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Reducing emissions or redistributing income: why is Australia pricing carbon?

By Geoff Carmody - posted Thursday, 2 August 2012


Greens leader Christine Milne wants the Gillard Government to explain the environmental benefits of their joint carbon tax/carbon pricing policy to help ‘sell’ it. This is sensible. Voters must understand why this major tax/benefit churning exercise is needed, and agree benefits exceed costs, if they are to accept it.

Any benefits from pricing carbon come from reducing global greenhouse gas emissions compared with ‘business as usual’. With less than 1.5 per cent of global emissions, and falling, Australian action alone won’t reduce global emissions much, at best. 

Others, including recently, Minister Albanese, say this isn’t the right question. They’re correct, for two key reasons. 

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First, the Government/Greens policy is intended to encourage other much larger emitters to price carbon and reduce their emissions as well. Australia wants to be part of a global deal. 

Will this plan work? On the evidence, over two decades of failure, including increasingly vacuous communiqués after climate conferences, suggest not (eg, Copenhagen, Doha, Cancun, and Rio+20). 

Worse, we are chasing the wrong policy design, actually impeding global action. The preferred carbon-pricing model taxes exports and exempts imports. It only works if everybody takes the same action at the same time. This hasn’t happened. The Kyoto Protocol ratifies the reality of differentiated national action. 

For countries deciding to act in the absence of a global deal, this model undermines their trade competitiveness. Their action is a strong incentive for their competitors not to act, so they can reap the trade competitiveness benefits given away by such ‘first movers’.

The Prime Minister and others compare their carbon pricing policy with the GST. The GST exempts all exports and taxes all imports and is trade competitiveness-neutral. But our carbon tax does the opposite. Senator Arthur Sinodinos noted this crucial difference. He labelled the carbon tax a ‘reverse tariff’.

Australia’s carbon pricing policy is effectively an engineered exchange rate appreciation that also increases local prices. Australia could do without this policy quinella, especially now.  Carbon pricing costs for Australia are magnified. Global environmental benefits are minimised.

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There’s a second reason why Minister Albanese and others are right.

Climate negotiators seek progressive implementation of a global emissions trading scheme (ETS), with international linkage via free trading in emissions permits between ETS participants.  This is the so-called market-based ideal towards which current even more dirigiste national attempts at an ETS are to evolve.

How is a fair sharing of emissions adjustment burdens to be measured under a global ETS? By reference to national carbon prices not by comparing reduced emissions production across countries. Under a global ETS with international permit trading, carbon prices will be the same in every country. That’s the only definition of ‘fair’ that makes sense under a global ETS.

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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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