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

In general, ‘direct action’ options tend to be the least cost-effective. That is, they deliver the lowest emissions abatement for a given cost, or the same emissions abatement at the highest cost.

‘Putting a price on carbon’ should be done (i) transparently, (ii) with a comprehensive, principled approach to the trade-exposed sector (exports and imports), and (iii) using the most cost-effective policy.

The Government, (and the Coalition, Greens and others), should commission independent analysis to determine which option(s) best meet these criteria before deciding how to ‘put a price on carbon’.

Otherwise their policy credibility, and, as a result, their ability to ‘sell’ their policies, will be undermined.

Unless they base their policy choice on a principled, comprehensive approach to the trade-exposed sector, they will be unable to escape the morass of ‘special deals’ based on arbitrary thresholds that were a feature of the CPRS.

If we adopt an emissions trading scheme, all permits, without exception, should be auctioned to the highest bidders, provided the purchase costs are given the same treatment as input tax credits under the GST. This, plus World Trade Organisation-compliant border tax adjustments for imports, will ensure a consumption-based approach is put in place. No industry ‘compensation’ is warranted.

This approach is easier to implement using a carbon tax.