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Greens-Government climate policy: inherently contradictory?

By Geoff Carmody - posted Tuesday, 26 July 2011


The danger with the Greens-Government climate policy package is that it is neither cost-effective nor financially sustainable.

The policy has two climate policy elements (plus others). The first comprises a 'carbon' tax, and later, an emissions trading scam (ETS). The second is taxpayer-financed 'direct action', where the Greens try 'picking winners'.

Will the package reduce global emissions? Not much, if at all, before 2015, and not cost-effectively.

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In 2015 there's a switch to setting an emissions 'cap', and, supposedly, letting the market set the price. But the ETS 'market' is 100% Greens-Government controlled on the supply side (permit issue 'caps'), and involves extensive demand-side regulation. In between, banks and others scavenge for margins, hoping to make a motza trading bits of paper that, at best, have no effect on emissions.

Emissions 'caps' apply from 1 July 2015. The first will be announced no later than 31 May 2014. From July 2015 to July 2018, the emissions price is regulated too. A price 'ceiling' will apply. This is to be announced, but will be $20 above the expected 2015-16 'international price', rising 5% in real terms each year. A price 'floor' of $15/tonne, rising by 4% in real terms each year, will also apply.

The Greens-Government position on the ETS is internally inconsistent from 2015 at least until 2018. Governments can control emissions price or quantity, but not both. Effective emissions 'caps' under an ETS require letting the market set the price. If you control the price as well, you can't expect necessarily to achieve emissions 'caps', let alone do so cost-effectively.

 

After July 2015, Australian emitters can purchase permits overseas, and will do so when they're cheaper, but subject to numerous restrictions and conditions on such purchases.

For example, until 2020, permits purchased overseas can cover no more than 50% of emissions. This is not reflected in earlier Treasury modeling and will be reviewed in 2016.

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This highly regulated ETS 'market' is subject to large internal contradictions.

For example, the Government needs revenue from the 'carbon' tax or permit sales to help finance household and industry 'compensation'. But themore the policy reduces emissions the less revenue it raises, and revenue is also lost if permits are purchased overseas. And if the offshore permit price is lower than in Australia, arbitrage may lower revenue from local sales of permits as well.

So the ETS either reduces emissions at least cost, or protects Budget revenue. It can't do both. And until July 2018 it may do neither.

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This article was first published in The Australian on July 19, 2011.



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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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