In stating my view that the former is more likely than the later I am making a guess about how both the economics and the politics will pan out. Obviously I don’t think I’m mistaken (otherwise I wouldn’t take the position I do) but I’ll freely admit that the chance that I’m mistaken on this issue is not insignificant. To put it another way, you might be right.

I am sorry, but I think you are mistaken. Ramping an ETS over time, in the absence of competitor countries having a similarly ramped up “real”* carbon price, will increase unemployment, particularly in sectors using larger amounts of energy such as manufacturing (and not just big EITE manufacturers either, despite what the government would have us believe.) In the case of such a manufacturing business, if it finds that the cost of the energy/transport inputs required to make a certain product go up due to the imposition of a carbon price, then surely this makes it harder for this product to compete with the same product imported from a country without a carbon price? If this “loss of market” happens to too many of the company’s products, they can try to reduce non-labour costs but eventually will need to reduce production and costs by laying-off workers. Maybe ultimately the business will have to close.

The same process happens with the cost of labour and other inputs, which is, of course, why we import so much of the manufactured product that we need. But why impose yet another new cost “inequity” that makes it yet harder to compete, unless it can be shown by cost-benefit and risk analysis that this is the best option? (And I haven’t seen too much of that sort of stuff from Stern, Garnaut, the Government or Treasury.) Note also that it won’t significantly matter how fast or slow you ramp the carbon price up, the cost increase will hit you on the “competition” nerve sooner or later. It’s not as though businesses operate with large amounts of unnecessary costs that they can reduce as the energy price rises. Granted, there may be a slight lessening of energy consumption due to efficiency gains, but in general this would be minimal. Many manufacturing processes need energy, heat and transport and the amount that is required is governed by the basic chemistry, thermodynamics and logistics of what they do.

I have spent 30 years or so managing or as a Director in a variety of manufacturing businesses, and have found that the hardest job is getting costs down. When margins/sales fall to a certain point, and you simply can’t find any more costs to slash, you simply have to lay people off to survive. Australia’s regulated labour situation usually doesn’t allow for wage reductions in the manufacturing sector (and little significant depression), wages are set by awards and the IRC. I don’t see the IRC and the unions accepting no wage rises just because we bring in a carbon price.

For an interesting report on the impact of carbon trading on Australian Manufacturers, go to http://www.acci.asn.au/text_files/submissions/2009/Securing%20SMEs%20in%20Australia%27s%20CPRS%20(%20FINAL%20Report).pdf

* By “real” carbon price I mean one that has the amount and price of free permits deducted.

they’re going to slow down the GDP potential which has been accelerating at a faster clip over the last 40 years.

My interest is in what comes next. It’s inevitable there will be depressed economic growth and increased unemployment. There will also be a debate about whether countries like China, India and Brazil should be forced to curtail their growth by adopting a similar system. Carbon-based protectionism is fairly likely, resulting in more depressed economic growth.

Australia could ultimately do very poorly out of it. The countries that switch to nuclear energy will have a comparative advantage they won’t want to lose, so there’ll be reluctance to give ground on coal.

Where that will all lead in political terms is anyone’s guess. You would logically expect any government that caused such a mess to lose public support at some stage, but Spain has 17% unemployment and the socialists are still in government. The peasants don’t inevitably start revolting.

It’s the most appalling thing I’ve seen devised for a while now.