Climate policy: it’s the (emissions) price, stupid!

The apparent emissions reduction precision of a national ETS is a dishonest charade. An Australian emissions target under an ETS will be white-anted if activity shifts to non-ETS countries. Importing emissions permits (often of doubtful provenance - but allowed under the CPRS) escapes an Australian emissions cap. The global emissions effects of ETS are suspect. At best, the “trading” bit of ETS systems doesn’t reduce emissions by one gram, anyway. It just shuffles them.

Whether we use an ETS or a carbon tax, the lever driving emissions reductions is price. So why don’t we focus on getting a globally applied, predictably rising price on emissions in place? That delivers greater investment certainly, drives changes in technology and, globally applied, cuts emissions.

Climate policy is intended to raise prices of emissions-heavy products compared with greener products. But it’s not intended to cut real incomes. Using most revenue from a carbon price to cut other distorting taxes and increase welfare payments can achieve the first effect and avoid the second.

The lesson is clear: mitigation policy is all about the emissions price. “Direct action” will cost us much more for a lot less.