Kevin Rudd – the _

A trend that is true on an individual level does not necessarily translate into a similar trend on a societal scale.

The most famous of all aggregation debates is probably the Keynesian paradox of thrift. Keynesians argue that too much saving by individuals could be unproductive. Too much saving eventually may make everybody poorer because there would be less demand for goods and services in the economy.

With less demand, there would be fewer economic transactions and thus, less wealth creation. In turn, the financial conservative act may later lower saving itself, contradicting the savers’ intentions.

This is not at all a defense of Keynesianism. Rather, it is to highlight the fallacy of composition regardless the tenability of the Keynesian position.

The fallacy of composition or simply the problem of aggregation has great importance in public discourse even outside of the discipline of economics. National policy can easily be so wrong simply because of innocent but difficult and costly aggregation process, with the subsequent interpretation suffering from composition fallacy.

The fallacy also has relevance in voting decision. This is particularly important as the next national and state elections loom closer.

There at least two groups of voters right now that are relevant to the topic at hand.

One group believes in the importance of power change at the federal level in bringing good. Power change enhances democracy. Power change forcefully uproots perverse interests from embedding itself further in the state.

To the group, change is institutionally desirable because it creates a precedent in a country where the same side has been in power from the very beginning. They believe power corrupts and to grant power to the same side for too long is folly. They think from the top and they intend to vote in terms of blocks.

Think of expressed party partisanship in terms of Barisan Nasional and Pakatan Rakyat. Think of the Anything But BN movement. Think of Haris Ibrahim. To them, power change is like tilling the land. The weeds will grow later but regular frequent tilling will prevent the weeds from growing too long.

The other group believes that change is overrated. Whichever the side power falls on, both sides are essentially the same as a whole. This is partly due to human nature: all of us respond to incentive for better or for worse.

There are ways to bring in change and the best to way to do that according to the latter group is by thinking from the bottom up instead of simply power change in terms of blocks. That means, ignore the political affiliation. Focus on the individual candidates instead. Evaluate the candidate on his or her own terms and then compare the candidate to his competitor. The ultimate question is who is the better candidate?

I appreciate the bottom-up approach but I fear the risk of composition fallacy. There is no guarantee that the bottom-up approach will lead to an outcome better than the wholesale power change approach.

The reason is that power resides not only with the elected ones, but also with the unelected persons and power brokers who sit in the shadows behind the curtains. While official faces may change with the bottom-up approach, it ignores entirely the crucial roles of unelected persons and their influence on elected officials and more importantly, their influence on the state.

These unelected persons are those whom the former Australian Prime Minister and more recently, the former Foreign Minister Kevin Rudd would call the ”faceless men” as he struggled to hold on to power, and appealed directly to Australian voters instead of to party officials of the Australian Labor Party. These faceless men are unelected, unaccountable and they have no direct responsibility to voters.

In this sense, the bottom-up approach tills the land but not deep enough. The bottom-up approach does not present enough threats to the faceless Malaysian men and women.

In contrast, the wholesale power change approach tills the land deeper still to threaten these faceless men. Remember that the only reason the established powers were shaken to the core in the aftermath of the last Malaysian general election was the threat of wholesale power change.

Notice how poor candidates were elected; while these poor candidates posed problems, they themselves were not the reason the incumbents were shaken to the core. They themselves were not the reason for new policies that the Najib administration has introduced so far.

Of course, just like weeds, the faceless men will come in other forms and each side has its own faceless men. Yet, the point is that at least, these will be different faceless men. The point is that these faceless men will not able to spread their tentacles deep and wide enough with frequent and regular power change.

Mohd Hafiz Noor Shams. Some rights reserved

First published in The Malaysian Insider on April 15 2012.

Before I begin, I must admit that there is much reading for me to do to understand the current debate on carbon emissions trading in Australia. I have not been following Australian affairs as closely as I should; I am still stuck with the New York Times, the Wall Street Journal and to a lesser extent, the Washington Post. But each time I took a peak at least up until two weeks ago, either The Australian or the Australian Financial Review, emissions trading, and climate change at large, seemed to dominate the headlines.

Even on campus here at the University of Sydney, a number of posters critical of the scheme are up.

While the debate is unique to Australia in a sense that the Liberal and others out of government squabbling with each other — the odd thing is that, the Liberals, who under Howard administration was friendly to the idea (in fact, it was the Liberal government that first introduced the idea), and the Greens are against the idea of carbon trading, at least in its current form as proposed by Rudd government — as well as the fact that the government does not have enough vote to get it past unilaterally, the mechanism of the policy is largely the same.

There is even a possibility of a general election if the bill failed to be passed. It is a possibility because the general sentiment is that, if there is an election today, the Liberals are going to get further beating with the Rudd administration strengthened. WIth that strengthened government’s position within the Parliament, the bill can then be passed without much trouble.

I acknowledge the need to address negative externality associated with greenhouse gases emissions that massively contribute to anthropogenic climate change. I have written it about in the past. As a freshman and later as a junior at Michigan, I wrote two papers related to the issue, though not specifically on the trading scheme. The acknowledgement, really, is the reason what I identify myself as a green libertarian.

For the benefits of those unfamiliar with the term externality and alien to the field of economics, here is a short introduction to it. Externality is a market failure where individual or private cost does not correspond to social or public cost. As a simple demonstration, in a situation of no law against littering at all, an outsider littering in a public space effectively suffer no cost of doing so. The community living in that public space however does suffer from the cost associated with that littering. Somebody has to clean it up but the one causing it does not suffer the cost of cleaning it up. Instead, the community does. That misalignment of private and public cost is externality, or more precisely, negative externality.

