The Fakel Report: Finkel’s fake economics
LibertyWorks board member and Austrian Economist, Darren Nelson, picks apart this month’s fake news; the economic policy and global warming response recommendations made by non-climate scientist and non-economist Dr Alan Finkel.
The 200-plus page Final Report released last week Friday by Australia’s Chief Scientist Dr Alan Finkel should be renamed the Fakel Report. This is because the pseudo-analysis within it is based on Fake Economics. This is not surprising given that Dr Finkel is not an economist, nor are any of the other four members of the Review Panel. This was certainly not made any better by only around 1% of the 390 written submissions in any way questioning climate change alarmism and/or favouring sound economics. And this is in the very important context of Dr Finkel’s surprisingly honest admission in Senate Estimates last month that the impacts from Australia’s alarmist policy efforts to ‘tackle’ climate change will be “virtually nothing”. Given this context, the Fakel Report is really the Faecal Report.
In October 2016 the COAG Energy Ministers agreed to the Independent Review into the Future Security of the National Electricity Market to take stock of its current security and reliability and to provide advice to federal and state governments on a Blueprint for the Future. This has been dubbed the Finkel Review, given it is chaired by Dr Finkel. The Report seeks three key outcomes, based on four key pillars and thus makes 50 recommendations, with these recommendations interestingly prefaced by the word “should” 72 times. There is no set timeframe for when the Turnbull Government will officially respond, but they are generally not expected to provide a response any sooner than by the end of July 2017. Given the reported unrest within the backbenches of the Coalition, there may never even be an official Turnbull Government response.
The number one key reform recommendation is a federal “technology neutral” Clean Energy Target (CET), which would be “calibrated to an emissions reduction target of 28 per cent on 2005 levels by 2030 with a linear trajectory to zero emissions by 2070”. The CET includes a new federal Renewable Energy Target (RET) of “42 percent” “in 2030”. The recommended CET (including a new RET), unlike almost all of the other reform recommendations, is not prefaced by the word “should”. Most of the other 50 recommendations further increase the already large role and budgets of the government related institutions of the National Electricity Market (NEM) in a variety of ways, supposedly aimed at better facilitating wind and solar in the NEM (over coal, gas, hydro and nuclear) as well as mitigating their price and reliability impacts on the NEM (including through demand management).
It is absurdly claimed that a CET (with a new RET) will result in “lower residential and industrial electricity prices” as a “result of the stability and reduction in risk for the electricity sector that commitment to a credible mechanism would bring”. The Report provides line graphs of “residential” and “industrial” prices for 2017 to 2050 under the CET and two other scenarios, but without a transparent table of supporting numbers. Along with these line graphs, the Report provides: A) a bar chart of the net present value (NPV) of the “resource costs” of the CET and the two other scenarios, but again without a transparent table of supporting numbers; B) a table of “finance debt and equity costs between fuel types”, this time with some supporting numbers; and C) a bar chart of the “levelised cost of electricity (LCOE)”, and once again without a supporting table of precise numbers. The undefined resource costs are made up of “capital investment, fuel costs, fixed and variable operating costs and retirement costs”, whilst the ill-defined LCOEs “represents the cost per megawatt-hour (MWh) of building and operating a generating plant in order to breakeven over an assumed financial life” including “capital costs, fuel costs, fixed and variable operating and maintenance (O&M) costs” but not including “transmission or distribution costs”.
The exact inter-relationships between the predicted prices and the three varieties of estimated costs is not at all clear, nor is it clear what connection there is to historical and future demand (say best, worst and most likely cases). Even if one was a climate change alarmist who favoured government central control over competitive market freedom, this Report is nevertheless still shoddy work.
There are a plethora of problems with this Report, the main one being that it should have been supported by a proper and independent cost-benefit analysis (CBA) by a credible agency such as the Productivity Commission (PC), Australian National Audit Office (ANAO) and/or Parliamentary Budget Office (PBO). Such a CBA should include a free market oriented ‘red team’. Such a CBA also needs to analyse other real options besides increasing RET such as stopping, reversing and removing RET in favour of sound economics and free markets. The current economic policy adviser to Prime Minister Turnbull, Dr Alex Robson, definitively reminded in 2013 in Australia’s Carbon Tax: An Economic Evaluation that: “A central tenet of good economic policymaking is that a full CBA should be undertaken, weighing up the gains and losses across a wide range of policy alternatives so that political decision-makers can be better informed of the economic effects of various options.” Dr Robson added: “The role of climate change policy is not to assess the possible damage of climate change, but rather to focus on the incremental net benefits of possible policy options.” He concluded that: “Unfortunately, such an analysis has never been completed for Australia. … In particular, there was never an assessment of the incremental net benefits to Australia of limiting emissions, versus other measures such as adaptation. The debate has been framed as limiting emissions on the one hand, versus doing nothing on the other.”
