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A cautionary tale…
How will the CPRS Carnival end?
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In the next week or so, the carnival of climate carpetbaggers is about to fold its tents on the Carbon Pollution Reduction Scheme (CPRS), at least for this year. How it ends up is still anyone’s guess — making predictions is like nailing jelly to the wall. It hasn’t been pretty. Various commentators have described this as one of the worst examples of public policy making. Professor Garnaut accurately paraphrased Winston Churchill to say “never in the history of public policy has so much been given to so few for so little reason”. There’s been a lot of criticism and cynicism about the intentions of our political leaders and of the effectiveness of emissions trading schemes and the CPRS itself. Much of this has been justified and much misdirected and/or misinformed. The Climate Institute and others have backed an emissions cap and trading scheme over other methods of applying a carbon price because, well designed, it gives greatest certainty that emissions will actually be reduced. The emissions cap is quantifiable, can cover large portions of the economy and, with appropriate targets, sends a clear signal to medium- and long-term investments. It can minimise the need for industry-by-industry regulatory battles that would be otherwise necessary and allow for cost-effective reductions across the economy. Such schemes need to be part of a toolkit alongside energy efficiency, renewable energy incentives and more but they can be a major tool in that kit. Notions that a carbon tax would be simpler and less politically controversial ignore all the history of taxation policy here and abroad. It gives little certainty of medium-to-long-term emissions reduction and is less responsive to economic cycles. For all its faults, the European ETS demonstrably had a stabilising effect for some industry during the worst of the financial crisis. There’s also been a lot of analysis and commentary of what would happen for Australian emissions should a 5% reduction target be adopted for 2020. This government target assumes a complete collapse of international action and negotiations, leaving the world with little or no prospect of peaking global emissions before 2020. Achieving that peaking is vital if we are to keep global warming increases under 2 degrees Celsius above pre-industrial levels. The Climate Institute has focused on the prize that counts. Australia doing its fair share towards an effective global climate effort while increasing our carbon competitiveness in the emerging global low-carbon economy. The question then, is whether the CPRS is well designed and able to achieve appropriate targets? The CPRS under the White Paper of December was failed these two key tests. It had excessive assistance for big polluters with little conditions or reviews, and it had an insufficient maximum target of 15% reductions. In May we, along with welfare, union, environment and industry groups, backed key changes that increased the potential target to 25% and added transparency and reviews. This is a much more credible target, according to our and other analysis, and was described by Professor Garnaut as our fair share. Additional transitional assistance in the form of a “global recession buffer” of extra permits was hard to swallow, and now unnecessary, but not fatal to the overall design of the CPRS whose foundations, with protection against windfall gains for generators and other differences, are much more solid than Europe’s original scheme. To assist our examination of what may result from the current coalition and government negotiations on the CPRS we engaged the modelers, used by both, at Monash University to analyse the 15% scenario. We chose this target because, as we recently reported, with significant domestic action from many developed and developing countries this is now a more likely target, and because the agreement for a 25% target would see a review of all exporter assistance on the grounds of significant international action. It lets us get a handle on the fiscal and political risks. The research examined the amended White Paper scenario and proposed coalition changes. It found, despite all the hype, under both scenarios Australia’s 2009 trillion dollar economy grows to $1.2 trillion by 2020, creating about 800,000 new jobs. It’s perhaps unsurprising, once you think about it, that the coalition’s big spending approach would have the bigger impact in slowing short-term jobs growth with between 10,000 and 30,000 fewer jobs created each year between now and 2015. This is because personal and corporate tax rates are increased to cover the shortfall. The larger handouts for big polluters and exclusion of coal mining and agriculture, turns a revenue positive scheme, at this 15% target, into a deficit of more than $36 billion to 2020. By far the biggest impact comes from changes for big polluting exporters and the exclusion of coal mines. Exempting agriculture without other actions puts another $7 billion on to taxpayers or business to purchase the extra permits. At this 15% target domestic emissions for coalition and government proposals peak about 2011, as opposed to after 2030 under a 5% target, but the coalition scenario increases the amount of international permits needed from 12% to 44%. Of course, models can vary according to assumptions but these different estimates underscore the budget risks faced by governments if they lock in high levels of assistance in an uncertain world. Unless the government maintains the ability to modify assistance and drive emission reductions in uncovered sectors such as agriculture it is locking in fiscal risk not managing it. To the extent changes threaten the ability to achieve at least 25% reductions they are unacceptable. Locking in excessive financial support also potentially further undermines Australia’s ability to help achieve an effective, binding and fair global agreement by constraining investments in national and global climate-change solutions. So as the carnival comes to its conclusion, there are clear limits to changes to the CPRS. There should be no further unconditional handouts or windfall gains. Instead, as The Climate Institute and others made clear in October, there needs to be sustained efforts and additional commitments to help Australia become competitive in the emerging global low carbon economy and co-operative in achieving an effective global climate agreement. |
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18 Comments
John Connor evokes the standard academic argument against a taxation approach to carbon pollution reduction, in that “an Emissions Trading Scheme (ETS) is better than a carbon tax, because with an ETS, you set the emissions cap, and let the carbon price float, but with a tax, you can only set the carbon price and you have to let the level of emission’s reductions float”.
