How an ETS would create economic chaos

The news is full of reports of demand for oil dropping and predictions that it will continue to fall during 2009 due to factory closedthe economic crisis, such as in Reuters 16 January 2009. The same economic factors are in play now as would be under a global emissions trading scheme, just the influence would be in a different direction. Do we want an emissions trading scheme which is the trigger for economic calamity?

The current global financial crisis is spreading into an economic crisis which is slowing industrial demand for a number of inputs, including energy which includes oil. Oil prices are dropping dramatically due to decreased demand for oil. The causal relationship in the current economy looks like this:

access to finance/ credit shrinks -> industrial productivity drops -> consumption drops -> price of oil to the producer drops

Imagine a different trigger event to the finance/ credit crisis, such as an emissions trading scheme which taxes consumption of fossil fuels heavily. The causal relationship then would look like this:

massive tax on fossil fuel consumption -> cost of production increases -> demand for products drops -> industrial activity drops -> demand for fossil fuels drops -> price to the producer drops

In this scenario, everyone loses, including government revenue:

  • industrial production drops
  • company tax paid to the government drops
  • unemployment increases
  • taxes paid on wages drop
  • standard of living in the developed world drops
  • carbon emissions drop a little, but not much, because poor people use carbon based fuels for heat and cooking, they can’t afford swanky solar panels on their roof (if they have a roof), they collect wood and burn it
  • clean technology innovation slows because industry can’t afford R&D or upgrades when the economy slows
  • global climate keeps on doing what it was doing anyway because the solar cycle is not influenced by economics

What a great scenario. In the meantime, unemployment increases and gross domestic product decreases. A fall in GDP in two successive quarters is called a recession. A fall in GDP of more than 10% is called a depression. What some countries are experiencing currently is bordering on recession, or is recession.

An enforced emissions trading scheme could trigger a full blown depression – a la 1930’s style. The objective of reducing carbon emissions would be achieved only by default – due to a decline in economic activity


5 Responses

  1. It is the fear of being seen doing nothing which is the root cause of Conservative politicians supporting this madness.

  2. There are more productive actions that could be implemented. I am working on ideas to post.

    What ideas do readers have?

  3. “An enforced emissions trading scheme could trigger a full blown depression”

    Oh but the markets are doing that pretty well by themselves. Your reasoning is very dodgy. Massive taxes on fossil fuel consumption have never been on the cards politically and would never be implemented in a way that would shock the economy as you fear. In Australia, the White Paper proposes a (very) soft start, for example.

  4. I agree the markets are far from the efficient mechanism they are meant to be. That adds to my fears for an emissions trading scheme – another market to be messed with.

    The Australian Treasury report Australia’s Low Pollution Future predicts a 5% reduction in GNP under CPRS -5 from the no change scenario refer page 14.

    The Australian Treasury makes a number of assumptions, including costing the outcomes of risk of global warming at 8oC at “stabilisation” refer page 8. This is at the far outside of global warming predictions. If global warming did not increse to this extreme, the net reduction in GNP from the CPRS would be even higher than 5%.

    More posts on this subject to come.

  5. Heavy taxes whether disguised as taxes to the Emperor or as ETS inevitably dampen, if not douse completely, the engines of the economy. Lower taxes always encourage the economy – it’s logical. “” obviously is still in pre-school when it comes to judging the “markets” and the Socialists’ long term ambitions. Useful idiots was the term that Lenin used and applied to those in the West who readily and without real thought or question fell into line with those who are intent upon hoisting the white flag. Dangerous idiots is more my description.

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