Emissions trading: getting the balance wrong

“We’ve got the balance right”. That’s the Government’s defence of its White Paper, Australia’s Low Pollution Future, against environmental and business concerns. This assumes there’s a trade-off between cutting greenhouse gases and cutting jobs.

This “trade-off” is largely or wholly illusory.

Job losses imply activity shifting to other countries not applying such policies, increasing greenhouse gas emissions there. Jobs and emissions shift overseas, there’s little or no change in either globally, but clear economic and employment costs for Australia. This is no “trade-off”. It’s just a really bad deal.

Worse, the Australian (and European) policies provide incentives for other countries not to follow our example. That’s how jobs and activity shift from Australia to them. In a global recession, these incentives are more powerful. Result? The Australian model makes a global deal unlikely. Without a global deal, Australia’s efforts will cut Australian jobs, nothing else.

With this sort of nasty “trade-off”, the world policy model won’t work.

But there’s good news. This “trade-off” is completely avoidable.

Australia (indeed all countries) could reduce greenhouse gases without any “carbon”/jobs leakage. In a global recession, especially, that is the model that “gets the balance right”. That model targets a country’s consumption of embedded emissions rather than production.

There are two policy paths we can choose.

Globally, greenhouse gas emissions production equals emissions consumption, and emissions exports equal emissions imports. Nationally, emissions production covers local production including exports, but not imports. Consumption covers local production excluding exports, plus imports.

If all nations adopt the same policy at the same time, targeting production or consumption is the same thing. But the production model only works if all nations act simultaneously.

Some argue the United Nations Framework Convention on Climate Change (UNFCCC) requires a production model. Ironically, they also support the Kyoto Protocol, which provides that countries (i.e., developed versus developing) do not act simultaneously! Developed economies have not acted together, either.

The UNFCCC/Kyoto Protocol/production model is designed to fail.

It shouldn’t have been surprising that production-based climate policy models allowing different national implementation dates would fail globally, reflecting concerns about “carbon leakage” and associated job losses.

Even if the supporters of the UNFCCC and Kyoto did not see it then, we can see it clearly now. The production model has failed, both within the EU and Australia (because of major policy “carve-outs” and exemptions), and more generally (because countries like the USA, China, India, etc, have not adopted such policies at all).

This is basic economics. When nations act at different times or to different degrees, production models undermine trade competitiveness of early movers compared with others. Result? No deal.

A national consumption model gets us to the same global end-point over time as a production model. The real clincher is that it’s much more likely actually to get us there!

Ross Garnaut asserts the “prisoners’ dilemma” prevents a global deal on climate change policy. This “dilemma” reflects concerns about “carbon leakage” and job losses. The production model is the cause. A consumption model solves this problem.

So why pursue a production-based model given its now-long history of failure? I’ve been told: “It’s too late to change course.” Why? We need a comprehensive long-term global deal. Is it really “too late”?

The emissions consumption model is practical. It starts with the production information required under the Green/White Papers. It uses Australia’s existing Tax Invoice system to pass carbon cost signals transparently down the supply chain to consumers, zero-rates exports (which then have carbon prices imposed by importers), and imposes a trade competitiveness-neutral border tax adjustment on competing imports. This ensures trade-neutrality and is WTO-compliant.

There are no job losses overseas, and Australia’s own emissions reductions make the same net contribution to global emissions reductions. All countries should adopt this model.

Production model supporters have dug themselves into a policy hole. If serious about climate change, they must do two things.

First, stop digging. Second, switch to “Plan B” - a consumption-based policy model. “Plan A” is a fizzer.

Let me summarise.

Globally, two roads can get us to a comprehensive climate change policy deal. One road targets national production of emissions. Another targets national consumption. Both roads reach the same destination: global emissions production equals consumption.

The production road is the road less travelled. It will only be travelled if all nations act simultaneously. The consumption road is navigable even if - as is realistic - they don’t.

If they only allow the production road, the UNFCCC and Kyoto Protocol approaches fail, measured against their own objectives.

Why should such international agreements preclude options more likely to get us to the same end point?

It’s a choice. If nations choose a better path to the same end, more progress is made than if they don’t.

I’m surprised there’s no coalition between business, unions and environmental groups in support of a consumption-based policy model. The failure of the alternative is obvious.

To adapt a famous Keynesian statement: “Given the evident failure of the production model, and the merits of the consumption model, why haven’t you changed your minds?”

Putting it in more Australian terms to these groups: “Where the bloody hell are you?”