Does the CPRS need CPR?

If we don’t get the design principles right, we’d be better off devoting scarce Australian resources to adaptation to the climate change problems we forecast will come. The “prisoners’ dilemma” problem will prevent a truly global deal until it is too late.

What about an emissions trading system (ETS) versus a carbon tax? That’s a matter for another article. But two points are worth noting here.

First, WTO concerns about policy “carve-outs”, compensation and border tax adjustments seem to relate in part to the price uncertainty inevitably associated with a production-based ETS.

That leads to the second point. Proponents of an ETS claim it offers quantity (emissions reduction) certainty and price uncertainty, while a carbon tax offers price certainty and quantity (emissions reduction) uncertainty. We want to control emissions, so an ETS is superior.

In a small open economy like Australia, with a production-based ETS model, this pro-ETS argument is incorrect.

Effective attempts by Australia unilaterally to reduce its greenhouse gas emissions are likely to induce “carbon leakage” offshore. An effective ETS therefore is likely to result in both price and quantity uncertainty (globally). WTO concerns would be allayed by a model generating price certainty. Long-term contracts (e.g., for power) affected by policy change might similarly benefit, allowing price signals to be passed on to consumers as intended.

This suggests a carbon tax approach would be better than an ETS.

One final thought.

We should be very careful about adopting policy designs born within the European Community (like the ETS). Some of them are not very sensible, even hurting their own residents. The Common Agricultural Policy (CAP) has been bad for the world, bad for Australia, and bad for EC consumers.

We can do better. The Green Paper should be the starting gun for a serious debate, not a rubber-stamping of current policy. Let’s have that debate.