Well, this may be true in an simplistic sense, but in reality, most if not all ETSs to date have been far too poorly designed to effect decent carbon cuts, whereas a well designed tax can be tweaked over time and so used as a lever to force cuts in carbon pollution at the (scientifically) required rate. Tobacco tax hikes and the consequent drop in its usage are a good example of this. An ETS could only achieve this if it was so pure as to have minimal or no free permits, polluter compensation or offsetting.
Other advantages of a tax approach are that a known tax rate would provide certainty for businesses and governments in their forward planning; existing tax collection mechanisms are already in place; and there’d be no need to create a new “free market” with all its attendant speculators, windfall profits, loopholes and other unscrupulous actions such as carbon offset scams. In the light of the current CPRS offering, I think the carbon tax approach is worth reconsidering.
I also don’t see the problem with a true carbon tax. While, as Braveheart has indicated, this theoretically allows the possibility of people just paying and polluting the advantage is that you can deliberately price carbon at or near the known break-even point of non emitting alternatives. This makes it an economic no-brainer not to pollute. Of course, any scheme with no actual cost penalty for carbon - such as a free permit scheme - acheives neither outcome.
My concern with the presently proposed system is the need to continually reduce the “emission cap”. It seems so like the approach to reducing the fishing catch as stock decreases. The reduction in fishing quota is so interfered with that the result has been good reductions but years too bloody late! If the cap system came with a “reduction in cap by 10% each year” then it would be worth thinking about, but I wouldn’t trust our leaders to meaningful reduce the cap either by the right amount or at the right time. Once a tax is in place the only way I can avoid paying it is by changing my lifestyle to avoid it - a much better use of my brains than yelling at decision-makers who refuse to acknowledge the seriousness of the problem - util it is too late.
Good point. Afterall, the RBA had to be made independent because no politician ever wanted to raise interest rates and there were always so many voices wanting an easy ride for just a little longer.
You folks missed his main argument against a tax though - ‘It gives little certainty of medium-to-long-term emissions reduction and is less responsive to economic cycles.’
I still prefer a tax model though - all these accounting models mean that rorting is inevitable, and relies on a market price which is controlled ardently by the government.
Sigh
Wonderful work Climate Institute
The modellers’ findings that the coalition approach would reduce growth more than the government’s scheme are an interesting new angle.
But Braveheart’s arguments for a carbon tax also have merit. There is little point in ignoring the realities of the political context. The purist approach might produce lower emissions in the unreal world of modelling, but the months of wrangling and backroom negotiations make it clear that no government could ever get a purist scheme up.
In the messy world of reality, the chances of reducing total global emissions at all are highly dubious.
There are however many reasons to move away from over-relance in fossil fuels, but to have any chance of doing this we need to erode the price differential between conventional power and power from sustainable sources.
A more simple strategy might have some chance of being accepted. It would run up against the same vested interests that have bedevilled the CPRS. But it would be harder to tinker with and more transparent, I would have thought. Power companies would simply pass the tax on to consumers at a fixed and known rate. We would all have to pay more, but that is the point, isn’t it??
The only options on the table at the moment are:
1. The hopelessly-compromised CPRS
2. Nothing.
Option 2 looks pretty attractive at the moment!
Carbon tax is the only other option that might get up if Option 1 is defeated.
Actually, you lost me on one point. You say that a 15% reduction is “insufficient”, and then go on to say, further down the page: “At this 15% target domestic emissions for coalition and government proposals peak about 2011, as opposed to after 2030 under a 5% target.”
So why is 15% insufficient, then, if it leads to emissions peaking in two years time (which I find very hard to believe, by the way)??
Can I suggest that instead the word Taxes, we use the word Royalties? Admittedly, royalties are more usually associated with extracting rather than emitting, but otherwise, I suggest that royalties are a better description of what is happening - an amount of money is being paid to buy access to a finite resource.
Nice intelligent discussion, and it highlights the many dilemmas apparent in any scheme. It seems to me that any scheme that gets up is going to be flawed somehow. In the meantime we wait for an ultimate carbon scheme that might save the world. ‘Not likely to happen I think, not in a timely manner.
Surely we are well past the “Nero fiddling whilst Rome burns” analogy. If we are unable to mount a carbon disincentive approach, how about directing our physical and intellectual resources towards something we can do?
In the end, a carbon tax is about reducing consumption, and whatever consumption does persist, it should have lower carbon impact. That devolves positive action to grass roots where it can become effective virtually overnight. I’m saying that given our legislative impotence we should direct our strategies to a practical expression of carbon reduction, and that government ought to be enabling a “bottom-up” course of action. Engage the community.
What might we do? Well bring on electric cars, make them affordable. Insist on low emissions for combustion powered vehicles in absolute terms not just a good % gas emissions. Educate people, about the need to conserve. Reduce waste, packaging. Develop a “can-do” attitude in people that makes them see that their consumption patterns are a serious component in global pollution, and that they can make a difference by even small changes in behaviour.
