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Emissions trading: getting the balance wrong

By Geoff Carmody - posted Wednesday, 21 January 2009


“We’ve got the balance right”. That’s the Government’s defence of its White Paper, Australia’s Low Pollution Future, against environmental and business concerns. This assumes there’s a trade-off between cutting greenhouse gases and cutting jobs.

This “trade-off” is largely or wholly illusory.

Job losses imply activity shifting to other countries not applying such policies, increasing greenhouse gas emissions there. Jobs and emissions shift overseas, there’s little or no change in either globally, but clear economic and employment costs for Australia. This is no “trade-off”. It’s just a really bad deal.

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Worse, the Australian (and European) policies provide incentives for other countries not to follow our example. That’s how jobs and activity shift from Australia to them. In a global recession, these incentives are more powerful. Result? The Australian model makes a global deal unlikely. Without a global deal, Australia’s efforts will cut Australian jobs, nothing else.

With this sort of nasty “trade-off”, the world policy model won’t work.

But there’s good news. This “trade-off” is completely avoidable.

Australia (indeed all countries) could reduce greenhouse gases without any “carbon”/jobs leakage. In a global recession, especially, that is the model that “gets the balance right”. That model targets a country’s consumption of embedded emissions rather than production.

There are two policy paths we can choose.

Globally, greenhouse gas emissions production equals emissions consumption, and emissions exports equal emissions imports. Nationally, emissions production covers local production including exports, but not imports. Consumption covers local production excluding exports, plus imports.

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If all nations adopt the same policy at the same time, targeting production or consumption is the same thing. But the production model only works if all nations act simultaneously.

Some argue the United Nations Framework Convention on Climate Change (UNFCCC) requires a production model. Ironically, they also support the Kyoto Protocol, which provides that countries (i.e., developed versus developing) do not act simultaneously! Developed economies have not acted together, either.

The UNFCCC/Kyoto Protocol/production model is designed to fail.

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First published in the Australian Financial Review on January 15, 2008.



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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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