Cost Shifting

Some classic examples of cost-shifting occur in some of the so-called "sin-stocks".  Probably the best example is that of the cigarette companies.  Their product, which costs about 50-60 cents to produce retails at around $15; so no doubt there's a strong desire to produce it - there's a lot of profit there.  Naturally the government is keen to also put their hands in the pot and adds excise and tax along the way.  But is it enough?  Clearly not.

The costs that are shifted include the littering problem, the smoke that is annoying for non-smokers, plus of course, the health issue.  Here's where the cigarette companies cost-shift.  They sell their product with the full knowledge of these other social costs, but don't contribute to them at all.  It all goes to their bottom line, and the health system and other government agencies are reduced to paying for these external costs.

The alcohol industry also does similar things.  The consequences of alcohol consumption are immense.  We have assaults, vandalism, broken marriages, massive car accidents, health issues, not to mention the simple task of cleaning up vomit!  All these are costs of consuming alcohol that the alcohol industry does NOT pay for.  Someone else picks up the tab for these "incidental" expenses, and the alcohol industry does not include them within their accounting bottom line.   It all stays there in the alcohol industry's books as profit, and is a massive expense for the governments who have to provide police, paramedics, counsellors, doctors, nurses and the like to clean up the mess.

With these issues, it's not difficult to get support from people about the cost-shifting.  People tend to agree that the industries need to fully pay for their impact on society.  For example, we now pay a levy to dump used car tyres when we buy new ones.  We pay an environmental levy when we get our oil changed in the car.  TV manufacturers are finally being forced to provide mechanisms for taking back their TV sets when they are no longer in use.

It's the same situation with carbon disposal.  Up until now it has been completely free to discharge Carbon Dioxide into the atmosphere.  This massive cost shifting has meant industries have been able to shift the cost of disposal of their pollutants on to other areas of the economy, and have the resultant profits in their own P&L statements.  The carbon tax is a fantastic way of pulling the costs into the existing accounting system without too much reliance on regulation or other cumbersome methods.  If it costs money to pollute, then it is in the interests of the company to reduce that cost, pure and simple.  Any reduction in costs in the accounts will result in an increase in profit.  And maximising profit is one of the most important aims of being in business.  It's listed right up there at the top of any company's aims!

These arguments need to be made and explained to the Australian people.  It's a pity the Federal Government is failing in its attempts to do so!

Why Tax Carbon

I am constantly dismayed at this common argument about the carbon tax:  we impose a tax, then we just go and compensate people for the tax, what's the point of imposing the tax in the first place?

The ALP has a lot to answer for for allowing this argument to run.  It's been used by a number of Liberal politicians lately, Christopher Pyne used it on Q&A last night, and it was never answered correctly.

The reason for the carbon tax is where it's applied and where it is felt.  The tax is going to be imposed on industries for emitting CO2.  They will then pass it on to customers by increasing their prices.  So as a Labor government, the policy is that the people being ultimately affected by the tax are going to be compensated.

Now, what this means is that an industry can either pay the tax for emitting CO2 and pass it on, OR they can find ways of not emitting the CO2 (by using green technology) and then their products become comparatively cheaper as their carbon tax outlay will be less.  They get a leg-up on reducing their expenses.  If their competitors increase their prices because of the tax, then the non-emitters can either keep their prices low and thus become far more competitive, or not increase their prices as much and improve their profitability.

What this does is assist low-emitting industries, and penalise high emitters.  After a while, industries will be encouraged to find ways of reducing their carbon emissions.  Either that, or they'll find their prices are not as competitive because they'll now be having to pay extra carbon tax.

It was said that to reduce smoking, tax on cigarettes is increased.  You don't then go and compensate smokers for the increase in cigarette prices.  But this ignores a very important economic concept: substitution.  A smoker really can't substitute other products - you either smoke tobacco or give up.  (There are probably a few substitutes, but not of high importance in our condierations here).

Whereas with energy there ARE many substitutions.  Already we can buy Green Power generated from wind turbines, hydro-electric schemes and the like.  It's more expensive than coal generated power, and therefore it's not really all that popular.  But if you tax carbon emissions, you make Green Power relatively cheaper, and thus increase demand for it.   People will be queueing up to tick the box on the Green Power option if it's not as expensive as coal-generated power; just as most people now take the cheapest power option on their bills (which just happens to be coal-fired stuff).

So the reason why the compensation IS different and the reason why we need to tax the emitters is simply to differentiate the products.  Don't forget if you don't generate CO2, you won't pay any carbon tax.  And if you do (which is regarded as the undesirable outcome) your emissions will make your products more expensive.

For too long industries have had a free run.  They have been allowed to emit CO2 into the atmosphere for free.  It's called cost-shifting.  You do something that costs someone something, but if you're not paying for it, then that cost is not in your accounts, it's in someone elses, therefore the profit is yours.  And some other poor guy (usually the government) has to pay to fix things up.  The government gets its funding from taxpayers, so that cost avoided is paid for by all of us.

I can't see why a government needs to pay for the expenses racked up by companies.  Consider a petrol station now being closed down.  The land needs to be remediated from the chemicals.  No-one would argue that the petrol station itself needs to pay for that remediation work.  But let's say they get away with it by becoming bankrupt.  The land still needs remediation, and now the government (ie us taxpayers) has to pay for it.  That cost has been shifted on to someone else.  And the saving in cost goes straight to the bottom line of the company avoiding it.  In other words taxpayers are subsidising the industries.

This is what has been happening for too long with carbon dioxide.  Emitters have been emitting it for free until now, whereas it's long been regarded as a cost.  Not a financial cost, but an environmental cost.  With a carbon tax, you immediately transfer that environmental cost into a financial cost.  It will appear on the business's bottom line, and they'll be doing something about it - mark my words.  With carbon emissions free there is simply no incentive at all to do anything about it.  Why bother?

We need a carbon tax, plain and simple.  Carbon emissions are NOT free to the world, why should they be free to businesses who actually emit them?  Cost-shifting is so frequently used by big business, and I'll blog more about it later this month as it's a fascinating concept that is, fortunately, being phased out gradually.  One of the biggest cost-shifting phenomena is that of free carbon emissions.