Emissions indecision déjà vu

Will the Government's 'carbon tax'/emissions trading scam (ETS) policy work? Specifically, will it (i) help reduce global emissions, and (ii) do so cost-effectively? If not, why bother?

The policy announced on 10 July 2011 is complex, partial, and, possibly, not fully resolved. It has large coverage exemptions and concessions: permanent, temporary and/or of uncertain duration. Despite Government criticism of the Coalition's position, it also has loads of 'direct action' as well. It has extra layers of regulatory and other elements, and new bureaucracies, covering emissions permits, monitoring, renewable energy, etc. It makes our now-abandoned wholesale sales tax look simple. It's the antithesis of the 'broad base, low rate' golden rule for tax design and 'pricing carbon'.

It's not cost-effective.

At $23/tonne, rising in real terms by 2.5% for three years, the real pre-ETS emissions tax is about $24.77/tonne in 2015. In nominal terms, at 2.5% inflation, that's about $26.7/tonne in 2015. It's unlikely to induce large shifts in the way stationary energy is produced in Australia. Don't we need at least $A40-$A60/tonne to reduce emissions production significantly? Marginal efficiency savings, at best, are likely.

The Treasury estimates an initial 'carbon tax' CPI effect of only 0.7%. What about after 2015? The proposed income tax cuts exceed initial compensation requirements for about 4 million lower and middle income households, giving them a net income 'buffer'. For these households, incentives to reduce consumption of emissions will be countered by higher income incentives to increase it.

Australia's production-based emissions pricing will discourage our trade competitors from following us. Why? Because their competitive gift from our own-goal will shift activity, jobs (and emissions) to them.

This initial version of the policy won't measurably affect net global emissions, still less global warming. Any minuscule (gross) reduction in Australian emissions will come partly at the cost of reduced economic activity and jobs here, plus redistribution of a smaller, less efficiently produced, economic 'cake' to lower income groups.

Large uncertainties about how this policy will evolve remain. These include uncertainties about coverage, Government-determined emissions caps (and resulting emissions prices under the ETS), and how all these relate to the bipartisan 5% reduction target (relative to 2000 levels) to be delivered by 2020.

Emissions caps after 2015 under the ETS haven't been decided. We don't know what emissions prices these will induce. We don't know if emissions caps and prices under the future ETS will be consistent with the bipartisan 5% (really 25-30%) 2020 emissions reduction target. Investment certainty? Hardly.

The Government claims its policy will cut emissions by 2020 by roughly enough to meet its 5% target. We don't know what emissions price is required to get this result. Is there an underlying emissions price assumption or has the Government just made an emissions 'cap' assumption? If the latter, what emissions price is required to do the job?

The parties to the 'agreement' are nurturing these uncertainties. Labor says there's no pain for the punter; only (net) tax cuts and government handouts. Windsor disputes Labor's (undeliverable) promise that punters' petrol will be exempted forever. Oakeshott says Australia should 'go low, go slow', like NZ. Hasn't the Productivity Commission confirmed we're already doing that, albeit very inefficiently? Bandt says the package is 'a platform for upwards flexibility', meaning more ambitious emissions reduction targets and much higher emissions prices. Who can believe any of them?

The ostensible purpose of this policy – reducing emissions cost-effectively – is lost in its complexity. Buying off competing interests, income redistribution, and slipping in (otherwise generally desirable) Henry Review reforms encouraging workforce participation, dominate its 'design'. This is a new tax to finance other policies.

On emissions abatement, from 2012 to 2015, this policy is like a base-load generator spinning its turbines but not connected to the grid. It's doing almost nothing. Australia's already-poor productivity will be undermined.

Is this 'getting the balance right'? If so, Australia's already poor productivity will be undermined.

Can't we do better?

The 'official family' (including Garnaut) say 'no': they say 'it's too late' to modify a long-term policy intended permanently to restructure the Australian economy that won't start until next year. We must follow Europe, they say, unlike the USA, Canada, China, India and the rest of the developing world.

Why? There's nothing in the now-dead Rio or Kyoto agreements that says we must apply the failed European ETS. Europeans have form. They devised the Common Agricultural Policy, are excessively pro-regulation, and are now mired in the follies and global threats of the Euro and related debt problems.

For those who don't really accept the science underlying concerns about climate change, the honest option is simply to come out and admit that, and reject policies to mitigate it, including 'direct action'.

For others, there's a better way to apply a broad-based price on emissions, whether we use a carbon tax or an ETS:

• apply the 'carbon' tax/ETS to all emissions produced in, and imported by, Australia;

• provide zero 'compensation' to industry, trade-exposed or otherwise; but

• allow all businesses to treat 'carbon' tax or emissions permit costs as input tax credits;

• allow these to flow down the supply chain using our existing GST system.

This is closer to a 'no regrets' option. It minimises economic damage to Australia if other major emitters don't act. It's a model that other countries could adopt. It improves chances of securing a global deal. Without that deal, Australia should really do nothing but adapt to whatever climate changes happen.

What now?

An early election, plebiscite, or recalling Parliament have been ruled out.

There's another option.

Garnaut was asked to update his 2008 report. Can the Productivity Commission (PC) update its recent emissions pricing report to include (i) the Australian emissions pricing effects of this policy, and (ii) the current emissions pricing policies of Australia's trade competitors? A credible, independent, evaluation of this climate policy by the PC could be done quickly. It would add rare rays of light to what is likely to be a very heated and noisy debate.

In future, either this policy remains a costly and ineffective response to global warming, and/or the emissions price will increase. A lot.