Climate Change and Government Carbon Pollution Reduction Schemes

The debate about climate change and the development of new non-carbon based energy industries is too often centred around short term costs, and the need for private industry to be the primary mover. The argument is made that private enterprise would develop clean energy industries if there were money to be made, and if the benefits outweighed the costs. These proponents argue that there is no need for governments to intervene to mandate emissions trading schemes, and other incentives to encourage the private sector to develop clean energy industries.

Unfortunately the market is not perfect. The market often fails to develop industries that may be of significant benefit to local, national or global communities. Markets often also impose significant costs on the world community during economic downturns, such as the financial and economic crisis recently generated in the United States, and there is no private sector mechanism to respond to terrorist attacks such as 911 in the United States. Without government support, the market fails to address many important issues such as climate change, air pollution, water pollution, health, national defence and poverty.

Market failures however, can be corrected by government support measures such as regulation, taxation, incentives, and on occassion, such as the recent financial meltdown in the United States, to partner with private industry to correct market failures. Climate change and the development of clean energy industries is one issue where government can regulate, tax, provide incentives, and work in partnership with the private sector.

Governments are often ridiculed by ideological extremists who argue for individual freedom and private initiative, claiming all governments are incompetent, should not be involved in economic decision making, and should leave everything to the private sector. These extremists are too often caught up in meaningless ideologies, and not focused on "what works". Unfortunately, when elected, extremists driven by this type of ideology often do nothing, and prove by their own inactions that governments are indeed incompetent.

Strong, ethical and effective governance at the political level is as critical as it is in the corporate boardroom. Incompetent, corrupt and unethical governance in both, which has been too prevalent in the US for example, in the last decade, is a recipe for disaster, as evidenced by the financial meltdown.

Government regulations and tax incentives related to climate change and "clean energy" are intended to encourage and help the private sector to invest in new forms of energy. That's what governments are elected to do, regulate, tax and support private industry, and the people who elected them, to achieve individual and development objectives. China, with strong support from government for a highly competitive private sector is already a huge player in wind, nuclear, hydroelectric power, and solar panels, and with a stimlus package of almost $700 billion will be investing heavily in new energy systems. It is the world's largest producer of solar panels, 90% of which are exported worldwide. Within two years it could become the world's largest consumer of clean energy.

The Obama administration in the United States is also likely to partner with private industry to address climate change, and develop non-carbon based clean energy industries. It could potentially provide significant benefits to private industry, as did the government inititiated space program NASA in the early 1960's, which spun off an immeasurable amount of private sector activity. Without it we would today not be corresponding by email, blogging, or navigating our roads by satellite navigation systems. There would have been no IT boom. This collaborative government and private sector program to explore space yielded enormous benefits not only to private industry, but to the world community in many ways.

In Australia, the Minerals Council has estimated that the Government's Carbon Pollution Reduction Scheme will result in the loss of more than 66,000 jobs over the next twenty years. Others, such as the National Australia Bank estimate that it will generate annual investment of more than $6 billion over the next 50 years. Both are likely crude estimates.

Judging by the spinoffs from the NASA space program in the United States, the benefits are likely to be immeasurable, and the costs marginal. And, we will breathe clean air, which will make an incalculable contribution to the most significant asset we all have, our health.

The United States Economy: A basket Case?

In the late 1990's, following the Asian financial crisis, I recall speaking at world outlook conferences in the United States, where many American economists, when asked about the prospects for Japan, simply threw up their hands and somewhat gleefully dubbed it "a basket case". Ten years later, how the world has changed. Now the United States is the prime candidate to be dubbed the world's economic basket case. But is it?

At those conferences I rejected the notion that Japan was a basket case. It was still among the top three economies in the world, and while prospects for strong growth in the range of 4% to 5% annually were unlikely, and have not been achieved in the past decade, it remains a major player on the world stage. Japan has matured as a major economy and faced some significant structural problems, particularly in the banking sector in the late 1990's, and still does, but these will be addressed over time. Japan remains a significant player on the world stage, and once it has solved it's structural problems, should be able to achieve annual economic growth in the range of 3% to 4%. This rate of growth does not match the 10% to 14% annual growth rates achieved in China over the past decade. However, China is in rapid development mode as Japan was until the 1970's, and once its economy matures, China will also return to more normal rates of growth.

The United States is not a basket case either. It remains the world's dominant economy, but faces significant structural problems in the banking sector, as Japan did in the late 1990's. The financial problems in the United States have had a much more significant impact on the global economy than the Asian financial crisis. Fortunately there has been a more coordinated global response to the structural problems generated by the United States financial system than there was following the Asian generated crisis. There have been a wide range of fiscal and monetary stimulus packages that will drive growth forward. These packages have already had a significant impact, particularly in countries such as China and Australia. China's growth rate could well reach 7% to 8% in 2009. Australia was quick to move early with a massive fiscal and monetary stimulus package, and is probably the only country in the industrialized world to have averted a "technical recession", which is two quarters of negative growth.

In the United States, the new administration has also been quick to respond with monetary and fiscal stimulus packages. Unfortunately, the federal and state governments have accumulated huge debts over the past decade, as has the private sector. The debts are the result of poor government regulation, excessive and poorly targeted expenditure, incorrect monetary policies, and enormous expenditures on the wars in Iraq and Afghanistan. It will be a long haul, but these structural problems will ultimately be resolved, and bring the economy back to a stronger growth path.

However, this will require significant committment to structural reform, effective government regulation, and a very active government to steer the economy forward. It will require a committment not just from government but from private corporations and individuals as well. There is no magic private sector bullet, and this will be no easy task in a country that has many political, cultural and regional divisions.

Financial and Economic Crisis and Forecasts

In July, 2008, the conventional wisdom in Australia was that inflation was a major concern, and forecasters argued for rising interest rates to curb inflationary tendencies and excessive economic growth. They were wrong!

The threat to Australia's economy in July 2008 was deflation, not inflation. The blinkered focus on the domestic economy failed to consider the impact of international developments on the Australian economy. Nobody bothered to ask the simple question, "What happens to Austalia's economy, if the United States economy moves into recession, China's exports to the United States take a sharp dive, and China's economic growth drops?"

That is exactly what happened. As early as 2006, housing construction in the United States began to decline. By early 2009, housing starts in the United States had dropped from over 2 million annually, to just 500,000, the economy was in rapid decline, and China's rapid growth of more than 10% annually decelerated to less than 7%. The rapid expansion of our minerals exports to China dropped sharply and despite government and Reserve Bank efforts to stimulate the economy thanks to a massive fiscal and monetary policy response, our economy has averted an official recession (two quarters of negative growth) in early 2009.

The question now is when will it turn? Again, the forecasters have missed it. The upturn has already started, even though it is not evident in the data. The sharemarket has risen by 20% in recent weeks. The housing market in the United States has hit rock bottom, and will follow the upward trend in the sharemarket in the third quarter. Housing starts in the United States at only 500,000 annually are way below underlying demand of 1.5 to 2 million, and the market is on the verge of a rapid upswing. By the end of the year, housing starts in the United States will be close to 1 million on an annual basis, and in early 2010, the economy will be in a cyclical upswing, spurred on by the impact of government stimulatory programs in the United States and in other countries. China will follow, as it's own stimulatory program kicks in and Australia will be into a sharp upswing by mid 2010, as the effects of fiscal stimulation, historically low interest rates and improving export markets all kick in to move the economy into a sharp upswing.

Watch for a synchronized worldwide cyclical upswing by mid to late 2010, and a booming Australian economy.

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