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Climate policy: itís the (emissions) price, stupid!

By Geoff Carmody - posted Tuesday, 3 August 2010

The Coalition and Labor want climate “direct action”, but won’t consider a carbon price now. This bipartisan recipe for high-cost greenhouse gas reductions, at worst, may deliver none.

We’ve learned nothing from history. We’re bad at “direct action”. Look at the home insulation, “green” loans, etc, debacles. We should set an emissions price and let the market sort it out. How?

From Rio (1992) to Copenhagen (2009) negotiations have failed. But they provide two lessons:

  • countries won’t apply the same mitigation policies at the same time; and
  • they keep haggling based on failed emissions production-origin policy models.

These lessons tell us what not to do, and suggest a way forwards.

Putting a price on carbon, whether via an ETS or a tax, is the same as applying a broad-based indirect tax. Countries have introduced these at different times and different rates. Our GST is an example.

Why are GST-type taxes successful when a carbon tax is not? They’re consumption-destination taxes. They exclude exports and tax imports the same as locally produced substitutes. They don’t undermine competitiveness. Production-origin emissions taxes hit exports and exclude imports.

Governments unilaterally proposing a production-origin GST would be ridiculed. Production-based carbon taxes are similarly treated. Quelle surprise!

Those countries introducing production-based carbon taxes try to reduce adverse competitive effects by building-in crudely devised trade-exposed sector “carve outs”, emasculating them.  Others take no action.


Australia is not just trying to cut indigenous emissions. We need the rest of the world to act over time to reduce global emissions. If it doesn’t, nothing we do (at 1.4 per cent of global emissions, and falling) makes much difference. This reality should drive our policy approach.

Nationally, we could devise, unilaterally adopt, and sell by example to other countries, a climate policy model that (i) reduces indigenous emissions; and (ii) does not undermine our trade competitiveness. Any country can adopt this “no regrets” model unilaterally.

Globally, production-origin emissions, by definition, equal consumption-destination emissions. In national accounting jargon, global GDP equals global GNE. The emissions embodied in both are the same.

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First published in the Australian Financial Review on July 12, 2010.

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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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