Can Copenhagen cut climate costs?

Political and business developments on Australian climate policy are diverging.

The Government’s House of Representatives inquiry into its policy (the Carbon Pollution Reduction Sheme or CPRS) was dropped a week later. Malcolm Turnbull rejected Andrew Robb’s carbon tax idea instead of an emissions trading system (ETS). Now, with an “open mind”, he’s pushing for a Senate review in place of the Reps Inquiry.

Those supporting current policy tried to stifle debate last week. But the Centre for Independent Studies and the Australia Institute (a broad church?) suggested a carbon tax instead of an ETS.

There’s been a rising tide against the CPRS.

Don Argus has suggested a carbon tax. Don Voelte has opposed the CPRS. Mitch Hooke (Minerals Council) has argued the debate isn’t over. Kate Carnell (Food and Grocery Council) asked why import competing businesses should face costs not borne by their import competitors. OneSteel is against the CPRS. The strongest Government supporter, Heather Ridout (Australian Industry Group), has done a U-turn, arguing for a “Clayton’s CPRS” until other countries act. The Business Council and the Australian Chamber of Commerce and Industry now want a “dry run”. The finance sector wants to make a margin on the trading of permits under the ETS, whether or not emissions are reduced. Below the radar, the import-competing story is a slow-burning fuse with potentially concentrated political consequences.

Overseas, a shift is on. New Zealand has a Parliamentary inquiry into its ETS. The Obama administration is looking at a carbon tax. Similar questions are being asked in Canada. China has signalled “no deal” for Copenhagen. Sweden’s U-turned on nuclear policy. The EU “20-20-20” Poznan agreement has more back doors than dunnies at a Grand Final.

Australia could be wrong-footed on climate policy. Instead of “staying ahead of the curve”, it may end up behind the 8-ball.

I didn’t understand the Government’s Reps inquiry. Its U-turn is more comprehensible. Turnbull’s stifling of Robb reminds me of Costello’s reaction to Turnbull canvassing tax reforms. Confusion reigns.

The broad forces driving this shifting on climate change policy are understandable.

The global economic situation is bad, expected to worsen, and forecasts are being revised down. Job losses could be large. Trade protectionism is up (dairy in Europe, steel in America, and cars everywhere).

Australia’s CPRS doesn’t fit. Preserving jobs and the CPRS are incompatible. Minister Penny tries to have it both ways. She says an ETS is superior because it delivers emissions reduction certainty. She says more ambitious targets will lose jobs and emissions overseas. Both can’t be right. Emissions reduction certainty needs a trade-neutral consumption based model. Jobs and carbon leakage come from a production model (the CPRS) - unless we have an ineffective policy (“Emissions Watch”).

There’s a nasty virus in the CPRS. It will white-ant any global deal on climate policy.

The virus is self-inflicted cost disadvantage.

If we adopt a CPRS, and our trading partners don’t, our exports cop a carbon cost not borne by our competitors. Our import-competing industries do likewise.

Globally, carbon emissions are more likely to rise than fall. Ours might fall, but only as businesses shift to countries not acting. We lose competitiveness, jobs, and the world keeps warming anyway.

It’s worse.

Under the CPRS, we download this virus. Unless we adopt Ridout’s “Clayton’s CPRS”, (a cost to business for no reason) we suffer the virus and lose jobs. Our trading partners get a competitive edge.

With the global recession, they’re losing jobs too. So they won’t adopt our CPRS, precisely because we have. That way, they gain jobs as ours fall. Globally, emissions don’t fall. They just get shuffled away from Australia.

Those without a climate change policy have strong incentives not to follow suit. Those “on board” are tempted to “jump ship”. Enter Garnaut’s “prisoners’ dilemma”. Translation: “I’ll reduce my emissions after you”. Nothing gets done, as we’ve seen since Kyoto.

Climate change is a global problem. A global policy response is needed. The “prisoners’ dilemma” (or similar labels) describes the road-block to a global deal. This road-block is a government failure. Governments chose the wrong emissions model, and so have undermined efforts in this area.

A production-based model drives other countries away (gaining jobs in the process). We lose jobs, and shift emissions offshore. Worse, our action actually underwrites failure in Copenhagen 2009.

But we can do a deal at Copenhagen.

The UNFCCC goal: stabilising greenhouse gases at levels that would prevent dangerous anthropogenic interference with the climate system should be the preamble. Acceptance countries won’t act simultaneously should also appear here.

An agreed framework of principles to guide policy design comes next. National policies should:

1. raise relative prices for carbon, but minimise effects on real incomes;
2. make the same contribution to lower emissions globally as nationally;
3. minimise “free rider” impediments to a global deal;
4. be comprehensive to minimise evasion and internal “carbon leakage”;
5. be competitiveness-neutral at least until all countries are “on board”;
6. allow countries freedom to choose between approaches, subject to principles 1 to 5; and
7. minimise national compliance and administration costs.

This framework allows evaluation of alternative policies. A production model won’t comply with principles 1-5. A consumption model will.

These principles (especially 2) suggest international trading in emissions permits is just “carbon leakage”.

The Government claims an “evidence based” policy approach. The CPRS is very poor evidence.

On the evidence, we’ll soon see a really large reduction in emissions compared with (desired) “business as usual”. It has nothing to do with climate policies. It’s compliments of the international economic crisis.