Ranking the CPRS: a one-model beauty contest

The Senate Select Committee on Climate Policy has released its report. Its first recommendation is that Treasury be directed to do more modelling of the effects of the CPRS (Carbon Pollution Reduction Scheme), including transition costs, allowing for the deterioration in the Australian economy, effects on jobs and the environment, and effects on regional Australia.

In addition, the Committee recommends Treasury be directed to model five policy alternatives:

1. a “baseline-and-credit” scheme;
2. an “intensity” model;
3. a carbon tax;
4. a consumption-based carbon tax; and
5. the McKibbin “hybrid” approach.

Options 1-3, and option 5, target Australia’s production of emissions, including in our exports. They don’t effect Australia’s emissions imports. Option 4 targets spending on emissions (our emissions consumption). It applies to local spending, including imports, and excludes exports. All options intend to price carbon, whether applied to production or consumption.

Without going further into their details, the Committee therefore sees at least six alternative policy models needing evaluation.

Minister Wong has asserted the CPRS is the lowest-cost option. Is it? Is it the most cost-effective option? This is crucial.

During the Committee’s hearings on April 15, a former Environment Department employee, Salim Mazouz, implied governments have chosen the best model. He said:

In addition to the one year of Garnaut’s research that underlies this we have had many reviews. As early as 2003 there was a proposal before cabinet to do emissions trading. … A lot of the ideas … have been around for many years. A decade ago when I was at the Australian Greenhouse Office I remember discussing the consumption-based approach. …

It is not the case that the Senate is facing a choice between the CPRS and an alternative proposal that might be superior. … (Excerpts from transcript, April 15.)

These comments reflect a widespread attitude at both official and political levels. Should we accept this paternalism? Mazouz’ comments suggest two possibilities. First, governments have made an assessment, but decided against releasing it, relying on the “we know best” assertion. Second, there has been no model-based assessment of options including the five alternatives above.

Neither possibility is a good look for governments supporting transparency and evidence-based policy. The Select Committee’s modelling recommendation makes sense. If it hasn’t been done, it should be. If it has been done, let’s see it.

Some home-grown hints and overseas modelling are suggestive.

On page 84 of its modelling report, Treasury said:

(Emission) Allocations based on production are likely to result in higher welfare costs for Australia than allocations based on consumption. (Parenthesis added.)

Does this imply a consumption-based policy is lower-cost than the production-based CPRS? If so, how can the CPRS be the lowest-cost option?

In a draft report open for comment, Climate Strategies has reported climate policy modelling results for selected emissions-intensive trade-exposed industries (cement, steel, aluminium) operating in the EU.

The modelling evaluates “carbon leakage” under six policy options for dealing with trade-exposed industries:

1. full border adjustment (BA full) - roughly equivalent to a consumption base;
2. BA import (border adjustment only for imports);
3. BA direct (adjustment of exports and imports but only for direct emissions);
4. BA EU average (adjustment for imports based on the EU emissions average);
5. BA import direct; and
6. full auction of permits using a production-based model.

The first five of these options are more or less comprehensive versions of the consumption-based carbon tax identified as option 4 by the Senate Select Committee. The sixth option is a particular variant of a production-based approach - a “pure” emissions trading scheme.

For cement, steel and aluminium, the first option, BA full, (closest to a consumption-based carbon tax) delivers the lowest “carbon leakage”. The sixth option (full auction of permits to producers) generates the highest “carbon leakage”.

Climate Strategies has been transparent, releasing a draft report for comment. If its modelling is correct, policy effectiveness (minimising “carbon leakage”) favours a consumption-based model (BA full) over production-based auctioning. Minimising “carbon leakage” should minimise job losses (and costs) too.

There is resonance between the Treasury statement cited above, the Climate Strategies report, and the in-principle merit of consumption-based policy because it’s trade competitiveness-neutral.

Would Treasury modelling produce a similar finding for Australia?

Meanwhile, Nicholas Stern recently agreed with Gao Li, China’s Climate Change Department Director, who earlier this year said:

… about 15% to 25% 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.

China’s approach delivers a consumption-based policy. Stern and China support this policy model because it’s fair. Crucially, it’s got another huge benefit. It removes loss of trade competitiveness and “carbon leakage” as a reason not to act.

A consumption-based model delivers Ross Garnaut’s desired “principled approach to the trade-exposed sector”, avoiding the morass of “special deals” and “rent-seeking” activity the CPRS has generated.

The CPRS is “the GST from hell”, delivering negative protection. Why should any country unilaterally tax its exports and effectively subsidise its imports, for no global emissions reduction?