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Pricing emissions: Questions for the Multi-Party Climate Change Committee and the Coalition

By Geoff Carmody - posted Thursday, 7 July 2011


The Multi-Party Climate Change Committee (MPCCC) might soon agree to features of the Gillard government’s proposed tax on greenhouse gas emissions and the transition to an emissions trading scheme (ETS).

Yet, much argy-bargy and conflicting claims about the so-called ‘carbon tax’ lie ahead. How can thinking voters ‘cut through’ the blizzard of ‘spin’ already inflicted, and about to intensify? Evidence-based advice would help. 

The Productivity Commission's (PC) research report Carbon Emission Policies in Key Economies is a valuable starting point. It shows that there are more and less efficient ways of abating emissions. Some of the worst policies in Australia have estimated costs of reducing emissions over $A1,000 per tonne. The existing average emissions price (about $A9 a tonne), suggests huge scope for Australia to swap better for worse emissions reduction options.

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This wouldn’t increase Australia’s current emissions reduction effort, but maintain it at much lower cost. 

The PC finds Australia’s emissions reduction effort is in the middle of the pack compared with our major (mainly developed) trading partners. This probably means Australia is already doing more, on average, than its major trade competitors (mainly developing countries, but also countries like Canada).

So the first question for the MPCCC, and the Coalition, is this: Should Australia increase its emissions reduction effort, rather than just deliver current emissions reductions at the lowest cost?If a credible, evidence-based, answer to that question is ‘yes’ (and that’s worth another opinion piece in itself later on), it spawns a set of follow-up questions.

First, what emissions reduction target should Australia seek to achieve? The Government and the Coalition have agreed to a unilateral reduction in Australian production of emissions, relative to year-2000 levels, of 5 per cent by 2020. Relative to expected ‘business as usual’ growth in emissions by 2020, this implies a reduction of about 25-30 per cent. The Government has paid lip-service to a 60 per cent reduction in Australian emissions by 2050 compared with year-2000 levels, or over 80 per cent compared with ‘business as usual’.

Second, what emissions price (express or implied), or price path, is needed to achieve the 25-30 per cent Australian emissions reduction target? What price is required assuming only more reliance on existing or known lower-emission technologies? What assumptions are required about technological advances?

Third, given the bipartisan 25-30 per cent target, will the Government set credible emissions permit caps, and accept whatever ETS prices these generate? Can the Coalition credibly claim emissions reductions to hit its 25-30 per cent 2020 target while also capping Budget expenditures on ‘direct action’? Really? How?

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Fourth, even if Australia delivers its unilateral 25-30 per cent emissions reduction target, how much will that be achieved, and ultimately offset, by diversion of economic activity, jobs and emissions to our trade competitors? If there is substantial emissions diversion offshore from unilateral action, is it worth it?

The answers to these questions would help voters judge whether a ‘carbon tax’/ETS (or ‘direct action’) is worth pursuing. The PC could produce the credible analysis to answer these questions. Without credible answers, all politicians are flying blind, and selling their policies should fail.

If we must have an ETS given international uncertainties and inaction, what’s the best model ‘out there’? The Kiwis have a cunning plan.

The PC notes that N.Z. has an ETS, but with no emissions ‘cap’. Kiwis are waiting to see what others do: no unilateral emissions reduction target for them. N.Z. has an emissions price ‘cap’ of about $A10 a tonne. The N.Z. Prime Minister indicated an intention to slow N.Z. efforts in this area. Without an emissions ‘cap’, and such a low price, does the N.Z. ETS deliver any emissions reductions? The PC finds almost none. The N.Z. ETS model seems ‘best practice’ symbolism. It costs a lot less than Australia’s current silly ineffectiveness. The PC also suggests that, on average, Australia is already doing more than N.Z.

An emissions-capped ETS and abolition of the costly symbolism still operating in Australia requires voters to recognise that the following is the ACME of ideology and the antithesis of rational analysis:

Christine Milne took another swipe at the Productivity Commission's damning assessment of small scale roof-top solar schemes…The Commission found that some schemes involved an effective subsidy of over $A1,000 per tonne of carbon abatement. Milne said "many of the small-scale renewable schemes have been put in place by governments as photo opportunities rather than as serious emissions reduction schemes. They've been photo-opportunities, they've been public awareness raising, they have not been seriously, ever, designed to be emissions reducing and therefore I think it's wrong to include those schemes and calculate a price in that way".

If we just go through the motions like N.Z, maybe this symbolism will cost less than our current silly posturing and pointless bickering, debate, ‘spin’, and related resource misallocation in Australia. 

This symbolism would require an ETS with no ‘cap’, and no unilateral emissions reduction target. We could have trans-Tasman trade in (near-worthless) permits, learning how to work the scheme when and if the permits have real value. This is inferior to doing nothing at all. It’s really a subterfuge for financing the Government’s wider income redistribution agenda. It adds nothing to our emissions abatement effort.

Would our policy debate then revert to improving Australia’s sagging productivity, and dealing with shortages in key inputs like labour and infrastructure? The N.Z experience suggests it might.

 

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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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