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Nov 3, 2009

Revealed: The high cost of the CPRS

Yesterday’s MYEFO figures reveal in clear terms just what a policy disaster the current version of the CPRS is. It also gives the lie to the absurd line from ETS opponents that the CPRS is a giant tax.


Yesterday’s MYEFO figures reveal in clear terms just what a policy disaster the current version of the CPRS is.

How the government started with the basic principles of an emissions trading scheme and ended up with this car wreck should become one of the key lessons in policy failure for future generations of politicians and public servants.

It also gives the lie to the absurd line from ETS opponents such as the Nationals that the CPRS is a giant tax.

Sorry chaps, but the numbers show that, far from taking money out of the economy, the CPRS requires a huge Budget subsidy until 2016. Even assuming a generous growth in revenue thereafter, the CPRS won’t break even until 2022.

This is the first time the government has provided a full costing of the CPRS — previously we had only seen the figures to 2012-13. And no wonder they kept them hidden. On launching the most recent version of the scheme — with more assistance and a later, softer start — earlier this year, the government released figures showing the scheme in surplus in its first proper year of operation, 2012-13. According to MYEFO, that has been revised downward by $1 billion, so that in 2012-13, the scheme will require supplementation from the Budget of more than  $300 million. The call on the Budget peaks at $1.6 billion in 2013-14.

Part of the problem lies in the strengthening of the Australian dollar, assumed as a consequence of stronger terms of trade and the appreciation of the Aussie since the Budget. This will reduce the cost of Australian permits, and thus reduce revenue. In 2012-13, MYEFO downgrades forecast CPRS revenue from $13b to $11.5b. There is a lower requirement for compensation for households and businesses, but nowhere enough to offset the fall in revenue.

But some of the problems have been built in right from the start. The fuel excise offset, intended to cancel out the impact of the CPRS on motor vehicle fuel, was devised to blunt Brendan Nelson’s hysterical, wheelchairs-in-Taragos-based campaign on petrol prices at the time of the Green Paper launch last year. More than $2 billion a year will therefore be wasted ensuring petrol prices do not go up by a few cents beyond what they otherwise would be — which will inevitably be across a far greater range than the impact of the CPRS.

And then there’s compensation for trade-exposed industries, which, remarkably, increases over the life of the scheme. In 2012-13, free permits to EITEs account for 28% of revenue. By 2020, they account for nearly 35% of scheme revenue, while compensation to households remains steady. This is despite assistance to EITEs intended to taper off.

This was a scheme that was intended — accepting some transitional costs — to be revenue-neutral. By 2016, it will have cost taxpayers nearly $5 billion. All for a scheme that will oversee a rise in Australia’s carbon emissions, courtesy of permits bought from countries such as PNG and Indonesia, and that assumes continuing, subsidised growth of our most polluting industries.

The few remaining supporters of this scheme outside the government must surely now accept that the CPRS in its current form must not go ahead. It will not drive a transition to a low carbon economy and it will impose a significant burden on taxpayers. Only the removal of the fuel excise offset or a significant reduction in assistance to big polluters can justify the introduction of this monumental stuff-up.


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37 thoughts on “Revealed: The high cost of the CPRS

  1. Kevin Cox

    To reduce greenhouse gas emissions we need investment. We can encourage investment by increasing the price of energy obtained from burning fossil fuel or alternatively we can reduce the financial cost of investing in NEW ways to generate energy or in ways to save energy or in ways to remove ghg from the atmosphere.

    The problem is an investment problem NOT a pricing problem.

    The underlying problem is that financial cost of investment in NEW productive enterprises is at least two to three times the financial cost of buying a similar existing productive enterprise. The reason for this is that you cannot get a loan to invest in a future asset but you can get a loan to buy an existing asset. This means that money for new investments must come from savings or from mortgaging existing assets (which is another form of savings). There are less savings than there are loans and so the demand for savings pushes the price up and so pushes up the financial cost of new investments.

    We can solve the problem by allowing the banks to give zero interest loans for NEW productive assets that reduce ghg emissions where the loans are paid back from the investment returns. To see more details on how this can be done visit http://www.slideshare.net/cscoxk/zero-interest-loans-for-energy-sustainability

    With this approach there will be reduction in energy costs, no drain on the public purse, easy ways to compensate the polluters for the reduction in asset values and a more equitable distribution of the new wealth created from the investments.

    There need be NO losers in this scenario because the approach increases the size of the pie and distributes it ‘fairly”. It will incidently help alleviate the gfc because it increases the money supply without increasing the interest burden.

  2. MichaelT

    If we’re going to do anything, surely a straight carbon tax would be better than this camel.

  3. Graeme Lewis

    Yes – the truth will out!!

    But by now is anybody listening. Certainly Penny and Kev07 stopped listening long ago.