How to pay for all that sort of thing? Well there was money for the stimulus package(s), direct some of that. Make a reliable Budget commitment to fund effective action against anthropogenic based climate change. Intriguing how the World found trillions of dollars to deal with the financial crisis but little money to deal with climate issues that threaten our very existence as we know it.
To trot out a “Whitlamesque” expression - It’s Time…
Worthwhile point that an ETS is sensitive to the economic cycle with a flat carbon tax is not. This means that it acts as an “automatic stabilizer”. This has certainly happened in Europe where the permit price dropped significantly during the economic slowdown. This is a desirable attribute.
Ben, changing the rhetoric doesn’t change what it is.
It’s a tax. An all pervasive tax. A tax that will be added to everything.
I note also - with no sense of irony - that the vested interests at the ‘Climate Institute’ conveniently gloss over the total failure of the European Union’s carbon ‘trading’ program.
Why should we ascribe to something that is clearly broken, John?
“…under both scenarios Australia’s 2009 trillion dollar economy grows to $1.2 trillion by 2020, creating about 800,000 new jobs…”
Rubbish.
Australia’s population growth - along to the projected 35 million by 2049 - would see these jobs ‘created’ anyway.
To suggest that they will be created by a CPRS is ridiculously false and misleading.
And patently untrue.
“…bring on electric cars…”
Plugged into what overnight - coal-powered 3-phase or the windmill on your roof?
“….Educate people, about the need to conserve. Reduce waste, packaging….”
This has nothing to do with an ETS, AGW or climate change.
“…Develop a “can-do” attitude in people that makes them see that their consumption patterns are a serious component in global pollution, and that they can make a difference by even small changes in behaviour.
Again, this has nothing to do with an ETS, AGW or climate change.
You are simply agitating for carrot and stick social engineering to affect behavioural change…how “Whitlamesque” of you.
I like Ben Aveling’s suggestion of replacing the word “tax” with something less politically charged & unacceptable, such as “royalty” or something similar (“republicty”?).
It brings to mind the standard reason for excluding agricultural emissions from the CPRS: “it’s too hard to account for”. I suspect that if the word “subsidy” were to replace “emissions”, it wouldn’t take too long at all for the farm sector to get their application forms designed & filled out!
Seriously though, whatever economic mechanism is used, it needs to drive behavioural change from the bottom up, and so for consumers & producers the uncomfortable truth is: if there’s no pain, there’ll be no gain in emissions reductions and no safe future for anyone.
@Mama - if “….Educate people, about the need to conserve. Reduce waste, packaging….” “has nothing to do with an ETS, AGW or climate change” then I don’t know what does. The problem the environment is facing is a direct result of the waste products generated by the consumerism that has driven the “developed” world’s economies since the end of the Second World War. That waste includes by-products of energy production and energy consumption. The greater the manufacturing output, the greater the level of waste generated, be it in the products themselves or the supporting materials that deliver it to the consumer (packaging, transport,advertising etc).
The problem as I see it is that we attempting to use Economic tools to deal with a problem that is caused by Economics itself. It’s like trying to cure cancer with cancer.
Read it and weep.
“…The problem the environment is facing is a direct result of the waste products generated by the consumerism that has driven the “developed” world’s economies since the end of the Second World War…”
Then stop insisting everything be wrapped in plastic for “hygiene” purposes.
Do you need a mobile phone, a Blackberry, a PC, a laptop and two iPods?
Does your partner?
Do your kids?
It’s called the Butterfly Effect.
No-one is arguing about the need to reduce waste and physical pollution.
But an ETS does and will do NOTHING to address those issues.
Consumerism will never stop.
Besides why should I deny a Serengeti tribesman the right to a cold drink and a cheap TV?
Why should you?
@Mama - The Butterfly Effect is a term appropriated by Chaos Theory to describe how slight variations in the origin state of a dynamical system can have large scale consequences to that system over time. What you are describing is accretion.
But anyway. Consumerism denies the capacity for a Serengeti tribesman to have a cold drink (or clean water), because the capital required to provide him infrastructure is tied up by consumers in the developed world servicing debt to pay for their lifestyle.
I do tend to agree though that an ETS on its own is too soft a tool to meet the reductions targets required to actually achieve the desired result. What is required is the phased abandonment of the toxic carbon based economy to replace it with a renewables based system. The ETS, that allows emitters to buy their way out of meaningful reductions, smacks of Papal Indulgences. Sure, let the farmers claim carbon credits for there agriculture, but continuing the subsidising of the coal industry at the expense of the renewables sector is slow economic suicide.
Actually, it’s not. At least, it wouldn’t be if the opposition weren’t insistent on ‘compensation’.
A straight royalty payment on each tonne of carbon emitted would impact products in direct proportion to the amount of carbon released in the manufacture and distribution of each product.
No carbon emitted, no royalties payable.
That would reward businesses that find better ways to manufacture equivalent products, or substitutes. And punish those that don’t or won’t.
Use the market, Luke.