Putting a price on carbon: what’s the best option?

‘Putting a price on carbon’ is shorthand for discouraging greenhouse gas emissions by making them expensive. Substantial resources are being diverted to this task.

The Climate Commission, the Multiparty Climate Committee, Ross Garnaut’s 2011 update of his 2008 Review, the Productivity Commission Inquiry into climate policy action in selected developed economies, and the ‘official family’ of Government Departments, are all working to devise and ‘sell’ the Government’s decision to ‘put a price on carbon’.

What’s the best way to ‘price carbon’? Who is looking at this question? None of the bodies listed above seems explicitly responsible for answering this question (for public consumption, anyway). Unless we know the answer to this question, anything is possible.

Any policy to reduce man-made greenhouse gas emissions ‘puts a price on carbon’. This includes ‘direct action’ options proposed by the Coalition, its unconvincing bluster on the topic notwithstanding.

Three key questions are relevant to determining ‘good’ policies for ‘putting a price on carbon’.

First, is the ‘price on carbon’ transparent (a feature extolled by the Government for the 13 February COAG deal on health funding still to be finalised in detail)?

Second, how will the trade-exposed sector of the economy be treated: via selective ‘special deals’, caving-in to ‘rent seekers’, or in a principled, comprehensive and consistent fashion?

Third, is the method chosen to ‘price carbon’ the most cost-effective option, maximising global emissions abatement for the cost involved?

Most politicians seemingly dislike transparent emissions pricing. That might imply consumers will end up paying most or all of the cost. (I note the Climate Commission head, Tim Flannery, to his credit, at least was not prepared to deny this reality in a recent TV interview.)

For the trade-exposed sector, a comprehensive, principled approach, cutting out ‘rent seekers’, ‘special pleaders’, and ‘green protectionists’ is crucial. The CPRS was poor process and policy in this respect.

That said, I think selecting just two trade-exposed industries for proper treatment, as suggested by Daley and Edis of the Grattan Institute (see Australian Financial Review 14 February) is both politically naïve and clearly non-comprehensive.

In my opinion, a broad-based price on national emissions consumption (see below) is likely to deliver the most cost-effective emissions abatement.