  4. james mcdonald

    Interesting Bernard that you’re starting come to the same conclusion–albeit for diametrically opposed reasons–as those who want no greenhouse bill until after Copenhagen.

    It’s crap. It will still be crap if amended. It always was going to be crap, because it was never written for an Australian audience, it was written to be waved proudly for the other world leaders and make Rudd look like the man of the hour. Rudd just assumed, following the election mandate for greenhouse action, that the same voters would would support anything that looks like a big extravaganza and has “carbon reduction” written on the front cover. The standing ovation was supposed to come from other global leaders.

    But, being Rudd, all he’s got to offer is crap. He sprays his crap with rose perfume, but when the perfume wears off, all anyone can smell is crap.

  5. Roger Clifton

    As our government has failed to provide alternatives to carbon, we must expect that our industry will use international offsets to cheat and that our government intends to condone the traffic.

    Vigilance may be up to the watchers in the street. We need criteria to assess whether an offset is legitimate or not.

    I suggest that to offset an emission into the atmosphere, a valid scheme must guarantee to store the same amount of carbon in a place where none would otherwise have been stored, for a period longer than 1000 years. Can you imagine any place that would qualify? On that basis, you must expect that any proposal for offset is fraudulent, should be checked and called “out” as soon as any industry tries it on.

    Planting of trees and non-clearing of forests don’t meet that criterion. Those trees and forests should not need dirty money to survive. Beware that a large amount of dirty money might corrupt the defenders of trees, forests, orangutans, foreign aid, charities and NGOs.

  6. Altakoi

    Not trying to defend this sorry piece of rubbish, I am also in the carbon tax camp, but when a policy fails so spectacularly in its ostensible goals one has to ask whether it has succeeded in other terms.

    The ETS will, I think, convince many Australians who are not looking too closely that the government is ‘doing something’ without actually requiring any horse-frightening changes to lifestyle. Big Coal will go along quietly because it is getting bajillions of dollars in public money, which many in the public will take as the government having acheived consensus, and the industry might even choke down the hairball and manage begrudging praise. And all those who don’t believe in climate change/AGW etc will get behind it because they know it isn’t going to acheive anything, so thats a good laugh on the lefty greentards (not my terms).
    Its only a failure in terms of outcomes. If there is a lesson, I think it is that we have to demand outcomes from government not policies, not process. Don’t ask them how much they are spending, what they are promising, what the strategic governance framework is or anything else – just ask what the KPIs are for the plan and what happens if they fail to acheive them.

  7. james mcdonald

    Roger: “I suggest that to offset an emission into the atmosphere, a valid scheme must guarantee to store the same amount of carbon in a place where none would otherwise have been stored, for a period longer than 1000 years. Can you imagine any place that would qualify? … Planting of trees and non-clearing of forests don’t meet that criterion.”

    The soil. Not just tree cellulose; terrestrial bacteria, like you get in healthy rich soils. Variations on terra preta (biochar) and similar catalysts can enrich the soil under our feet and increase farm productivity, and incidentally draw down more carbon than emission reduction/geosequestration could hope to achieve. The main bottleneck in Australia is water–not a showstopper, but requires careful management. In the long term, landscape revegetation will tend to increase rainfall.

  8. Kevin Cox

    The book http://www.amazon.com/gp/product/157504112X (much of which can also be found on google books) says that if more farmers adopted mulching, no-till farming, and the use of cover crops and manure, 3,700 million acres worldwide could sequester 1 gigaton per year of CO2, roughly 12 percent of annual global emissions.

    As 3,700 million acres appears to be a small percentage of the total cropland in the world the ability of changing farm practises to reduce levels of ghg is considerable.

  9. MichaelT

    Altakoi, I think you are on to something here. Funny how the most basic aspects of planning & performance monitoring don’t seem to apply to governments.

  10. Scott

    Kevin Cox, no bank is going to invest in new technology for no interest. Maybe Super funds and investment companies might be interested. But new technology is risky. Most would want an interest rate to offset the potential losses (especially when they can invest in Government debt and get a riskfree 3.5%).

    As for the CPRS, I’ve been saying all along it needs to happen but is going to cause no end of grief. And the MYEFO guys haven’t factored in the macroeconomic effects of such a policy on GDP and inflation. There is a real danger of stagflation with this.

  11. Kevin Cox

    Scott you should look more closely at the reference I provided.

    Every bank will want to give zero interest loans if they do not have to make up the money if the loan does not work out. It gives them no risk transaction based income and they can offer loans – as the islamic world does – where the lender pays back more than is lent but not as a fixed annuity paid as interest.

    The current financial system only gives loans secured by existing assets because banks have to make up the money if the loans are not repaid. To make sure they have adequate capital to cover bad loans they have two strategies. One is to make sure they can get deposits (which requires interest payments) and the other is to have a lien against existing assets. If they do not have to make up the money from bad loans then they do not require either of these strategies to give zero interest loans.

