Central planning through the backdoor

Published in Insights, The New Zealand Initiative’s newsletter, 11 February 2022

If you thought central planning was buried with the fall of communism, you should look at the European Union.

In recent years, the EU has been working on its so-called taxonomy. This is a list of industries considered conducive to the goal of carbon neutrality by 2050.

It sounds like such a harmless idea – until you realise how politically corrupt and economically dangerous it is.

Those industries on the list will have easier access to capital and possibly subsidies. However, everyone else will have a hard time in financial markets.

The EU Commission announced last week that nuclear power and natural gas would be included. That was controversial, to say the least. Nuclear waste remains a problem and (obviously) natural gas is a fossil fuel.

The EU’s decision was driven by France and Germany, which were both seeking to protect those energy sources crucial to their national interests. It illustrates just how political the taxonomy is.

But whether nuclear and gas should have made the list is not even the biggest issue. The question is whether such a list should even exist.

In a market economy, the government’s role is to set the legal framework within which businesses operate. For carbon emissions, for example, that should mean pricing carbon or setting emissions standards.

Once these rules and regulations are set, investors should be able to allocate their capital as they see fit. After all, it is the investors bearing the consequences of balancing risks and opportunities.

With its taxonomy, the EU goes well beyond the role government should play. Effectively, it moves towards centralised planning in deciding which industries should exist and which should not.

We can already see the outcome with the nuclear and gas decision. Politicians and officials are meddling in the economy. A complex and political bureaucracy is emerging. And capital markets are no longer freely allocating capital.

Unfortunately, New Zealand is following Europe’s lead. For example, the Government last year banned default KiwiSaver funds from investing in fossil fuels. No matter that fossil fuel use is legal, and emissions are capped under the Emission Trading Scheme.

Using rules for financial markets to direct capital into favoured industries is a path towards central planning. This approach should not have a place in a market economy under the rule of law.

You only need to look at the EU’s taxonomy to see where such policies can lead.

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