Does the CPRS need CPR?

Accepting climate change is a global problem we can influence, we need all countries to do their bit. Ross Garnaut has noted a big road-block to a global deal is the “prisoners’ dilemma” (or “free rider”) problem. Why should we act if others won’t? If we all take that view, no action will be taken.

Faced with this problem, imagine a policy response whose design makes the “free rider” problem worse than it need be, reducing the odds of cutting a global deal - the very thing we need most.

Worse, attempts to offset its fundamental design flaws result in arbitrary “carve outs” from the greenhouse gas emissions covered by the policy, drastically shrinking the scope of the policy in Australia, and emasculating its effects. Still worse, it encourages business to shift offshore at the margin, diverting, rather than reducing, greenhouse gas emissions, and costing jobs in the process.

Businesses with competing interests present a less-than-coherent response by trying to “band-aid” the flawed policy design, some ending up sounding like “new protectionists” as a result. Unions generally appear supine or policy-supportive, despite likely job losses (even as business conditions weaken for other reasons). The WTO threatens to challenge the “band-aids” offered by the government, and pushed further by business, as being free trade-inconsistent.

Government is caught between “Emissions Watch” (an ineffective policy because it puts a low price on carbon), and “Jobs Overboard” (an ineffective policy because a high carbon price pushes emissions and jobs overseas). Politics won’t allow the latter. The WTO may not allow the former.

This scenario is fanciful, isn’t it? Not at all, it’s alive and well in Australia. It’s called the Carbon Pollution Reduction Scheme, (or CPRS, for the acronym aficionados). Given the politics, some nasty people have dubbed it the Carbon Reduction Avoidance Program.

The root cause of this mess is the decision to focus on Australian production of greenhouse gas emissions as the target for the CPRS. We have a choice here. We could choose production (as embodied in Australia’s Gross Domestic Product - GDP), or consumption (as embodied in Australia’s Gross National Expenditure - GNE).

If all countries acted together, it wouldn’t matter whether we focused on GDP or GNE. But they won’t act together. Indeed, the Kyoto Protocol says they won’t. So the choice matters. Why?

We need to get real. Australia can’t control production of greenhouse gas emissions globally. If we try to control our own, and this just pushes them offshore, we just displace them. The only thing we reduce is our jobs. We can control our consumption of greenhouse gas emissions. These are embodied in local production consumed locally, plus our imports. We have the policy instruments to deal with both. Done properly, our actions are WTO-consistent. And our actions don’t damage our international trade competitiveness.

What’s more, this same model works for other countries, in exactly the same way as the production-based model doesn’t (with apologies to The Hitch-Hiker’s Guide to the Galaxy)!

Could a consumption-based model be the basis for a global deal on greenhouse gas abatement policy? It’s certainly a “no regrets” trade policy model. It allows individual countries to choose when, and how fast, to pursue this objective, without threatening their trade competitiveness. It’s far superior to the production-based model.

Can a consumption-based policy be easily implemented? No, it will be difficult, and needs more research. Is it impractical? It’s too soon to know. But one thing is for sure: a production-based model won’t work. It won’t facilitate a global deal. It will run up against WTO concerns. It will maximise chances that policy will be cosmetic and resource-wasteful, rather than being effective and efficient.