Firms may ‘bank’ compensation

The MD of Rio-Tin­to Aus­tralia this week com­plained that firms seek­ing com­pen­sa­tion for the impost of car­bon tax­es on exports are unfair­ly char­ac­terised as “rent seek­ers”.

But, there is per­sua­sive evi­dence from Europe that large firms there have made wind­fall prof­its by bank­ing the com­pen­sa­tion they were offered under the EU car­bon abate­ment scheme while pass­ing on most or all of the cost-bur­den of the scheme to con­sumers.

First, here’s Mr Peever’s indig­nant objec­tion:

Remark­ably, how­ev­er, when it comes to the issue of car­bon, trade-exposed Aus­tralian firms that insist on main­tain­ing a lev­el play­ing field with their inter­na­tion­al com­peti­tors are liable to be dis­missed as self-inter­est­ed rent-seek­ers.” Extract from Indus­try urges, get tax right | The Aus­tralian

I agree that exporters have a strong case for rebates of the tax to off­set their loss of com­pet­i­tive­ness (although there is long-stand­ing analy­sis show­ing that such off­sets may be inef­fec­tive).

Now con­sid­er the recent detailed econo­met­ric study by the Dutch envi­ron­men­tal con­sul­tan­cy CE Delft that showed firms in the Iron and Steel, Refin­ery and Chem­i­cals indus­tries in Europe mak­ing “wind­fall prof­its” from the Euro­pean com­pen­sa­tion mea­sures.

it was shown that there is ample evi­dence that ener­gy inten­sive com­pa­nies did pass through the oppor­tu­ni­ty costs of their freely obtained allowances into the prod­uct prices. This seems espe­cial­ly the case for prod­ucts from the iron and steel and refiner­ies sectors…the con­clu­sion of this research is that sub­stan­tial wind­fall prof­its have been made by ener­gy inten­sive com­pa­nies that obtained allowances for free, but cal­cu­lat­ed their mar­ket val­ue in the prices of the prod­ucts. There­fore, the alleged com­pet­i­tive advan­tages of free allo­ca­tion are gross­ly over­stat­ed. Free allo­ca­tion mere­ly shifts income from con­sumers to com­pa­nies with­out help­ing the com­pet­i­tive posi­tion of com­pa­nies or the envi­ron­ment.

The “oppor­tu­ni­ty cost” of the free allo­ca­tions of per­mits under the EU emis­sions-trad­ing scheme is the val­ue that the per­mits would have had if sold back into the emis­sions mar­ket rather than put to their intend­ed use: to par­tial­ly off­set the costs of the emis­sions lim­its.

What firms in these indus­tries did, accord­ing to CE Delft, was to pass-on to con­sumers as much as pos­si­ble of the addi­tion­al costs of the emis­sions restric­tions (the degree of the cost trans­mis­sion is deter­mined by the price elas­tic­i­ty of demand) and they also fac­tored into those costs the val­ue they would have had from sell­ing the free per­mits allo­cat­ed to them by the EU author­i­ties on the emis­sions trad­ing mar­ket. This cre­at­ed a “wind­fall prof­it” for the firms.

Can this find­ing be direct­ly trans­posed to a fram­work of a com­pen­sat­ed tax? I think so: cash com­pen­sa­tion com­pris­es “vouch­ers” in just the same sense as emis­sion per­mits. Using the “free” cash to reduce the cost to con­sumers has an oppor­tu­ni­ty cost for firms in the same sense as using the emis­sion per­mits rather than sell­ing them back to the mar­ket.

Para­dox­i­cal­ly, the firms behav­iour as described by CE Delft sug­gests the com­pen­sa­tion may be more effec­tive in com­bat­ing car­bon-leak­age than bor­der tax adjust­ments (that may have no real impact). After all, what firm in receipt of wind­fall prof­its from the scheme will want to relo­cate pro­duc­tion to an uncon­trolled (and uncom­pen­sat­ed) emis­sion mar­kets like Chi­na or India? This would pre­sum­ably be wel­come to the Gov­ern­ment that is con­cerned to reduce glob­al car­bon-diox­ide emis­sions.

CE Delft do not sug­gest this activ­i­ty by firms is in any way rep­re­hen­si­ble. I agree: it is nor­mal, desired-by-share­hold­ers, prof­it-max­imis­ing behav­iour by firms to look at their full oppor­tu­ni­ty costs of pro­duc­tion rather than at the eco­nom­ic costs (and prof­its) from pro­duc­tion.

But I can’t help agree­ing, too, with this piece in the Wash­ing­ton Exam­in­er (HT Sin­clair David­son) describ­ing the char­ac­ter­is­tics of the lob­by for “alter­na­tive ener­gy” poli­cies and “cer­tain­ty” on car­bon prices

Envi­ron­men­tal pol­i­cy is not dri­ven by tree-hug­ging activists, earnest lib­er­al blog­gers, or eco­log­i­cal­ly mind­ed cit­i­zens. Instead, it flows from the lob­by­ists and exec­u­tives of well-con­nect­ed multi­na­tion­al cor­po­ra­tions and built-for-sub­sidy star­tups that see prof­it in the loan guar­an­tees, hand­outs, man­dates, and tax cred­its Con­gress cre­ates in the name of sav­ing the plan­et.” Extract from Meet the lob­by­ist who turns ‘green’ into green­backs | Wash­ing­ton Exam­in­er

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