22nd March 2009

Dr Bruce Felmingham and Ian McMahon from IMC-Link joined Health Minister Lara Giddings and Carers Tasmania CEO Janis McKenna for the launch of the report The Profile of Carers in Tasmania.

The IMC-Link report, commissioned by Carers Tasmania, examines the economic value of Carers Tasmania to the state and will assist the Tasmanian Government to better understand the present and future needs of carers.

“This report is extremely valuable and will help planners and the general community better understand the lives and experiences of carers across the country”, Ms Giddings said.

To view this article on The Mercury website click here

To view a copy of the Carers Report click here

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The plan to establish a public-private partnership to acquire the banks toxic assets has initially received positive responses from the markets. If it is successful then it will represent the end of the financial part of the global financial crisis, with the real economic crisis still to be fully resolved. The quantitative easing now underway in both the UK and the US should do much to address the monetary component that is the third leg of the crisis. The fundamental solution to the real economy is government induced demand, either through infrastructure spending or emissions reduction.

The toxic assets are not the only problem driving the financial crisis. The more fundamental problem is the impact of the fall in the value of toxic assets on the value of bank equity. While toxic assets were illiquid the financial sector lived in the twilight zone, not knowing whether banks were fundamentally sound or not. By putting in place the toxic asset partnerships the government is creating a market to value these assets, thus illuminating the fundamentals of bank solvency. Therefore the toxic asset plan is not an end in itself, but a means to an end, restoring the credibility of the banking sector.

Once transactions are underway, then Treasury Secretary Tim Geithner will need to rapidly undertake the next step in the strategy, the stress tests that determine which banks are fine, which banks need more capital and which banks need to be handed over to the Federal Deposit Insurance Corporation (FDIC) for liquidation.

Part of the problem of the initial bailouts is that they have been fire-fighting, with good money thrown after bad. With the stress tests now viable it is important that the Treasury, Fed and FDIC return to the rigorous assessment of public benefit that stops corporate welfare. The least-cost rules of the FDI Act were relaxed in the name of systemic-risk, but the relaxation now represents the greatest risk, by reducing public trust in the wake of the AIG scandal and allowing cash-sucking zombie corps to lurch across the financial landscape. The involvement of the Federal Reserve in lending to the real economy is now so broad that no institution should be considered too big to fail. This is the stick that should pressure banks to clean up their balance sheets and sell assets to the toxic asset partnerships, with the carrot being that with federal support, toxic asset partnerships will be willing to pay slightly more than vultures.

Now for the kitchen sink. There has been some criticism of the Obama Administration for a budget that focuses on too many fronts, particularly with the inclusion of health care, infrastructure and addressing climate change. Critics believe that the problem is the banking sector and that the solution lies in the banking sector and that should be the administration’s focus. Warren Buffets call is a cry in triplicate ‘win the economic war’. The war analogy is perhaps apt, because you can’t win a war by just investing in the Manhattan project or strategically bombing Germany. You have to fight on every front, with every means at your disposal, and after the fighting is stopped, fully fund a Marshall Plan to turn your enemies into friends. This is the kitchen sink, and the Obama Administrations strategy must be seen as fighting to save the financial sector today, the real economy tomorrow and America’s economic competitiveness for the next decade, simultaneously. Without attacking each element, success can turn to failure with every bump or bomb in the road. To follow the military analogy, this is what was happening in Iraq and is now happening in Afghanistan. To address the global financial crisis there must be a strategy for the real economy so that a recovered banking sector has a profitable economy to support. Otherwise unemployment will drive up defaults, asset values will continue to fall and the toxic asset plan will fail.

Infrastructure and addressing climate change create a platform for both public and private investment spending that creates jobs and increases future prosperity. Health care reform should improve the long-run competitiveness of Americal corporations like General Motors that were hamstrung by legacy health and pension costs not borne by their competitors. This spending can and should be supported by the Fed opening up the printing press, so that less of the burden falls on future taxpayers and instead falls on the foreign investors that helped fund the bubble. The increased liquidity and fall in the value of the dollar helps support US exports and spreads the costs around the world. The inflation then reduces the real burden of debt and encourages a return to consumption.

The toxic asset partnerships or TAPs are just one part of the kitchen sink.

The emissions trading scheme is effectively a grand experiment in identifying the price of international emissions reductions. It won’t necessarily reduce emissions in Australia, but it has the capacity to do so, so what should be the bottom line in negotiations?

Now that the Liberals have effectively dealt themselves out of the game it is up to the Green and other independent Senators. The current legislation won’t necessarily reduce Australia’s emissions, but it does give the Minister, and then the Climate Change Regulatory Authority the power to do so.

