Monday, November 7, 2011

Market-Clearing is Overrated

In Australia, today they voted in the Senate to pass a tax on carbon dioxide.

Now, there are some reasonable argument for having a world-wide price of carbon, assuming countries could somehow be arm-twisted into doing so.

There are bugger-all reasonable arguments for imposing carbon tax when very few other countries are doing so. All that will happen is that carbon-intensive industries will be exported overseas.

But (as Tim Blair notes) to add to the hilarity, the tax comes in at a specific amount - in this case $23 a tonne. The trouble is that the current carbon price in Europe is about half that. You can see the progress for yourselves.

But that's alright, we've got Climate Change Minister (yes, really, Australia actually has one of those) Greg Combet to point out the answer:
But Climate Change Minister Greg Combet is not convinced the difference demands a change in the local price, saying a few months ago the European cost was “there or thereabouts” of $23 a tonne.
“We’ve just got to take a bit of a longer term view of this,” he told ABC Radio
Hmm. Any particular reason you think that the current price is unrepresentative, but the old price is clearly accurate? Any reason at all? I mean, if you're willing to admit that the market is inefficient today, why is 'a few months ago' the gold standard for the halcyon days of price efficiency?

Don't hold your breath waiting for a good answer to that one. But even this is beside the point - efficient or not, the European price of carbon right now is a lot less than it will be in Australia. (Not to mention that the Chinese price is forecast to be $0 for quite some time now, with an R-Squared of about 100% on that regression). As long as there's going to be a price, it ought to be the market price. Unless you think the relevant market is the US and China, in which case we're back to the earlier Shylock regression.

In Australia, the price will be at $23 a tonne, which some days will be less than Europe, and other days will be more.

In other words, the price will definitely not be a market-clearing price. This gives Australian firms a fluctuating competitive position relative to Europe, and a permanent disadvantage relative to just about everywhere else. Heckuva Job, (Bob) Brownie!

One prediction I can make with some confidence - expect the market for Australian-produced Aluminium to start clearing very rapidly at an equilibrium quantity supplied of zero.

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