    Today the government is guaranteeing the money created as a result of bank loans and so the banks are protected even more than “normal”. What is being suggested is the government continue to guarantee the money (not the loans) but as a quid pro quo remove the need for interest payments on the money for investment in renewables and other ways of reducing ghg and require the borrower to repay the loans from the income generated.

    The bottom line is that good investments pay back more money than is invested and so everyone can win. We need to work out ways so that the extra value created by good investments is divided up in an “equitable” fashion. Of course all this presupposes that the investments will be good and the system will not work unless we can be assured that most investments will be profitable. If you do a few calculations you will find that renewable energy investments are highly profitable if we do not have to include finance charges as we do at the moment so it is pretty easy to ensure good investments.

    You might also take a look at the China economic “miracle” which is what Soros calls state capitalism http://www.ft.com/cms/s/668e074a-bf24-11de-a696-00144feab49a.html. China is continuing to show near 10% growth and it is due to China keeping control of their money supply and investing in infrastructure or ways to increase income – not investing in asset bubbles. China is succeeding because it does not use the antiquated system of money creation that effectively throttles new investment and they do not direct money towards the buying of old assets. How long it will take before the entrenched interests that control existing assets will stop this approach we do not know but it happened in Japan and effectively stopped the Japanese miracle in its tracks.

  12. JamesK

    Rudd knows that spending money can be politically rewarding. Just look what a mere $900 given to practically every voter who is Labor or is likely to swing can do.

    Raise taxes from the entire population and then concentrate the spending on certain targeted voter groups who will forever know what side their bread is buttered. Mind you the percentage of solid citizens willing to contribute to their own health care dwindles. The public system slice of the pie increases and the result is rationing. See Nicola Roxon’s class ministerial career. See Medicare. See emergency trolley corridor waiting lists.

    Copenhagen is a leftist’s wet dream but so far it has only cost Australia over $1 billion before a single piece of legislation is through and nor a single molecule of CO2 imprisoned as a result. But that’s hardly noticeable these days with unwanted pink bats costing $4 billion and school halls costing $13 billion…whoops well maybe a teensy bit more.

    We’ve had rivers of inefficient recycling of taxes with middle class welfare costing an estimated $1.60 for every $1.oo tax raised.
    What will the ratio actually be for this supposed planet saving monstrosity leftist intervention?

    Well apparently according to its erstwhile ‘it is better than nothing proponent’ the future don’t look so rosy now does it?

    Will it change the concentration of CO2 in the atmosphere? Will such a change do anything for the good if such a change were possible?

    Or will it make lawyers, brokers, merchant bankers, accountancy consultants, tax consultants soothsayers and anyone claiming to study the negative possible effects of climate change on their area of interest a sh1tload of taxpayer monies whilst choking the economy?

    Will it continue the liberal progressives process of dehumanising free people and reducing them to sheeple?

    Have no fear Crikey readers that term only applies to the little people……….not to ‘We The Enlightened’ who must minimise the baser instincts.

  13. John james

    “.Gives the lie ..that CPRS is a huge tax…….far from taking money out of the economy.. is a huge subsidy”.
    Spoken like a true socialist Bernard. Governments spend money, its true, but whose money, Bernard, whose money?
    “Governments generate wealth” you’ll be telling us next.
    Give me a break, Bernard, and get your hands out of my pocket!

  14. james mcdonald

    (Edit) It’s going to be about as useful as GroceryWatch or congestion taxes on road-dependent commuters.

    The fact that carbon credits will be a finite resource means they will get seriously scalped in a speculators’ market, a bit like Australian residential land. They won’t be like computer chips where you can always bring more factories online if demand goes up.

    Better to just agree targets, tax emissions, and provide tax rebates for mitigation measures to be measured by an international standard.

    Here’s the discussion paper on on terrestrial sequestration for Australia: http://www.wentworthgroup.org/docs/1270%20Optimising_Terrestial_Carbon-9b1.pdf

    By the way I wrote to the authors asking if these measures would increase rainfall long term. The answer came back that a number of factors will affect rainfall trends but the proposed measures would be positive drivers in the long term.

  15. MichaelT

    John James is being unfair to Bernard. Bernard’s whole point is that “By 2016, it [the CPRS] will have cost taxpayers nearly $5 billion.” So he is in fact objecting to the government putting its hands into our pocket, especially for a scheme that will not work.

    So his contribution is quite acute, and he is on the side of the taxpayers, I think!

  16. Jillian Blackall

    I agree with Altakoi that the ETS will convince many Australians who are not looking too closely that the government is ‘doing something’ without actually requiring any horse-frightening changes to lifestyle. That would be the aim of it from the government’s perspective.

