Insight

What would you choose between having a handful of party balloons or an early diagnosis of a shadow on your brain?

Would you rather speak in a squeaky voice for a party trick or have a better understanding of the fundamental nature of the universe?

Both are no brainer choices, assuming sobriety.

Yet as a community we have, apparently, been making exactly these choices without knowing it, and predominantly choosing the wrong way.

Helium is not nearly the abundant gas that our collective squandering of it would suggest. In short, helium is a by-product of petroleum exploration. In the 1920s the US Government concluded that air power would be a decisive factor in future wars. It made the less prescient call that airships would be key to this, and stockpiled helium as a strategic resource. 

By the 1970s, it decided that there was enough evidence to suggest that airships probably wouldn’t be the weapons of the future, and began to dump its presumably massive stockpile of helium onto world markets, causing the price to collapse and party balloons to rise.

Sadly, we have recently moved from feast to famine and helium, which is a necessary ingredient in scientific applications from MRI scans to research into the fundamental structure of atoms, is now becoming hard to come by for researchers, even causing expensive experiments to be cancelled.

The new economics have seemingly not yet flowed through to the local party shop, probably because helium is not core business to them but a marginal cost that supports other sales and can therefore be largely absorbed.

The helium story serves to illustrate a couple of broader pints, however. Firstly, it shows how very effective price signals are in shaping the individual economic choices we make every day, for good or bad. These choices can profoundly shape the very basis of a national economy by shifting where investment is made.

Secondly, it shows the wisdom of seeking to use those signals to align consumer behaviour with public policy objectives.

In the case of helium, thoughtless policy decisions drove price signals in the wrong direction and led to the wasting of a scarce resource. But there have been numerous examples where governments have taken a more considered approach.

In fisheries, quotes were used to reflect a resource scarcity, and to put a value on it. Given the resource was under water and the scarcity was not obvious, the intervention was necessary to stop irrational overfishing.

Similarly, governments responded to the acid rain crisis in the 1970s by capping the total amount of sulphur that could be emitted, requiring emitters to pay for an entitlement to emit their “share” and letting them trade any rights they didn’t use. This created an incentive to decrease pollution by first putting a price on damage that had previously been costless to the polluters but paid for by the community, and secondly allowing polluters to generate value from reducing their pollution.

The success of this strategy is obvious. A generation has grown up not knowing what acid rain is.

Which brings us to the carbon pricing policy and the real risk for the Government of the approach now adopted in Australia.

The preference of the Rudd/Gillard Government and the Howard Government before it was to replicate the sulfuret model. However, the Greens preferred a more punitive policy that “taxed” polluters to try to simply force them to stop.

From its minority position, the Government eventually negotiated a hybrid approach – an initial tax moving to a floating price for permits set by the market.

Creating conditions of scarcity by capping emissions and then allowing the market to set the price of pollution theoretically has the least disruptive effect on investment decisions while still achieving the aim of reducing pollution. Setting a fixed price that is ‘wrong’—that is, it is not the price the market would pay for the right to emit a tonne of pollution – risks creating price signals that run in perverse directions – like stuffing helium into party balloons instead of MRI machines.

A pollution price that is too high risks creating a subsidy for activities that are not internationally competitive. A price that is too low fails to stimulate the low emission industries of tomorrow.

This is why there has been so much attention devoted to whether international carbon prices per tonne in trading markets are getting out of line with the proposed $23 a tonne fixed price to be implemented in Australia next year.

Although the fixed trading period is short at three years, the further out of line it is with international price signals, the more the Government will have to be alert to bad investment outcomes that the Australian economy will have to live with for a potentially very long time.

Such are the perils of micro economic regulation.

-DF

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