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

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.