Greens-Government climate policy: inherently contradictory?

The danger with the Greens-Government climate policy package is that it is neither cost-effective nor financially sustainable.

The policy has two climate policy elements (plus others). The first comprises a 'carbon' tax, and later, an emissions trading scam (ETS). The second is taxpayer-financed 'direct action', where the Greens try 'picking winners'.

Will the package reduce global emissions? Not much, if at all, before 2015, and not cost-effectively.

In 2015 there's a switch to setting an emissions 'cap', and, supposedly, letting the market set the price. But the ETS 'market' is 100% Greens-Government controlled on the supply side (permit issue 'caps'), and involves extensive demand-side regulation. In between, banks and others scavenge for margins, hoping to make a motza trading bits of paper that, at best, have no effect on emissions.

Emissions 'caps' apply from 1 July 2015. The first will be announced no later than 31 May 2014. From July 2015 to July 2018, the emissions price is regulated too. A price 'ceiling' will apply. This is to be announced, but will be $20 above the expected 2015-16 'international price', rising 5% in real terms each year. A price 'floor' of $15/tonne, rising by 4% in real terms each year, will also apply.

The Greens-Government position on the ETS is internally inconsistent from 2015 at least until 2018. Governments can control emissions price or quantity, but not both. Effective emissions 'caps' under an ETS require letting the market set the price. If you control the price as well, you can't expect necessarily to achieve emissions 'caps', let alone do so cost-effectively.

After July 2015, Australian emitters can purchase permits overseas, and will do so when they're cheaper, but subject to numerous restrictions and conditions on such purchases.

For example, until 2020, permits purchased overseas can cover no more than 50% of emissions. This is not reflected in earlier Treasury modeling and will be reviewed in 2016.

This highly regulated ETS 'market' is subject to large internal contradictions.

For example, the Government needs revenue from the 'carbon' tax or permit sales to help finance household and industry 'compensation'. But themore the policy reduces emissions the less revenue it raises, and revenue is also lost if permits are purchased overseas. And if the offshore permit price is lower than in Australia, arbitrage may lower revenue from local sales of permits as well.

So the ETS either reduces emissions at least cost, or protects Budget revenue. It can't do both. And until July 2018 it may do neither.

In addition, as the Productivity Commission has already suggested, the large 'direct action' elements in the Greens-Government policy will very likely be very cost-ineffective. They should not be implemented and, where they already exist, they should be abolished.

Measures such as renewable energy targets magnify threats of 'carbon leakage' and job losses offshore from Australian trade-exposed sectors.

They thereby magnify the global cost-ineffectiveness of the Greens-Government policy.

It would be ironic if the government's policy, ostensibly promoting a sustainable climate, proves financially unsustainable, just like the raft of existing State-based household rooftop 'feed-in tariff' incentives, now being wound back.

For example, the 'commercially oriented' Clean Energy Finance Corporation (CEFC) has funding of $10 billion spread evenly over fiveyears from 2013-14. But if it is really 'commercial' why is the taxpayer involved? The whole point of governments setting an emissions price is to give the private sector an incentive to deliver emissions-reducing innovations.

Strangely, the CEFC is 'to invest in the commercialization and deployment of renewable energy and enabling technologies, energy efficiency and low-emissions technologies', but it 'will not invest in carbon capture and storage technologies', where there seems a stronger case for government intervention.

The CEFC is to 'invest' $2 billion of taxpayers' money per year from 2013-14. The Budget impact in the Forward Estimates is shown as only$467 million in 2013-14, and $455 million in 2014-15. Where's the other $1.5 billion (plus) each year?

If CEFC funding is used for commercially viable investments, I think public sector accounting conventions allow 'off-Budget' treatment. However, if such investments are not commercially viable they appear as 'on-Budget' expenditures.

The Budget impact estimates above suggest two possibilities. First, CEFC investments are all assumed to be non-commercial but take-up of the available $2 billion per year is expected to be dramatically lower in the first two years. This seems unlikely, given the $2 billion per year spending assumption. Alternatively, something less than 25% of CEFC investments are assumed to be non-commercial (and therefore recorded, plus borrowing costs, 'on-Budget'). The rest, assumed commercial, are 'off-Budget'.

What if more CEFC investments turn out to be non-viable? This raises financial sustainability concerns. Adding up to $1.5 billion (plus), plus compounding borrowing costs each year, is a sizeable hit to the Budget bottom line.

Emissions price outcomes under the 'carbon' tax and ETS, and the viability of CEFC investments, are another source of policy tension.

Lower emissions prices mean less emissions cuts, but probably more Australian permit revenue. But fewer commercial renewable energy and other projects will ensue, with more government spending classified as 'on-Budget'. If emissions prices are higher, there might be more

emissions cuts, but less emissions revenue. Against that, more commercial ('off-Budget') CEFC investments might be found.

The danger is that the Budget bottom line will be worse than claimed, and all for little if any global environmental gain.