Meanwhile, positive externality is where private action brings about public benefit. For instance, if a person has a collection of really good music and he plays it on the radio that he bought, positive externality is when you happen to sit close enough to him to listen to the music without paying anything for it. You get the benefit of good music. Here, he enjoys the music and you do too without paying. Of course, if he plays bad music, the situation immediately switches from positive to negative externality. He enjoys it but you risk deafness, and uncompensated at that.

A model known as Tragedy of the Commons is the most utilized model to impress the consequence of negative differential between private and social cost. In the model, there is a grazing field, henceforth called the commons. Headers of cows have their cows grazing the field freely because it is a commons and an unregulated one at that. It is then in the interest of the herders — assuming that there is little cooperation between them — to have their cows to graze the commons more and more. They compete for the use of the commons and this competition leads to overgrazing as everybody seeks to keep resources from the commons to themselves. Overgrazing then will turn the whole commons worthless as it is left dead without grass. In the end, everybody loses in the long run.

Greenhouse gases emissions is more or less like that. Economic progress in general and definitely in the current framework, requires consumption of energy and by and large, it produces greenhouse gases, in particular, carbon dioxide. Meanwhile, carbon emissions impose little cost to individual emitter, i.e. little private cost. Assuming that economic progress is desirable, it is in the interest of individuals to commit to progress and emit carbon. But if everybody continue to emit carbon, combined emissions contribute to climate change (I will not go into the science) and climate change imposes cost on all in the end, i.e. social cost. There is obviously more nuance — for example, the cost will not be evenly distributed and in fact, some may experience benefits from climate change; one example of such benefits is the opening of sea route up down in the Arctic Ocean — to the whole issue but that simplification here is done to show why carbon emissions phenomenon, which contributes to anthropogenic climate change, is a negative externality.

The solution to this negative externality or tragedy of the commons is to equalize private and social cost. This can be done by pricing the externality. In terms of climate change and carbon emissions, it means pricing carbon.

Two most popular solutions in mainstream discussions involve tradable quota (more popularly called cap and trade) and tax (carbon tax). The tax is also known as Pigovian taxes, named after a British economist that first proposed such tax to align private and social costs, Arthur Pigou.

By quota, it means assigning rights to emit to market participants and then letting these participants trading among themselves given their endowment. The typical setting is that the government gives (either freely or auctioned) certain amount of quotas to all industries (or even individuals) players. Once endowed with permits, all players are allowed to trade it so that these players can reach to their efficient level of emissions, given multiple constrain.

Carbon tax on the other hand is simply a tax on all activities that emit carbon. I am being sloppy with definition here because even human being organically emit carbon. The idea is to reduce carbon emissions from perhaps, mechanical and electrical operations, as well as one of commercial and industrial of nature. Here again, I am being sloppy but let us not dwell on the matter because that is not the reason for this long-winded entry.

Theoretically, the two methods are the same. A certain number of quotas or permits can have the same effect to a certain level of taxation.

However, political impacts of the two policy differ and most often than not, quota is the most the popular one because nobody likes to be taxed. Quota, despite its ability to imitate the impact of carbon tax, does not directly impose tax and therefore, less obvious in its impact. It is being considered in the United States and Australia — with great controversy in Australia — and it is already in force within the European Union.

The granting of quota however is a messy business vis-Ã -vis carbon tax. I warn though, much written below is not original. The issue has been debated over and over again by various individuals that trying to cite them may seem like trying to cite somebody just to indicate that the sky is blue.

Firstly, the granting of quota appears to be arbitrary. How exactly does the government determine how much quota a particular firm will get? Past emissions? Forecast emissions?

If it is past emissions, paraphrasing the efficient market hypothesis, past data does a bad job at predicting the future because it does not incorporate future data that are not yet available. If forecast is used, clearly the firm has the incentive to provide overly optimistic forecast that the imposition of quota does little or even nothing to align private and social cost.

Secondly, who should get the quota is a huge problem. Relative over-endowment of permits to certain players in the market and under-endowment to others may turn the whole scheme into an unfair wealth distribution exercise rather than a mechanism to reduce carbon emissions. Some firms may find it more profitable to trade permits rather than engage in productive activity.

Thirdly, the quota system is overly open to political compromise that it stops becoming an equivalent of a tax. This happens when quotas are granted freely such as what happened in Europe and may appear to be the case in Australia. Free quotas, coupled with the first issue, tend to render the whole exercise worthless that it is practically business as usual.

Fourthly, for tradable permits to become an equivalent of carbon tax, it needs to be auctioned. The problem is that, the auction component is almost never implemented. In Australia in its current proposed form, only a fraction will be auctioned while most will be given freely. In Europe, auction is a foreign term. In the US, 85% of the permits will be given freely, if the Senate passes the American Clean Energy and Security Act or more commonly called the Waxman-Markey Bill. The House of Representative narrowly passed the bill earlier in June this year. This is perhaps the cost of political compromised.

Fifthly, the auctioning, monitoring as well as the assignment of permits require a kind of bureaucracy which I am, as a libertarian, unwilling to see taking root. That bureaucracy will require resources to run, definitely more than mechanism for carbon tax demands for.

Carbon tax does not suffer from the complexity revolving around bureaucracy and distributive issues. Imposition of tax rate can be introduced uniformly. Sure, some will lobby to be hit with more generous levels of taxation or even request for downright exemption but compared to cap and trade method, carbon tax, even under compromised outcomes, is better. Unlike tradable permits which must be auctioned in order for it to be effective, tax imposes direct cost to carbon emissions to align private cost with social cost.

This is why I prefer carbon tax.