    That and, as James McDonald said, it was never written for an Australian audience, it was written to be waved proudly for the other world leaders and make Rudd look like the man of the hour.

    In relation Bernard’s comment that “far from taking money out of the economy, the CPRS requires a huge Budget subsidy until 2016” – and then the response from John James – the subsidy could come from cutting spending in other areas, rather than increasing taxes – or heaven forbid, more borrowing. It would be interesting to speculate which of these options will be chosen.

  17. Scott

    Kevin, couple of flaws in your plan.

    Firstly, banks don’t create and destroy money. When a punter gets a loan, the bank has to find the money from somewhere, it can’t just type a number into a computer. Banks obtain money from a few sources (Deposits of savers, overseas investment and even the Reserve bank) Now all these sources invest in bank bonds, wanting a return. The bank has to pay these guys for the use of their money. So a bank is never going to lend money without making a profit on the difference between their costs of finance and their return from their funds. A bank that did would get APRA on their case pretty quick.

    P.S For future reference, only the Reserve Bank can control the money supply. It does this mainly by selling or buying foreign currency and government bonds.

    Secondly, what you are proposing is less a zero interest loan and more of a zero coupon bond. A bond is bought in year 1 and then sold in year 5 at a price that matches the future value of the bond (determined by interest rates and yield). The difference between buying price and selling price is the yield and is a substitute for the interest. Established financial instrument. Problem is that such a bond to invest in a startup business to build a plant would be rated at “junk” status as the default risk would be huge (especially if the bond was 3 years or more). The Yield would have to be huge for even a hedge fund to be interested. No bank would touch it.

    Thirdly, the Government guaranteeing bank funds is not a good option long term. it was bought in recently due to the Financial Crisis, but is starting to get wound back for reasons that it encourages risk taking by financial institutions (never a good thing). The government can’t guarantee it for ever.

    As for China, the reason it is growing so quickly is that it has a huge population, it is investing in infrastructure (but not all of it “green”), and it is starting to improve technology (the three fundamentals in the long run economic growth equation). However China is also a developing country. Australia, even if it invested huge amounts in infrastrucuture would grow at a much slower rate.

  18. Roger Clifton

    Overwhelmingly, government investment should be in the provision of alternatives to carbon fuels. It can only be insincere to press industry to move away from carbon if they have nowhere to get their energy. Instead industry resorts to the use of “offsets”, a conman’s trick to conceal the total amount of carbon released.

    Yes, we need expenditure on infrastructure. However that infrastructure should have already started, with vast fields of solar collectors, both thermal and PV, a distribution network of compressed hydrogen for vehicles and a wave of nuclear reactors across the country on the sites of existing coal and gas power stations.

    Above, both James McDonald and Kevin Cox attempted to identify legitimate offsets. However neither scenario conceals carbon where it would not otherwise be concealed, for more than 1000 years. Sure, some charcoal or lignin remains after thousands of years, but it is a tiny minority of that which has passed through the soil in that time. BTW – 3700M acres is about the total of the world’s arable soil, and 1 Gt/a of CO2 (even if sequestered permanently) is less than 5 % of current emissions.

  19. Altakoi

    Re Scott
    I don’t want to get in the middle of this interesting exchange, but if one thing peaves me more than free carbon permits its the amount of free money polluting the system.

    Banks do create money every time they issue a loan. When I buy something on a credit card money magically appears in the account of the person I payed, and that same amount of money then gets repaid to the bank by me + interest. Where there was no money, there is now two lots of the purchase price in circulation.

    The only thing which would stop this would be if banks had to have all the money they lent. But they actually only have a fraction of what they lend, and so are pretty free to expand credit. Even more so if they can sell their debts – all those CDOs which were sold to punters around the world – and clear their books to take on new ones.

    If this sounds illegal, immoral and wrong, I offer one simple test. Find someone with money on deposit with a bank who has been told “sorry, this money is currently unavailable for you to spend because we have lent it to X for their house. Get back to us in 30 years”.

    Secondly, our banks get a large percentage of their money from international capital markets. The RBA has no control over this supply of money. It also as no control over whether
    foreigners pump huge amounts of US dollars into our system by buying Australian dollars.

    Not sure how that all relates to dirt and such, but I just wanted to say how much the banks are at the very centre of selling the financial system down the drain.

