Can China change the Copenhagen consultations?

China, one of the largest economies, with greenhouse gas emissions to match, has made a positive contribution to the climate change policy debate.

This might transform chances of getting a global deal on climate change policy in Copenhagen in December 2009.

Gao Li, Director of China’s Department of Climate Change, says: “about 15 per cent to 25 per cent of China’s emissions come from the products which we make for the world. … This share of emissions should be taken by the consumers, not the producers.” Gao Li believes this is a “ … very important item to make a fair agreement”.

I think he’s right. Why should countries target production of emissions rather than consumption?

Some argue producers of emissions should be held responsible for them. Producer responsibility is well established in the environment policy area (“polluter pays”, etc). But in a world where countries don’t act in concert on emissions, this argument collapses because of national trade and jobs concerns.

First, it cannot work in a world where producers can relocate production to where it’s most cost-advantageous. A country’s pursuit of an emissions production base may even increase global emissions as production shifts to more emissions-intensive locations. Under the Australian Government’s policy, (the CPRS) industrial dislocation in Australia, with the (at best) transitional employment and income costs that go with it, will come with no gain in terms of global emissions - they could even increase.

Second, a production focus suggests wealthy countries (like Australia) can impose their national emissions reduction costs on other, much poorer, economies, by raising their export prices. It also pretends we won’t switch our own spending to emissions-intensive imports when these become cheaper compared with locally-produced substitutes now affected by higher carbon costs.

The assumptions that, under the CPRS, poorer countries won’t switch to cheaper sources of supply than countries like Australia, and (worse) that we won’t switch to cheaper imports (“contracting-out” emissions generation overseas), are hypocritical. By pursuing the current CPRS unilaterally, Australia is generating the incentive to do both. It’s shifting emissions overseas. It’s not reducing them.

If Australia won’t clean up its act - curtail its own consumption of emissions - what right has it got to tell others to reduce theirs? If we are to lead by example, we should address what we can control first: our emissions consumption.

These “moral” arguments have hard-edged economic benefits. A consumption focus could break the logjam preventing global adoption of a Kyoto-type climate policy.

If all countries focus on their emissions consumption, we still address global emissions. By definition, global emissions embedded in spending on (consumption of) goods and services are the same as emissions embedded in the production of those same goods and services.

But there’s a big difference between the consumption and production paths to a global deal on climate change policy. The consumption path covers local production sold locally plus imports. The production path covers local production sold locally plus exports. The consumption path avoids adverse trade competitiveness effects. The production path maximises these adverse effects.

The production path causes what Ross Garnaut calls the “prisoners’ dilemma”. This (not that accurate) theoretical label is better expressed as: “I’ll cut my emissions after you cut yours.” Obviously, on this basis, nothing gets done.

That pretty much summarises the results of the Kyoto Protocol to date. If we continue with the failed production model pursued over the last couple of decades, it also indicates the likely outcome of the Copenhagen meeting in December 2009: “I’ll cut my emissions after you cut yours.”

Garnaut’s so-called “prisoners’ dilemma” is almost entirely due to governments choosing a production-based climate policy model. If they switch to a consumption-based model, the “dilemma” largely disappears. The roadblock to a global climate policy deal is eliminated.

Isn’t this a radical change in the policy approach? Not at all. The European emissions trading scheme and Australia’s CPRS already modify the production approach by “carving out” large sections of emissions production in the “trade exposed sector”. As a result, they - badly - attempt to steer away from a production model to a consumption model.

Why address the “trade exposed sector” problem badly when we could do the job properly?

Garnaut suggests a “principled approach” to the treatment of the “trade exposed” sector is needed. I agree.

A “principled approach” is to exempt exports (which are then subject to the carbon price in the importing country) and ensure imports attract the same carbon cost as locally produced substitutes.

We have a model to guide us. Indeed, we can use the Tax Invoice system already operating under this existing model to “tweak” the CPRS to get to the right result. It’s our GST system. I find it ironic that the three blocs or countries trying to implement a production-based climate policy already have in place a system allowing them to implement a far superior consumption based policy.

Europe already has a Value-Added Tax (VAT). Australia and New Zealand have their antipodean counterparts: the GST.

China’s given the rest of the world a lead. Will we take it? We should. It leads to the same emissions end-point, but is much more likely to get us there.