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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