A very very small sample of the other problems with this Report include the following:
- The Finkel Review appears to be just an ex-post justification for a much larger RET. The current RET is 23.5% by 2020. The new RET is 42% by 2030, which will be 100% by 2070. Under a supposedly technology neutral CET, it should not be simply assumed that Australia needs to “increase our reliance on variable renewable electricity generators”. The recommended CET is really just a rebranded RET. However, the bigger worry is the economic and human catastrophe that is likely to come, not just in the lead up to the 42% RET by 2030 but especially between 2030 and 2070 during the move to a 0% CET by 2070.
- The NEM has struggled to cope with the federal and state policies driven by climate change alarmism and the climate industrial complex. These policies have been most significant since 2007, which has led to massive increases in prices (as evidenced in even electricity CPI) as well as significant reduction in reliability including more blackouts. The veracity of the level and trajectory of Finkel’s projected electricity prices needs to be properly and independently tested, either in their own right or as part of a comprehensive CBA. The residential and industrial price trajectories, in particular, are highly unlikely to be so flat and instead are far more likely to massively increase. As for reliability, this has been compromised by attempting to integrate intermittent and non-synchronous electricity flow, especially wind and solar, into a NEM based on peaky but continuous electricity flows. As Economics Editor at The Australian, Judith Sloan, wrote earlier this year: “[T]here is no certainty that the wind will be blowing or the sun will be shining when the peaks occur … [and thus] the race to install more intermittent energy has required all sorts of other expensive measures to achieve reliability.”
- The pithy meme that investors and businesses need government policy certainty rather than uncertainty is a partial truth. Most businesses, and especially entrepreneurs, prefer uncertainty about good business policies (like low and falling regulations, taxes and subsidies) than certainty about bad business policies (like high and rising regulations, taxes and subsidies). Confidence for most investors, rather than those within the climate industrial complex, is undermined by bad economic policies such as those driven by climate change alarmism which take form as yet more regulations, taxes and subsidies as well as yet more borrowing and money inflation. Such policies are the true source of high sovereign or systematic risk. There is always the option to slow, stop or reverse bad policies. One should never keep throwing good money after bad. The expenditure to date on climate change alarmism is a sunk cost and should not determine future policy and investment decisions.
- Finkel’s recommended “stronger governance” is just a euphemism for more government regulation along with the higher taxes and prices to pay for this. There is usually some combination of special interest (as highlighted by Public Choice Theory) and ideology (as highlighted by the Austrian School of economics) to the origination, continuation and reform of regulation. This was colourfully dubbed by Bruce Yandle of the Mercatus Center as the ‘Bootleggers and Baptists’ phenomenon. Economics Nobel laureate Milton Friedman expanded upon this when he observed in his book Free To Choose: “A real or fancied evil leads to demands to do something about it. A political coalition forms consisting of sincere, high-minded reformers [ie ‘baptists’] and equally sincere interested parties [ie ‘bootleggers’]. The incompatible objectives of the members of the coalition (eg low prices to consumers and high prices to producers) are glossed over by fine rhetoric about ‘the public interest’, ‘fair competition’, and the like. The coalition succeeds in getting [Parliament] to pass a law. The preamble to the law pays lip service to the rhetoric and the body of the law grants power to government officials to ‘do something’. The high-minded reformers experience a glow of triumph and turn their attention to new causes. The interested parties go to work to make sure that the power is used for their benefit. They generally succeed. Success breeds its problems, which are met by broadening the scope of intervention. Bureaucracy takes its toll so that even the initial special interests no longer benefit. In the end the effects are precisely the opposite of the objectives of the reformers and generally do not even achieve the objectives of the special interests. Yet the activity is so firmly established and so many vested interests are connected with it that repeal of the initial legislation is nearly inconceivable. Instead, new government legislation is called for to cope with the problems produced by the earlier legislation and a new cycle begins.”
The recommended reforms in this Report are based on Finkel’s Fake Economics and are thus not true reforms like those under National Competition Policy (NCP) during the mid-1990s to mid-2000s. NCP reduced government control in favour of market freedom, which in turn reduced the prices and increased the reliability of many goods and services in Australia including of electricity. Finkel will do the opposite. Sound economics and history shows time-and-time again that real costs and prices only trend downwards over time when markets are free and competitive and thus driven by the needs and choices of most consumers, producers and shareholders rather than the dreams and dictates of a few activists, politicians and bureaucrats. Rather than yet another central plan, noting that such a plan in electricity first appeared in 1996 and was significantly enhanced in 2004, it is about time to look instead towards free people, free markets and competitive federalism as the Australian Constitution intended. The first step is to immediately ignore the Finkel Review, as being complete and utter non-sense. The second step is, in the shorter term, 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, to turn the Fake Market of the NEM into a real market.
Darren Brady Nelson is an Advisory Board member of LibertyWorks and an economic policy advisor to Senator Malcolm Roberts.