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August 11, 2008
Gary Banks, the Productivity Commission Chairman, sums up his recent Colin Clark Memorial Lecture about industry protection thus:
Australia’s approach to industry policy has evolved considerably from the protectionist regime that so concerned Colin Clark, and our economic performance has been much the better for it. With strong pressures emerging for new industry policy initiatives, it is important that these too undergo rigorous evaluation .... good policy requires governments to be active in areas where there are genuine market failures that intervention has good prospects of correcting. It requires careful attention to the design of programs up front, and evaluation after the fact. And it requires that governments rebuff any claims for assistance that, while couched as being in the interests of the economy or environment, result principally in transfers from taxpayers to the recipients, with little or no public benefit.
Banks adds that these requirements can be technically demanding and politically challenging. But they are integral to achieving the productivity performance that Australia must aspire to if it is to meet the challenges that lie ahead.
Referring to the proposed emissions trading scheme (ETS) to reduce greenhouse emissions from Australia's coal-fired power stations and energy intensive export industries Banks says:
A more active ongoing rationale for certain industry policy measures is distributional. Such considerations most obviously arise in cases where government decisions lead to a loss of pre-existing ‘property rights’, where an element of compensation may be called for. The assistance arrangements put in place for dairy farmers, following the abolition of quotas as part of the deregulation of their industry in 2000, are a case in point. But again, reminding us of Colin Clark’s insight, we find this theoretical justification being pushed to the limits. Thus, in the context of the current debate about ETS, there is the prospect that some more highly emission-intensive businesses will in some way be compensated for the impacts on their profitability and shareholder value.
Banks adds that 'sovereign risk’ considerations are clearly relevant where major policy changes come out of the blue. However, he points out that the prospect that government action might one day be taken to address greenhouse gas emissions is hardly news — the Commission (IC 1991) conducted the first inquiry into the costs and benefits of doing this, in the lead-up to the ‘Rio Earth Summit’ almost two decades ago. Moreover, depending on how such compensation is paid, it could delay the adjustments in economic activity that the ETS is designed to drive.
So we have a new form of industry protection buried within protecting the environment from greenhouse pollution
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