  20. Scott

    Hi Altakoi
    While it might appear that there is more money in the system, this isn’t really the case. There are more transactions, but the amount of dosh remains the same.
    Think of the three parties as jam jars.
    When the bank pays the vendor, it takes one teaspoon from its jam jar and puts it in the Vendors jam jar. The Vendor is better off by one teaspoon. Then when I pay the bank, I take one teaspoon and a little bit more from my jam jar and put it in the banks jam jar. I am worse off by one teaspoon and a bit, the bank is better off by a bit and the vendor is better off by 1 teaspoon. But no new jam has been created.
    You are right however about the banks not needing all the funds they lend. This is because to a bank, loans are assets (its the deposits that are the liabilities). However they do need 8% of net assets in equity however according to the BASEL 2 standards which should be enough to handle any future liabilities. And they can use the short term money market and the Reserve to top up any shortfalls every day…(hence why they never tell you to bugger off when you want your money)
    Nothing wrong with the concept of the CDO’s by the way. It was just that the risk wasn’t correctly priced into the assets (especially as they were based on US housing).
    As for the international capital markets, you are right that the Reserve can’t stop people investing in Australia (well they can a little bit through monetary policy and currency manipulation). However they constantly monitor the money supply and if they notice overseas inbound capital flows that could affect the money supply, they usually start selling bonds to conteract it (by selling bonds, they remove funds from the money supply…banks buy them with AUS currency)

  21. james mcdonald

    Roger, didn’t you just move the goal post a little bit? Last night you asked for a solution that would “guarantee to store the same amount of carbon in a place where none would otherwise have been stored, for a period longer than 1000 years” and now changed “store” to “conceal”.

    Terrestrial sequestration does not conceal anything; but if effective it can drive a positive-feedbackup process leading to in increase in carbon in and on the soil. The fact that carbon turnover continues is necessary, but also means there is no “concealing” going on.

    Anyone not familiar with the positive-feedback terra preta process might really find it interesting. According to the Wentworth Group of Concerned Scientists in the report I linked to above:

    At a global scale, a 15% increase in the world’s terrestrial carbon stock would remove the equivalent of all the carbon pollution emitted from fossil fuels since the beginning of the industrial revolution …

    CSIRO estimate that the Australian landscape has the biophysical potential to store an additional 1,000 million tonnes of CO2e in soils and vegetation for each year of the next 40 years.

    If Australia were to capture just 15% of this biophysical capacity, it would offset the equivalent of 25% of Australia’s current annual greenhouse emissions for the next 40 years.

  22. Altakoi

    Hi Scott,
    I would like to live in the Jam Jar economy, because it would make the currency and asset prices a lot more stable.

    But this issue, as we have agreed, is that the banks only hold a fraction of what they lend. If we assume they are really conservative and keep 20% then,

    If I deposit $100, the bank keeps $20 and lends $80. That $80 gets spent on something and the business who benefit put it in their bank.

    These banks keep $16 and lend $64. This $64 gets spent on something, deposited and relent.

    And so, on.

    If you calculate that out until there is no money left to lend, my $100 eventually secures about $480 dollars in loans. Lets assume the news is good, and they all get repaid. Then, hey presto, there are $480 dollars on deposit created through nothing else but the repeated lending of my original $100.

    So it doesn’t just appear there is more money in the system.

    The problem with CDOs is that, having sold debt off their books, the banks can reset this whole sorry machine and start lending again. Eventually they have too much debt to be balanced by their assets, so they sell this as CDOs and reset the machine again. Its nothing to do with the CDOs, or their risks, is about the banks not having to track their money creation.

  23. Roger Clifton

    Have some compassion for CSIRO scientists. Along with BOM scientists, they have been silenced from pointing out what our government should be doing to avoid disaster. Although we can blame the Howard government for that, the Rudd government does not seem to have restored them to the status of experts whose advice we should be heeding.

    They are now funded on the basis that if they do discreetly achieve some world-class science, their public face must only be associated with the pipedreams of industry. Such pipedreams include environmental obscenities such as underground gasification, biosequestration, and geosequestration.

    Consequently, respected CSIRO scientists are funded to check what can and cannot be done, and only announce what can be done. If they say that it is possible to balance/park/store/conceal the entire world’s CO2 emissions in soil biomass, they can only leave it to their readers to notice that it is not going to stay down there.

    There is currently 1.6 kg of anthropogenic CO2 above every square metre of land, sea and ice, increasing. If 3% of that area is the soil which is going to absorb that, then we are invited to believe that up to 50 kg/m2 of extra biomass is to appear in the soil column. Since it wasn’t going to be there without this generation’s ingenuity, we must ask derisively, how is it going to be maintained there for the next 30+ generations?

  24. james mcdonald

    Be that as it may, have you looked at the Wentworth Group proposal I linked to? What do you think of it?

  25. Scott

    Yeah but remember when all the loans are paid back, $480 will also be removed from the bank accounts of those repaying the loans. So the net effect on the money supply will be $0. Economic Activity will increase though (as there are more transactions)

    What you are describing with your $480 is the multiplier effect, which is more about how spending in the economy can stimulate economic growth (as people spend more on goods, businesses will then hire people who will spend etc..). Its a transaction based thing though…There is a variable called the “propensity to consume” which details how much a population will spend given $1 of income. This can then be used to calculate the multiplier. This is a positive thing..Means economic growth can increase greatly as a result of small government/private sector spending or investment. Has no affect on the money supply though (but is used by governments to calculate the effect of fiscal policy)

    Banks have to track their assets (the loans) and liabilities (deposits) as they constantly need to prove to APRA that they are solvent. APRA is pretty diligent in keeping track of what is going on (especially after the HIH debacle). As mentioned before, the Reserve bank tracks the money supply to ensure this is kept under control.

