Carbon coupons may be the way to go

Unfortunately for Australia, our reliance on hand-picked but non expert economists is leading us down a very different post-Kyoto path. As if making up for lost time, we are racing to design a technically perfect carbon tax which faces evisceration by exemptions demanded by politicians. That could do more harm than good.

Many nations will struggle to sign up to a carbon tax for which the costs are large and uncertain. The impact on machinery and vehicle sectors, chemicals, metals, paper, plastics, agriculture and food will vary for each signatory. International carbon trading means external shocks are transmitted to other nations in a “zero-sum game”. Lastly, signatory nations have to churn carbon tax revenue back to compensate vulnerable citizens. This is a very impure science at the best of times.

Climate change’s rate-limiting steps are the giant developing economies. This week, China supported the election of Robert Mugabe at the UN. When one also considers China’s actions in Darfur, it is clear that self-interest still trumps altruism. For the other half of the world with incomes below $10 per day, there will be little appetite for adding a 20 cent carbon tax to fuel which is already subsidised.

Last century, 44 nations tried to fix the price of money to a gold standard at Bretton-Woods. They failed. Enforcing a global price for carbon will be even tougher. Elements of McKibbin’s proposal avoid the pitfalls of a global “cap and trade” and deserve urgent consideration. Unlike the gold standard, this time we don’t have the luxury of decades to urge imperfect administrations to adopt a perfect carbon tax.