Reducing emissions or redistributing income: why is Australia pricing carbon?

Greens leader Christine Milne wants the Gillard Government to explain the environmental benefits of their joint carbon tax/carbon pricing policy to help ‘sell’ it. This is sensible. Voters must understand why this major tax/benefit churning exercise is needed, and agree benefits exceed costs, if they are to accept it.

Any benefits from pricing carbon come from reducing global greenhouse gas emissions compared with ‘business as usual’. With less than 1.5 per cent of global emissions, and falling, Australian action alone won’t reduce global emissions much, at best. 

Others, including recently, Minister Albanese, say this isn’t the right question. They’re correct, for two key reasons. 

First, the Government/Greens policy is intended to encourage other much larger emitters to price carbon and reduce their emissions as well. Australia wants to be part of a global deal. 

Will this plan work? On the evidence, over two decades of failure, including increasingly vacuous communiqués after climate conferences, suggest not (eg, Copenhagen, Doha, Cancun, and Rio+20). 

Worse, we are chasing the wrong policy design, actually impeding global action. The preferred carbon-pricing model taxes exports and exempts imports. It only works if everybody takes the same action at the same time. This hasn’t happened. The Kyoto Protocol ratifies the reality of differentiated national action. 

For countries deciding to act in the absence of a global deal, this model undermines their trade competitiveness. Their action is a strong incentive for their competitors not to act, so they can reap the trade competitiveness benefits given away by such ‘first movers’.

The Prime Minister and others compare their carbon pricing policy with the GST. The GST exempts all exports and taxes all imports and is trade competitiveness-neutral. But our carbon tax does the opposite. Senator Arthur Sinodinos noted this crucial difference. He labelled the carbon tax a ‘reverse tariff’.

Australia’s carbon pricing policy is effectively an engineered exchange rate appreciation that also increases local prices. Australia could do without this policy quinella, especially now.  Carbon pricing costs for Australia are magnified. Global environmental benefits are minimised.

There’s a second reason why Minister Albanese and others are right.

Climate negotiators seek progressive implementation of a global emissions trading scheme (ETS), with international linkage via free trading in emissions permits between ETS participants.  This is the so-called market-based ideal towards which current even more dirigiste national attempts at an ETS are to evolve.

How is a fair sharing of emissions adjustment burdens to be measured under a global ETS? By reference to national carbon prices not by comparing reduced emissions production across countries. Under a global ETS with international permit trading, carbon prices will be the same in every country. That’s the only definition of ‘fair’ that makes sense under a global ETS.

This point is crucial. Production of emissions will shift between countries as the permits market seeks out the lowest-cost ways of reducing emissions. This is the rationale for the ‘trading’ part of ETS models. I won’t cover the vexed question of initial national allocation of emissions permits – the ‘cap’ part of such schemes.  This is likely to render implementation of a truly global ETS model impractical.

The search for lowest cost emissions reductions may mean emissions in some countries change little, or even increase, compared with business as usual. Australia may be such a country. The fact that the Government/Greens policy envisages large purchases of emissions permits from offshore (subject to non-market limits) indicates that our emissions reduction commitments will be partly ‘contracted out’ to countries selling us emissions permits (and reducing their own scope to emit as a result).

Minister Albanese and others have drawn attention to another question. If Australia can’t make a large contribution to global emissions reductions itself, and equal burden sharing implies the same carbon price across countries under the preferred ETS model, why should Australia get out ahead of its competitors?

In May 2011 the Productivity Commission (PC) concluded that economy-wide, Australia’s effective carbon pricing was about the same as the average for a selected group of developed economies (for electricity, equivalent to a carbon price of about A$9/tonne). Australia’s trade competitors were not fully covered by the PC, and our effective carbon price was probably well ahead of our competitors.

With a A$23/tonne (and rising) carbon tax until 2015, allowing for winding back of inefficient existing schemes (eg, feed-in tariffs), and including the 20 per cent renewable energy target (RET), Australia is now even more ahead of our trade competitors on average. 

At A$23-A$29/tonne, the carbon tax is not high enough to induce a significant shift even away from coal to gas (and gas prices may continue to rise). Environmental benefits are due to the more costly RET.

But the carbon tax will raise revenue, at least until 2015. This will be used to finance other measures, including compensation, albeit temporarily. Lower income groups will be over-compensated – for now.

This further undermines the carbon price. Increasing real incomes for groups likely to spend it increases their demand for emissions intensive products, weakening price effects intended to reduce emissions.

The bottom line is that the Government/Greens policy smells more like inefficient income redistribution than emissions reduction, efficient or otherwise.

Explaining the environmental benefits of the Government/Greens joint carbon pricing policy is crucial. 

If voters believe there is no environmental benefit from the carbon pricing policy, and see almost exclusive Government emphasis on selling the ‘hip pocket’ consequences for them, even those receiving a ‘fistful of dollars’, shoved into their bank accounts with no questions asked, might smell a rat.