    And there is nothing wrong with the CDO process you described. Packaging up debt securities is fine (as long as investors are being paid to take the risk). The CDO’s should have had a higher risk premium attached to them in regards to yields. In fact lenders like RAMS and Aussie (As they aren’t banks, they don’t have access to deposits), used RMBS’s quite successfully to write loans, package up the debt and then write more loans. They didn’t fair too well when the bottom dropped out of the RMBS market however and got taken over by the majors. But its the consumers that suffer (as noone is there to compete with the big 4 and keep margins on mortage interest rates low)

  26. Kevin Cox


    The banks when they give a loan write a promissory note saying that the bearer can have x dollars when they want it. In return the person getting the loan promises to repay the loan at some time in the future and if they don’t they will forfeit some asset against which the loan is secured. There are some institutions that are allowed to write out new promissory notes in the government’s name rather than in the banks name. That is, the government has outsourced the creation of its money (promissory note) to banks. In return for this privilege the government requires the bank to repay the promissory note if the loan defaults. To make sure the banks do not create too much money on the government’s behalf and that the loans get repaid the banks have to obey a set of rules and regulations. One rule is that they shall have “capital adequacy” so that there are enough things on mortgage and in reserves to cover all the loans. The other is that they shall have 8% in “liquid assets” to cover deposit withdrawals. When the loan is repaid the “promissory note” is destroyed – that is the entry the bank has made in the borrower’s account is written off. The fact that the money is “covered” by liens on other assets is irrelevant to the fact that the bank has created money even if only for a short time while the loan is outstanding. The banks borrow money to make sure they cover their capital adequacy and fractional reserve regulations not to lend – quite different things. The Reserve Bank only creates a small proportion of the increase in the money supply.

    We can change the regulations so that the bank can make zero interest loans but NOT be required to pay back the money if the loan defaults. The proviso is that the loan be made in a way that makes it highly probable that the loan would be repaid. What is important in the proposal is that the way the loans are made make it highly probable that the loans will be repaid. It requires a change in the capital adequacy and liquid assets regulations BUT it can be done and it will work – if the loans are repaid.

    As you say the government is already guaranteeing the money created by the banks. Of course they are winding it back because it encourages risk taking on the part of the banks. Please take a good look at the restrictions on zero interest loans and you will see that it is NOT the banks taking on the risk but it is the borrowers taking on the risk under very constrained circumstances in a way that pretty well guarantees the loan will be repaid.

    With respect to your statements about China the size of the population has nothing to do with the percentage growth rate. It is – as you say – investing in infrastructure and it is spending money on ways to increase output. Australia would grow at the same percentage rate if we invested the same proportion of money in ways to increase output instead of simply spending money pushing up the price of existing assets and spending a high proportion of money on consumer goods that do not increase output. Housing bubbles and consumption items do not increase long term wealth.

  27. Kevin Cox


    10% of the world’s land surface is arable land or 13,500 million acres. 3,700 million acres is 27% of that amount or about 3% of the total land surface. The point about putting carbon into soil is it accumulates. Soil carbon is part of the solution and it can start to reduce ghg levels – provided we invest enough money to make it happen.

    Take a look at the presentation I mentioned above http://www.slideshare.net/cscoxk/zero-interest-loans-for-energy-sustainability on how we can get enough investment to get to zero net emissions and beyond by a small change in the financial system.

    The point I am trying to make is that we can reverse the levels of ghg concentrations and be wealthier in the process. Most of us believe we need to have a sustainable society and it is achievable.

  28. james mcdonald

    Roger: “we are invited to believe that up to 50 kg/m2 of extra biomass is to appear in the soil column. Since it wasn’t going to be there without this generation’s ingenuity, we must ask derisively, how is it going to be maintained there for the next 30+ generations?”

    According to the theory, a positive-feedback process transforms the arid landscape into a less arid ecosystem, growing more agricultural yield and eventually generating more rainfall. One variation of this practice already seems to have increased the biomass in parts of the Amazon basin.

    The carbon atoms don’t stay there; they cycle through the biosphere, but the increased terrestrial carbon mass does have a net permanent affect on the atmosphic carbon budget.

    Anyway, at least read the report. Asking me questions beyond what’s in it is not much use, I’m not a scientist. I did write to them with a question of my own (about rainfall); I received a prompt and detailed reply.

  29. Roger Clifton

    Kevin Cox says that:
    >The point about putting carbon into soil is it accumulates

    Not for long enough!

