Thursday, July 01, 2010

Climate change: A comparison

In my last post, I highlighted the long-term cost of the ETS's pollution subsidies: $105 billion to 2050, or about $2.5 billion a year (this cost BTW has been confirmed by Treasury; contrary to Nick Smith's view, we're not just making it up). Its difficult to imagine figures that large, so I put it in context by comparing it to other public expenditure - its more than we spend on police (about $1.4 billion a year according to the Budget 2010 Summary table [PDF]), and about the same as the costs of the dole and DPB combined ($1.7 billion and $0.9 million according to the 2010 MSD Estimates [PDF]).

Here's a scarier comparison. Between 1978 and 1985, the New Zealand government ran a system of agricultural subsidies called the Supplementary Minimum Price scheme [PDF]. These subsidies were costing us around $340 million a year in 1981, or about $1.3 billion a year in today's money. The cost was widely regarded as ruinous, an albatross around the neck of the New Zealand economy.

ETS subsidies will cost us about twice that much.

Not even farmers defend the scheme today. In fact, they proudly claim to be subsidy-free, unlike their competitors in the US and Europe. But agriculture makes up half our emissions, and is responsible for half the subsidy. So, under the ETS, we'll be subsidising our farmers about as much per year in real terms as they were getting back in the dark days of Muldoon.

Quite apart from ideological considerations, the SMP scheme was a bust, with a cost - benefit ratio of about 7:1 (that is, it cost seven times more than the benefits it produced - $1192 million in subsidies for a $168 million boost in agricultural production). Our ETS subsidies are likely to be a similarly bad deal. To point out the obvious, we are unlikely to be getting an extra $2.5 billion a year of economic activity from the subsidy. Instead, we're just lining the pockets of polluters, paying them to run inefficient, outdated and ultimately unsustainable businesses. That didn't make sense in 1981, and it doesn't make any more sense now.