Government, energy & environment

War on want

What do you get if you add economic turmoil, erosion of Western political power, and apocalyptic predictions of rising tides and wild weather? Nervous! But as with any crisis – real or imagined – you also get new ideas. One idea is that economic growth should be limited because of finite resources, population growth and climate change. Some governments are already suggesting that work hours should be cut and consumption curtailed. In other words, it’s the new age of austerity and we should start to learn to live with less. Problem is, half the world doesn’t want to.

It’s true that natural resources are limited and there is a valid debate about whether GDP is misused as a measure of progress. However, the idea of prosperity with no growth whatsoever is rather simplistic. Furthermore, dire forecasts about rising populations and scarce resources are nothing new. Thomas Malthus (1776-1834) argued correctly that populations would expand and predicted that we would run out of food as a result. He was right about population growth but wrong about starvation because he failed to predict technological developments. Equally, the Club of Rome argued in the 1970s that the world would start to run out of resources by the 1980s, but failed to take into account innovation, regulation, efficiency and behavioural change.

We have a battle between strong political and intellectual forces on the one hand versus strong economic and technological forces on the other. Benjamin Friedman, the Harvard academic and author of The Moral Consequences of Economic Growth, states that any society that gives up on growth paves the way for arguments over distribution of resources and invites intolerance and populism. This is emerging already, with European rhetoric on low growth protectionism clashing with Eastern (Asian) politicians talking about the need for growth before their populations get too old.

What’s needed, perhaps, is a middle ground where growth is still sought but not at the cost of weaker human relationships, culture or community.

A new strategic threat - rare earths

Rare earth minerals are 17 elements with magnetic properties that are an essential, but largely invisible, component of our electronic lifestyles. China accounts for the production of around 90% of rare earths and appears to be consolidating its grip on supply in what is currently a $US1,250 million market (predicted by some to be double within 5 years).

Rare earths are found in everything from iPods, solar panels, LCD screens and energy efficient light bulbs to aircraft, wind turbines, lasers and the motors of electric cars. So is a battle looming between suppliers and consumers? China certainly seems intent on limiting illegal supply while other nations seem keen to put the future supply of rare earths on a similar strategic footing as oil and gas. The concern here is partly that, if China ever decided to focus on domestic consumption, other countries could struggle to find supplies and, partly, that many rare earths have military uses much as oil does.

Japan, the world’s second largest consumer of rare earths after China (responsible for 25% of world demand versus China at 60%) is urgently developing high-tech alternatives and is funding a number of exploration projects to secure supplies from outside China. Meanwhile, the race is also on to find alternatives for metals, such as lithium and zinc, that are also essential in the production of many electronic goods, but whose supply is similarly concentrated in a handful of nations. For instance, 50% of lithium reserves (an essential component in iPods and mobile phones) are found in Bolivia. Expect interest in rare earth minerals to increase and expect prices to move upwards.

The rise of Euro-pessimism

The European debt crisis has created a new wave of Euro-pessimists who believe that the European project is unworkable. They think a Euro-zone break-up is inevitable. Differences in culture, competitiveness, labour costs and social policies must sooner or later drive member states apart, so the theory goes. And even if the nations themselves don’t do it, speculators and market volatility will.

This argument misses a few matters. First, the cost of pulling out of the Euro would be so high that few politicians would dare to chance it. If Greece, for example, were to pull out of the Euro, its debt (90% of which is held by other nations) would simply balloon as its own currency fell. Idealists and federalists think the only alternative is greater centralisation (more of what caused the problem in the first place some might argue).This would see a strict transfer of control from national economies to Brussels or Frankfurt. Gone would be national levels of taxation, national spending plans, and national regulatory policies.

The choice, as the historian Niall Ferguson has argued, is between a proper United States of Europe and a hodgepodge that will one day fall apart. At the moment, the pessimists seem to be in the ascendant. However, there is a sense in which Europeans have no choice but to cooperate. On their own they are too small. While the commitment of European nations to one another is certainly not unconditional, they possibly have enough interests in common to keep them glued together a little longer yet.

The carbon credit fiasco

Do you understand emissions trading? If so, you are in a minority. Assessing or measuring emission levels (something now controlled by the UN) is even more complicated. Not so long ago, carbon trading didn’t exist. Now we have a whole new industry, all based on the rather spurious idea that you can precisely count offsets and that firms should be allowed to trade in pollution.

One job that didn’t exist a while ago is emissions assessor. These are the people who visit sites to work out whether a promised emission reduction or carbon offset package stacks up. There’s big money in this.Since 2005, when the largest greenhouse gas polluters signed up to the Kyoto protocol, $US300 billion worth of carbon emissions have been traded and speculators now bet on carbon in the same way as oil and gas prices. If the current US President signs the cap-and-trade system for emissions, this market is predicted to grow to US$2-3 trillion annually.

How does all this work? Industries have limits on how many emissions they can produce, but they can buy credits (or offsets) from others. Similarly, projects that create a positive effect (people growing trees for example) can sell their credits. In other words, you don’t have to actually cut emissions to comply with the law, you can simply buy extra wriggle room. Hence, we now have carbon developers (and investors) who create schemes that produce credits, carbon accountants who verify the value of these schemes, and multinational companies travelling the world in search of offsets that allow their companies to comply with the law.

Overall, carbon trading has two aims. The first is to create a profitable market. The second is to reduce greenhouse gas emissions by diverting money into cleaner technologies. But the whole project could become unstuck because of ‘additionality’. This is the proof that a specific renewable energy project would not exist without the funds created by the sale of carbon credits to polluters.

In theory this should be easy, in practice it’s not. For example, the Journal of Climate Policy found, even if carbon trading didn’t exist, 60% of clean energy or offset projects would have happened anyway and 40% of companies would have reduced emissions. Moreover, 15%-20% of carbon credits should not have been issued in the first place because the companies (or investors) behind the projects failed to produce any evidence for additionality.

The key takeaway is that this is a new market, worth trillions, that is filling the pockets of sundry lawyers, investment bankers and bureaucrats. It is based on a promise of future behaviour that is difficult to verify or police. Think about that next time you order a carbon neutral cappuccino.

Cooking up some sacred cows

A newish Australian book called What if? edited by Peta Seaton offers some tantalising glimpses into what Australia might look like if the centralising reflex of modern politics were restrained. For instance, what would happen if schools were allowed to make a profit or non-teachers could become school principals? What if everyone were allocated an equal right to use the road system, but those who didn’t want to were allowed to sell their share to someone else? Or how about inviting voters to publish e-Bay-style ratings of government services? Or abolish the states too? The glue that links all these ideas together is a mixture of local decision-making, the contestability of public services, consumer choices, and smaller government. All sounds pretty good to me.