A brief submission to the Climate Change Committee

Those advocating policies to reduce greenhouse gas emissions are pestered to reveal their views on the effects of human activities on climate change.

Well, I don't know for sure.  I'm just an economist.  I'm told the science is subject to uncertainty.  I start by assuming there might be a man-made problem.  Given that assumption, what's the most cost-effective way to respond?  That's a question we economists can examine.

One approach reviews positions on the science, and derives cost-effective policy responses for each.  Experts can then haggle over the resulting policy smorgasbord.

Three positions define the global warming science spectrum. 

First, some say there's no man-made global warming problem.  Second, others say most global warming is man-made.  Third, others aren't sure if human influences are affecting the climate, and/or, if they are, by how much.

The first group is often labelled "climate change sceptics" or "climate change deniers".   The second group is labelled "believers".  The third group is sometimes also labelled "sceptics" (hinting they're "deniers"). 

Scepticism is respectable.  It is essential for scientific advancement.  In the climate policy debate, this label is applied more like a "heresy" indictment.  This pushes the scientific approach away from evidence-based analysis towards a more "dark ages" approach, where, if you don't believe what the second group believe, you should be ignored, silenced, ostracised (and certainly not funded).

The ambitions of the Government notwithstanding, we are likely to be stuck with this spectrum of views, rather than getting a "consensus", for the foreseeable future.

This spectrum allows us to develop a matching smorgasbord of policy responses.

The logical policy response for the first group is to do nothing.  To argue for any other policy approach makes no sense, and exposes a lack of courage of proponents" convictions.

For the second group, implementation of the most cost-effective policy to reduce greenhouse gas emissions ASAP is the sensible position.

For the third group, a risk management approach is prudent.  We only have one planet.  If there is a significant man-made global warming effect, some "policy insurance" is warranted.  The insurance policy should use the most cost-effective measures to moderate greenhouse gas emissions.

The difference between the appropriate policy responses for the second and third groups is the amount of policy effort, not policy type.  The second group should favour a stronger emissions price response than the third group.  But both should use the most cost-effective policy.

With this policy spectrum, what can be said about mooted options for dealing with global warming?

First, "direct action" should be off the menu.  Those believing global warming is "crap" should not be supporting any policy response.  They believe nothing needs fixing.  Moreover, the evidence available is that various "direct action" measures are horrendously expensive in terms of the dollar cost per tonne of greenhouse gas emissions avoided.  The looming story of costly "feed-in tariffs" for solar panels will reinforce this point.  "Direct action" is unlikely to qualify as a sensible policy response, whatever your views on the science.

Bizarrely, amongst all possible options, it is "direct action" that has broad support.

The Coalition, the Commonwealth Government, and the Greens support "direct action" of various types.  Commonwealth and State Governments have implemented some of the least efficient "direct action" measures.  Some of these (eg, "green car" assistance) are discriminatory local producer subsidies that may violate World Trade Organisation anti-protection rules.

Given recent Government lecturing about "green protectionism" in Europe and elsewhere, this is ironic.  Australia is at least a contender for the trade policy "pot calling the kettle black" award.

Second, the policy spectrum collapses to putting a price on emissions as cost-effectively as possible.  That policy should be broad-based, trade-neutral, shouldn't attempt to "pick winners", and should encourage the market to find the best ways to reduce emissions by setting the price for not doing so. 

The policy spectrum also should exclude all restrictions on options that otherwise might become cost-effective as the emissions price rises (including nuclear power). 

This spectrum covers all three groups' views on the science of climate change.  For the first group, the appropriate emissions price is zero.  For third group, the price is positive.  For the second group, the price is positive and higher than for the second group.

This leaves just one question.  What's the most cost-effective way to price emissions?  With that answer, we can calibrate the policy to set a price reflecting any given weighting of views on global warming.

The matrix below classifies broad policy options, reflecting basic design criteria that action taken by Australia in advance of our trading partners should meet.

The criteria are:  (i) cost-effectiveness as discussed above; (ii) ensuring Australia does not lose (or gain) international competitiveness, while complying with WTO rules; (iii) ensuring emissions price certainty to overcome investment barriers; (iv) and ensuring any reduction in Australian emissions is also a net contribution to global emissions reductions.

I think the choice is between a national emissions consumption-based "cap and trade" scheme (with no offshore permit trading), and a national consumption-based emissions levy. 

Evidence favours the latter.  What does the Productivity Commission think?  Will it be asked its opinion?