Emissions trading: getting the balance wrong

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.