Better planning is necessary for resource taxes
Aleks Atrens | 6th May 2010 | Politics | No Comments »The proposed minerals tax is bad policy. Taxes inevitably dampen private enterprise; this tax will slow the resources sector. That is not the problem with this tax however – its flaws lie with its bluntness. A more subtle, well-designed mechanism to tax windfall profits in the resources sector would be defensible.
Blatant money-grabs by governments, even if through taxes, are an action that can do long-term damage to economies. The damage is done either through making industries unprofitable, or by frightening off current and potential future investors. This tax does not have many issues on the former point, as it focuses on corporations with large windfall profits. It does little, however, to mitigate the issue of investor confidence.
Investor confidence can be fickle, and if the Australian Government cannot provide a sense of continuity for the legal, regulatory, and taxation frameworks under which companies operate, we may see a long-term reduction in foreign investment. The obvious extreme example of such a case is when governments can no longer convince corporations that property rights exist on a solid footing. This has historically been the case in many African (and some South American) nations that have repeatedly seized lucrative private assets. Australia isn’t anywhere close to that situation yet, but this policy could be perceived to be a step in that direction. No doubt some will portray it that way.
The resource & minerals industry is slightly different from other economic sectors however, in that it does not always bring prosperity to countries owning the resources (African nations are also a case in point). If the resources companies are internationally owned and the domestically employed workforce is small, economic benefits of a resources sector can be minimal. The Australian economy still gains significant benefits from its resources sector, but less than was once the case. From this perspective, a well-planned policy to ensure the domestic economy gets full value from windfall profits in the resource sector would be beneficial. This is particularly the case in the current environment, where the boom is not driven by exceptional management or technological improvements, but by external circumstances: the economic boom in China.
A well-planned resource taxation policy would consist of a small royalty imposed on mineral exports for individual minerals when their sale price is much higher than that of market fluctuations, with the royalty ramping upwards as price increased further from the average. Such a policy could be in place over the long-term, reducing investor uncertainty, would ensure a larger share of windfall mining profits remains in the domestic economy, and could help provide a braking mechanism for the boom-bust cycles in Australia’s resources sector.
Even such a mechanism would have some detrimental effects on the resources sector in the long-term, but they could be outweighed by the overall benefits. The tax as currently proposed, however, is using a cleaver when a scalpel is needed.
Buzzwords & Sustainability
Aleks Atrens | 15th February 2009 | Energy, Politics | No Comments »The public dialogue relating to climate change and energy sources is being clouded by the overuse of buzzwords. A clear example of this is a Google search for renewable energy, sustainability, green, peak oil, and climate change, turning up 116,000 pages containing all of those words. The use of “green” and “sustainable” as descriptive adjectives serves to make discussion of the topic less accessible to a lay audience, and to distract attention from the key issues. Public discussion needs to focus more on the advantages, disadvantages, and costs of the solutions to the challenges we face, instead of skewing discussion with catchy terms.
The word “green” is overused now to the extent that it now only indicates to the reader that the discussion somehow relates to the environment. “Sustainable” as an adjective has a flexible connotation. It is variously used to describe anything from socially responsible projects that consider future impacts through to a “truly sustainable society” where everything is powered by renewables, and there is no overall waste, only re-use and recycling. The more troubling aspect of these words is not their lack of clear definition to a general audience, but their role in subverting discussion of the importance challenges facing us. They’re more powerful emotionally than intellectually, to the point where they are used to inspire public support or approval even where it might be misplaced. Declaring a technology to be “green” renders it socially favourable, even where it might not cause significant benefits.
Discussion of mitigating climate change is often diverted to an argument for a “truly sustainable” society. It is a fashionable viewpoint to respond to cost-ineffective renewable energy and recycling technologies with the argument that “even if they’re not effective in negating climate change, they’re still an important step in a progression towards a sustainable society”. This type of thinking is dangerous in that it can lead to damaging our ability to achieve vital short-term goals in favour of distant ones. Automatic support of anything that promotes sustainability risks sub-optimal results in the near-term (particularly when partnered with opposition to anything that’s not sustainable indefinitely). It’s a mistake to bypass cost-effective mechanisms for combating climate change because they’re not sustainable in the long term (proponents of nuclear power in particular face this problem).
An example of misplaced concern that zeal for sustainability has caused is concern for the sustainability of metals and minerals (in the long-term sense). Clearly mining is not an indefinitely sustainable industry – in the distant future it needs to transition towards recycling and re-use of the materials we have extracted from the ground. But concern regarding the topic of peak oil production has spilled over into anxiety about the immediate sustainability of metal use and the exhaustion of metal ores. For example, there are concerns that if current growth in consumption continues, we would exhaust iron ore reserves in 64 years (page 109 of this reference). These concerns have neglected to consider the important aspects that differ between liquid fossil fuels and metals: recycling, accessible alternatives, and how they’re used. Unlike fossil fuels, metals aren’t “used up” by most of their uses, and their products also have a limit of application (unlike energy use, which will continue indefinitely). We mine more metals partly to enlarge our accessible pool or material available, and partly because it’s cheaper than recycling. For example this New York Times article from 2008 mentions that last year’s soaring metal prices were leading to theft of publically accessible fixtures for sale to recycling companies:
“For most of the cities, the increase started in the spring of last year as the price of steel and iron surged because of a growing demand for recycled metals in China and India. Thieves have been pulling up anything metal — screen door frames, plumbing fixtures, copper wiring — they can get their hands on.”
When demand inevitably does outstrip our supply from easily-mined reserves, the cost of metals will rise, leading to increased overall recycling. Equally so, if the costs of individual metals are too expensive, there are generally different materials which can be used instead without large cost increases (which is not yet the case for liquid fossil fuels). The worry about resource exhaustion is misplaced, and too much concern for the importance of sustainability may lead to poor use of limited resources.
All of this is not to say that an ideal of a sustainable society is not admirable; it is. Neither is it to say that discussion of sustainability and a progression towards it are irrelevant. However it is a separate, long-term issue for our society. It is important that we consider our actions in the short-term in the context of the goal of long-term sustainability, but we shouldn’t destroy our ability to solve our immediate problems because of it. Mitigating climate change, and developing a reliable source of liquid fuel will be incredibly important challenges for the world in coming decades. Solving them requires strategic thinking; this necessitates accurate and deliberate weighing of the options, not prematurely making decisions that may be far from optimal. The solutions should aim for the best overall benefit to the people of the world in terms of quality of life (in general they should be the most cost-effective options, but should also aim to avoid abrupt changes), but that’s a discussion for another day. It would be a shame to waste our resources now on ineffective solutions merely because they are superficially socially or politically attractive.