There are lots of questions for the Senate inquiry on implementation issues not specified in the legislation. Two questions are fundamental. Firstly who can buy permits at auction and secondly what are the conditions on the acceptance of international units, and at what point will the Minister step in to avoid the system becoming ’swamped’.

At present, Australia’s legislation is about fitting Australia into a global system and then letting the system sort out where emissions reductions should take place. The proposed structure for protecting emissions intensive exporters, while imperfect, is probably workable. The timetable for special assistance for coal is short enough to support investment in the best medium-term solution, a dash for gas electricity generation on Australia’s eastern sea board based on Queensland’s ample coal seam methane reserves. While no-one likes rewarding polluters, some transition arrangements are necessary, for coal power in the short-term, and for exporters until there is a global agreement to prevent carbon leakage.

What about all those well-meaning households investing in photovoltaic systems? A big concern of GetUp and others is corporate Australia free-riding on Australian households’ voluntary emissions reductions. When households reduce their carbon foot print, polluters can simply increase their emissions.

Actually, what the emissions trading scheme is trying to communicate is that photovoltaics are not a particularly economically efficient way of reducing emissions. You can now by a 1KW system for around $4000 after rebates. But that might only save 0.9-1.4 tonnes of carbon dioxide each year, because the daytime operation of solar electricity competes more with gas generation than coal. After taking into account the value of the power generated, one is effectively paying $170 for every tonne of CO2 that is offset. That is four times the early phase price cap. It might be much cheaper and effective to simply buy emissions permits from the market.

The key test is not whether a well-meaning investment in reducing household emissions has the effect of lowering overall emissions or the price, but whether households can effectively improve the emissions target by purchasing emissions themselves or through a charity. If charities are enabled to participate as bidders in the auction system then we have the potential for an efficient outcome and a significant reduction in emissions, almost irrespective of the 5% reduction target. It works like this. Currently, if the average Australian emits 25 tonnes of Carbon dioxide equivalent each year, then the power companies and petrol refineries will be required to buy 25 tonnes worth of emissions permits from the auction system. The average person can reduce their emissions by purchasing green power, which should reduce the number of permits that the power company has to buy. This may then allow those permits to be used by another emitter, resulting in no net reduction.

Alternatively the person could make a donation to a Charity that was willing and able to purchase emissions units from the trading scheme. It simply sits on these permits as a tangible contribution to saving the Great Barrier Reef, Murray-Darling Basin or other likely climate change victim. Because these permits are simply purchased and taken off the market, then the available permits for polluters falls and the price rises. If the price of permits was $10/tonne then by spending $250 a person would reduce emissions around Australia by 25 tonnes, offsetting their entire emissions without giving a polluter a free-ride.

If enough Australians felt that it was really important that we hit a 90% reduction or 85% reduction by 2020 then, assuming that non-emitters can acquire permits, it is simply a question of how much they are willing to spend.

This is highly efficient, as it should directly demonstrate the willingness to pay to reduce emissions, with the government then using the additional auction revenue to compensate other households and businesses hit by the price rises. The big question is whether the CPRS regulations will allow individuals, charities and other organisation to voluntarily up the pace of emissions reductions. If it does, than having a framework to reduce emissions is much better than no framework at all.

The international financial crisis is an interesting time to be encouraging the globalisation of the carbon market.

On the one hand, Mr Rudd and Ms Wong are concerned at the lack of international agreement, yet on the other they are willing to trade emissions with uncapped countries. This is the real zero-gain game; notional emissions reductions in developing countries allow developed countries to continue emitting. Developing countries are uncapped, so global emissions continue to grow, effectively unchecked. We become more economically efficient in our emissions, but unfortunately, efficiency won’t save the planet.

There is an open question of foreign emissions from developing countries flooding the Australian market. If it happens then there are mechanisms in the legislation to stop those emissions being tradable, but can we trust Labor to activate them? We want Indonesia and Papua New Guinea to stop destroying their forests, but do we want saving those forests to enable more coal to be burnt in Australia?

One solution would be a price floor that protected Australian investments in abatement and created a clear signal for when the rules on foreign reductions would be implemented. Another would be for the Australian government to support forest protection by buying such permits, but without these permits then becoming part of the Australian scheme and perhaps bridging the gap between 95% and 85% target ranges. An annual allocation of $500 million would be a clear expression of Australia’s bona fides and support an international agreement.

Ultimately the question comes down to how much Australians are willing to spend, not just locally, but globally, to save the planet.