been proved time-and-time-again over the course of 4,000 years and counting. Politicians have cited a plethora of reasons for introducing price controls – ie price ‘ceilings’ and ‘floors’. At the end of the day, whether they believe these reasons or not is irrelevant to economic outcomes. The outcomes are always bad. Price ceilings always lead to shortages and price floors always lead to surpluses, which often then lead to further government interventions such as rationing and subsidies as well as more taxation, regulation and money printing. Artificial government laws of price controls cannot overcome natural economic laws of supply and demand.
- The NEM is largely a market in name only – ie a ‘Fake Market’, not a real market. A real (free and competitive) market does not need 10+ legislative instruments with 2,000+ pages to be created and maintained. Even prior to 2007, the NEM did not have great performance in terms of prices and quality. Regarding prices, these were largely rising somewhat from 1998 to 2007. Unlike government regulation, real competition (amongst suppliers, consumers and shareholders) would have resulted in prices decreasing over time as was seen in say IT&T the past 20+ years. ‘Win-win-win’ innovation can only be fostered through entrepreneurs pursuing profits as guided by output prices (for goods and services) and input prices (for labour, capital and natural resources) in competitive markets.
Thus, the first step is to immediately ignore the Finkel Review, as being complete and utter faecal. The second step is, in the shorter term (say the next 3 years), to remove the RET and all other climate change industry related taxes, subsidies and regulations. This may even require a monopoly taxi industry style buy-out. The third step is, in the longer term (say the next 6 years), to turn the fake market of the NEM into a real market. As the great neoclassical economist William Stanley Jevons concluded: “With coal almost any feat is possible or easy; without it we are thrown back in the laborious poverty of early times.”
Darren Brady Nelson is on the LibertyWorks advisory board, an economic policy adviser to One Nation Senator Malcolm Roberts & a Liberty Evangelion