Abatement action needed

Federal government dithering on measures to achieve greenhouse abatement could cost consumers and the Australian economy.

The Australian Financial Review reported on June 20 2000 that Senator Nick Minchin had gone to cabinet seeking five commitments in relation to greenhouse gas abatement:

1. Domestic carbon emission trading be introduced only when there is an international system
2. The government always prefer market-based mechanisms to reduce greenhouse gases
3. An inquiry be held into the effect on competitiveness of emissions trading
4. The government give the LNG industry credits for emissions reductions already achieved
5. The government confirm that it will do nothing to harm Australia’s competitiveness.

Senator Minchin failed to get Cabinet agreement.

While that failure doesn’t represent a major blow to the aim of Sen Minchin in seeking a moderation of greenhouse gas abatements strategy, it does represent a serious problem for Australian consumers. Firstly, the commitments that Minchin is seeking are not necessarily a good prescription and secondly every week that we procrastinate on abatement compresses the costs of abatement into a smaller time period, thus increasing the short-run costs for consumers.

The five commitments Minchin seeks are bad policy because:

1. Early introduction of an emissions trading system will provide Australia with a competitive advantage as the world moves towards emissions trading. It will also improve the short-term capital attractiveness of Australia by providing carbon abatement valuations that are reliable.
2. Always preferring market-based mechanisms is code for no carbon taxing. The OECD believes that carbon taxes are a key to making emissions trading viable. This commitment also stupidly writes out a useful policy instrument.
3. Minchin’s inquiry would be an expensive exercise in reading the economic literature already available and regurgitating it.
4. The idea to give the LNG industry concessions is good but what about other equally (or better) emissions-abating industries. And what about Holden’s recently announced hybrid low-emission car. Industry and greenhouse policy shouldn’t be about playing favourites.
5. Point five, once again code, but this time for "don’t worry we are still interested in winning elections".

So, if you agree that Minchin’s plan has flaws and isn’t necessarily good, what are the impacts of the Government’s continued consideration of it on the community and economy?

First, we are committed to limiting greenhouse gas emissions to 1990 levels plus 8%. The rest of the world has different targets and some parts of the world, the developing economies, have none. Much debate is going on about the effect of some countries being in the abatement tent and others being outside of it. The OECD believes that the current situation could see as much as 20% carbon leakage.

For us lay people, "carbon leakage" refers to the carbon emissions that will be exported from countries like Australia (where emission will be very expensive) to countries with no emissions targets (so emissions will be very cheap). An emissions trading system is designed to limit that leakage, because it reduces the costs of emissions. The sooner Australia establishes trading systems the better off we will be because Sen. Minchin’s preferred market mechanisms will have a chance to work. Having a trading system sooner rather than later also limits the cost of pre-emptive shifts of emitting industries to developing economies.

What does all this mumbo jumbo mean for consumers? It means we will pay the same amount to reduce our greenhouse gas emissions but we will do it in a shorter space of time and with a potentially smaller economy. Consumer durables and energy-intensive products will become more expensive either through taxation or from market mechanisms. Spending power in these fields will decrease but, potentially, spending power in low-energy products will increase.

What is the balance point? The OECD believes that the oil-coal price relativity will make oil a more attractive option than coal. So transport becomes cheaper but electricity will potentially become more expensive. This means manufactured goods become more expensive as the greater energy input is in production, not distribution.