    When organic matter accumulates in the soil, it becomes a food resource that attracts new species of consumers, which brings the organic content back down to some new quasi-equilibrium. In the case where the oxygen supply is limited, sulphate reducing organisms take over. Then the accumulation of reducing matter becomes increasingly replaced with sulphide, and the soil is poisoned.

    I am afraid that the scheme will be touted to the barons of industry as an “offset” for carbon emissions, giving them more right to pollute. Don’t believe it – it would fail the most essential requirement, that the carbon must be sequestered – where nature would not have done so – for thousands of years.

    He also quotes the desperately important target of “zero net emissions and beyond”. Having tugged at our heartstrings, the sentence continues and refers to “a small change in the financial system”.

    Is this a con? We are already facing a raft of schemes requiring subsidies, feed-in tariffs, etc, paid from carbon-based industry, all promising to rescue us from their paymaster. If they really were viable, they would be able to compete with carbon at some estimatable level of carbon tax. Yet we do not hear many of them demanding any carbon tax, just more subsidies.

    Out with “offsets”. In with a Carbon Tax and let the market sort them out!

  30. Kevin Cox


    It is not a con when I say “a small change to the financial system”. The small change in the financial system is to make the financial cost of building a new productive asset that reduces ghg emissions cheaper than the financial cost of buying an old asset like a power station. If you would care to take a look at the presentation you will find it is a market based system and much more practical and cost effective than any linear pricing mechanism like carbon taxes. This is NOT a subsidy but it is an investment approach rather than a pricing approach. Investments compound. Prices are one hit wonders.

    Carbon taxes are not enough to solve the problem. Happy to have them but do a few calculations and you will soon see that we will have to increase the price of energy at least two times to encourage investment in renewables. Increasing prices is a linear effect. We need to get positive feedback into the system. Lowering the cost of investment through financial means introduces a compounding mechanism that will rapidly lead to lower energy costs.

    You have the same misconception with respect to carbon in the soil. SOME of the carbon remains and is not recycled. It accumulates and builds on previous years. Compounding solutions are needed for compounding problems (last years ghg emissions are still there this year).

    By all means have emissions permits and/or carbon taxes but do not think they will solve the problem.

  31. james mcdonald

    Roger the terra preta anthropogenically charcoal-enriched soils in strips of the Amazon basin are believed to have been sequestering or maintaining carbon levels since the middle of first millenium BC. The effect has been stable.

    The challenge is to generalise this method to other areas and conditions, and to design an economically efficient market for doing so. Economic aspects will be helped by the fact that you can grow more food as a corollary, and the world’s population is hurtling towards a global famine. I’m sorry if this unwelcome intrusion of hope rains on the parade of geosequestration being our only chance, but there it is.

  32. james mcdonald

    Further interesting material on sequestering carbon in Australian soil: http://soilcarbonmyths.blogspot.com/

  33. Kevin Cox

    James McDonald

    Thanks for the good references. Soil carbon particular of the “charcoal” variety is going to be an important part of the solution.

    We know that adding carbon in its various forms improves soils and hence increases productivity. We also know it takes investment to increase soil carbon. Let us give zero interest loans with a repayment period related to the average length of time significant amounts of carbon remain in the soil.

    For investments that lead to charcoal we could require the money to be paid back in say 100 years. For other investments where the carbon stayed for an average of 10 years we could require the money to be paid back in 10 years.

    Farmers will not bother to invest unless it increases their production and if there is no interest on the loan then farmers will choose the method that gives the greatest total return.

    This approach is much simpler than putting a price on carbon and will lead to investments that increase wealth as well as remove carbon.

    One of the problems with carbon pricing is that people will use practises that remove carbon and not necessarily increase production. A good example is how to solve the problem of people planting trees then burning them down and planting them again which becomes a temptation when you put a price on carbon.

    Using an investment approach – which IS NOT a subsidy – but is a different way of doing the accounting works better than trying to manipulate investment through prices – which is a price subsidy.

    We have become slaves to the methodology of cost benefit analysis where getting early returns is calculated as being worth more than later returns. The accounting methodology we use for evaluating projects means that with a return on investment of say 20%, which is typically used for investment decisions, we will invest in a project that returns $1000 in the first year versus a project that returns $5,000 in ten years time.

    Putting a time value on money means that we bias our investments towards the short term and leads inevitably to higher consumption rather than to long term sustainability and wealth creation.

    It is sad that an accounting practice (discounted cash flow) has lead to this perverse result – but it is true. One way to fix it is to take away the time value of money when making investment decisions and that means giving zero interest loans paid back from earnings on the investments to put it into practise.

