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.

Hitherto, Australian climate policy “debates” have been conducted under very restrictive, paternalistic, terms of reference. “Official family” modelling of the CPRS was based on idealistic, not real-world, assumptions. The question of how best to achieve a given emissions reduction was suppressed.

The Climate Change Committee can operate differently - if it wants to.

I think there are important “process” matters determining whether the Committee’s work is productive.

First, the Committee should commission research from an independent agency to evaluate the effectiveness of alternative policies for pricing emissions. This would allow the various options to be ranked on the basis of their “bang for buck” emissions reduction outcomes.

Specifically, this exercise should guide the Committee in choosing which policy option produces the largest emissions reduction for the cost involved. Alternatively it could rank options based on which achieves a target emissions reduction for the lowest emissions price.

I think the Productivity Commission is ideally placed to undertake this “keystone” policy analysis. The analysis should be published for community education, consideration and debate.

Second, I assume the Committee is working towards a policy that Australia could adopt unilaterally. This is realistic. Ever since Rio, and certainly since Kyoto and Copenhagen, everybody knows that a global deal where all countries act simultaneously is not on. Differentiated national action, both as to timing and scope, is the only realistic option.

Accordingly, policy options for pricing emissions should be evaluated not only from a cost-effectiveness viewpoint, but also by whether or not they are trade competitiveness-neutral.

“First movers” in pricing emissions should not have to face reduced competitiveness versus others not acting. That sets up incentives for nobody to go first (or only to adopt sham versions of emissions pricing). It also encourages others to delay action or never to act at all.

The global emissions outcome of adverse competitiveness effects can be increased emissions, rather than reductions. Moreover, those acting and reducing emissions (as activity shifts to other countries) can end up actually increasing their consumption of emissions by importing them, as Dieter Helm of Oxford University recently pointed out for the United Kingdom.

Pricing emissions on a national basis must be trade competitiveness-neutral. Otherwise, the chances of a global deal will be as slim as the evidence of the past 20 years has demonstrated. If this criterion is not met in the Committee’s policy recommendations, Australia should take no action before others.

Third, the Committee’s work should be linked to the Tax Summit on the Henry Report. This opens up some important matters that can debunk the notion of a carbon tax as a “great big new tax on everything”.

For example, it allows consideration of increased reliance on consumption taxes and reduced reliance on income taxes (as recommended by the IMF) to leave real after tax incomes unchanged while increasing emissions prices. The increased reliance on consumption taxes is a way of increasing GST-like taxes, where “consumption” is consumption of emissions. Overall tax burdens shouldn’t increase.