The Climate Change Committee: getting the process right

The Climate Change Committee is to undertake another climate policy review.

Its terms of reference assert the need to price greenhouse gas emissions. Its deliberations will be “broadly limited to the issue of a carbon price”. The Committee will consider various options, including broad-based emissions trading schemes (ETS), a broad-based carbon levy, a hybrid of both, and “economy-wide and sector-based approaches”. This focus on how best to price emissions fills a long-standing gap - if the process adopted is right.

Under the CPRS debacle, alternatives to a badly flawed emissions trading scheme were ignored.

The 2009 Senate Select Committee on Climate Policy recommended that six alternative market-based ways of pricing emissions be evaluated. The Rudd government and the Opposition rejected this. The “Citizens’ Assembly” option proposed during the election wasn’t going to cover policy options, either.

How best to price emissions needs independent, evidence-based, analysis before deciding policy. All options, including a carbon tax, an ETS, and “direct action”, need evaluation. All options put a price on emissions.

“Direct action” indirectly prices emissions. The cost of incentives encouraging government-selected specific actions to reduce emissions sets the emissions price (or tax). An ETS indirectly puts a price on emissions by directly restricting emissions permits. A carbon tax or levy does so directly.

Assertions that these alternatives are different, from an emissions pricing perspective, to use a technical term, are “crap”.

There are differences. “Direct action” involves governments “picking winners”. Governments have lousy track records here (for example, “green cars”, “green loans”, “cash for clunkers”, and so on). Market pricing of emissions forces emitters to work out how best to reduce them. Emerging technologies becoming viable as the emissions price rises are not ruled out (unlike the NBN?).

“Direct action” is not transparent on pricing emissions. An ETS is more transparent, but partially hides the reality that governments set the emissions price (tax) by how tightly they limit emissions permits. That’s its political appeal.

A carbon tax or levy is the most transparent option. Governments set the price. That’s its political Achilles Heel.

All of these options are intended to reduce greenhouse gas emissions. But which reduces emissions at the lowest cost? This is the key issue that needs resolution.

The Committee could answer this question - if it adopts the right, evidence-based, process.