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Pricing emissions: Questions for the Multi-Party Climate Change Committee and the Coalition

By Geoff Carmody - posted Thursday, 7 July 2011


The Multi-Party Climate Change Committee (MPCCC) might soon agree to features of the Gillard government’s proposed tax on greenhouse gas emissions and the transition to an emissions trading scheme (ETS).

Yet, much argy-bargy and conflicting claims about the so-called ‘carbon tax’ lie ahead. How can thinking voters ‘cut through’ the blizzard of ‘spin’ already inflicted, and about to intensify? Evidence-based advice would help. 

The Productivity Commission's (PC) research report Carbon Emission Policies in Key Economies is a valuable starting point. It shows that there are more and less efficient ways of abating emissions. Some of the worst policies in Australia have estimated costs of reducing emissions over $A1,000 per tonne. The existing average emissions price (about $A9 a tonne), suggests huge scope for Australia to swap better for worse emissions reduction options.

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This wouldn’t increase Australia’s current emissions reduction effort, but maintain it at much lower cost. 

The PC finds Australia’s emissions reduction effort is in the middle of the pack compared with our major (mainly developed) trading partners. This probably means Australia is already doing more, on average, than its major trade competitors (mainly developing countries, but also countries like Canada).

So the first question for the MPCCC, and the Coalition, is this: Should Australia increase its emissions reduction effort, rather than just deliver current emissions reductions at the lowest cost?If a credible, evidence-based, answer to that question is ‘yes’ (and that’s worth another opinion piece in itself later on), it spawns a set of follow-up questions.

First, what emissions reduction target should Australia seek to achieve? The Government and the Coalition have agreed to a unilateral reduction in Australian production of emissions, relative to year-2000 levels, of 5 per cent by 2020. Relative to expected ‘business as usual’ growth in emissions by 2020, this implies a reduction of about 25-30 per cent. The Government has paid lip-service to a 60 per cent reduction in Australian emissions by 2050 compared with year-2000 levels, or over 80 per cent compared with ‘business as usual’.

Second, what emissions price (express or implied), or price path, is needed to achieve the 25-30 per cent Australian emissions reduction target? What price is required assuming only more reliance on existing or known lower-emission technologies? What assumptions are required about technological advances?

Third, given the bipartisan 25-30 per cent target, will the Government set credible emissions permit caps, and accept whatever ETS prices these generate? Can the Coalition credibly claim emissions reductions to hit its 25-30 per cent 2020 target while also capping Budget expenditures on ‘direct action’? Really? How?

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Fourth, even if Australia delivers its unilateral 25-30 per cent emissions reduction target, how much will that be achieved, and ultimately offset, by diversion of economic activity, jobs and emissions to our trade competitors? If there is substantial emissions diversion offshore from unilateral action, is it worth it?

The answers to these questions would help voters judge whether a ‘carbon tax’/ETS (or ‘direct action’) is worth pursuing. The PC could produce the credible analysis to answer these questions. Without credible answers, all politicians are flying blind, and selling their policies should fail.

If we must have an ETS given international uncertainties and inaction, what’s the best model ‘out there’? The Kiwis have a cunning plan.

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Article edited by Jo Coghlan.
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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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