    We now have a different problem and that is how do we restrict the amount of new investments. We can do this by putting a limit on the total amount of money we allow to be invested for any particular purpose and we allow the right to invest to be a saleable commodity. If the price is high we need to increase the amount. If the price is low we are probably trying to invest too much. However, if the price is low then people will not bother investing in the area and so it will self correct. This is how markets are meant to work and the approach will turn money markets into stable functioning market places compared to the current system where money markets are unstable and unpredictable.

  34. james mcdonald

    Hi Kevin,

    I confess I’m unable to load the presentation you linked to on my browser, it just keeps “loading” for hours. I’ve been trying to follow the discussion between you and Scott. I suppose I’d need to see an investment bank opinion on whether it would work. But I’d still be wary of inventing a whole new kind of financial instrument and accounting standard to measure its worth, because the ones we already have have taken years to iron out the wrinkles.

    I can see the problems you describe with the currently proposed methods. The investments required will be too big for the traditional tax deduction or rebate to enable them. The production return will too slow and unpredictable to base interest repayments on them.

    Simply paying cash on the carbon-credits market also, as you say, potentially leads to cheating such as tree-replanting. Another way to deal with this type of cheating is to create an army of scientific carbon surveyors. Assess credits based on net increases or decreases in the carbon survey of a piece of land over the last ten years (or sooner if the landowner wants to pay an early survey fee).

    Sounds expensive. But would it be more expensive than the scalpers’ market in carbon credits?

    That’s one of the things that concern me. In a world with a finite number of carbon credits allowed to exist, those credits will become like rock-concert tickets or blocks of land in Pyrmont. Supporters of the trading scheme are obsessed with “determining the right price” for carbon credits, but they ignore the potential distortion effect on that price when an operator with lots of cash simply buys up all the available credits, exerting an overwhelming effect on the scarcity value, and then becomes a monopoly broker.

  35. Scott

    Kevin, no offence mate, but if you are going to propose a change to the financial system, you might want to learn a little bit more about how the current system works. Some of your comments listed above (I especially enjoyed the comment about doing away with the time value of money by the way; it’s only the cornerstone of the financial system), will get you laughed out of the room in any serious finance or economics discussion (but since we are on a blog, go for your life).

  36. Kevin Cox


    No offense taken and I am quite used to gratuitous comments about my parentage etc. and I truly welcome brickbats as that is part of the evolution of ideas:) Better to have comments than the normal reaction which is polite non comment. Many people think – “this cannot be right – but it sounds plausible. I had better keep quiet just in case he is right”.

    I understand exactly how the current system works and I have done more cost benefit analyses based around discounted cash flow than you have had hot breakfasts.

    The difficulty with putting up radical ideas is that people take what you are saying “to the extreme”. I am NOT saying we get rid of the time value of money for most investments. I am saying that we do it where we want to get investments in areas of the economy where we know we want to invest but the existing system does not accommodate it – such as investments in ways to reduce ghg emissions – or in ways to prick asset bubbles before they get out of control.

    Of course I am likely to get laughed out of “serious economic” discussions and I put up these blogs so that I am prepared for those occasions and to help me get material for the monograph “A solution to the Tragedy of the Commons”. As far as I can see your argument against getting rid of the time value of money for investment is based on the fact that that is the way we do it and so it must be right.

    I might remind you that Islamic banking and most finance up until recent times was not based on discounted cash flows as the accounting procedure to evaluate the best investment. Discounting is an artefact to try to work out what is the best investment from a selection of choices where it is assumed that the extra value created from the investments (the profits) can be reinvested at the same return.

    I am saying that this model is not the appropriate model if you want sustainable investments. For sustainability time of return is not the critical factor but total value returned from a given investment is the critical variable. If we want sustainability (getting more from finite resources) it is the total return that is the variable we should optimise.

  37. Kevin Cox

    James send me an email to cscoxk at gmail.com and I will figure out a way to get the presentation to you. It is important to see the graphs as they make the problem and the solution obvious.

    I am taking the proposal to the commercial banks – not investment banks and part of this exercise is to get the arguments straight. The system can be made to be very profitable for the banks as they will be able to lend money with no risk and take their regular “clip” on the way through.

    It is important to realise I am NOT inventing anything new – only a different set of rules to ensure loans are repaid. That is why I have gone the route of zero interest loans. It fits in very easily with the existing system as it is variation on existing rules.

    Economic strategies based on manipulation of prices are fundamentally flawed as they come from a misunderstanding of how markets work. True markets use price as the “governor” in the terms of James Watt’s steam engine. That is it is something that stabilises the speed or in the case of economics it stabilises supply to demand. James Watt did not use the governor to control the speed as that does not work but leads to instability. In the same way economists who try to use the governor (or prices) to control supply and demand will only lead to instability. Any price manipulation system like carbon credits, emissions trading etc. simply cannot be reliably used to control the input and output of the economic system. While it might appear attractive in concept in practise it just does not work.

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