Unlike most “independent” analyses of the Government’s ETS, the review commissioned by Andrew Robb and conducted by the Centre for International Economics’s David Pearce is a valuable addition to the debate on how to address climate change.

What a pity the Coalition didn’t do more of this work when in Government. One of Pearce’s overall conclusions is that more work and more modelling needs to be done. That would have been a useful recommendation in 2001.

The most important line in the review — bearing in mind this is a Coalition-commissioned document — is Pearce’s simple statement “mitigation will inevitably be costly.”

“Employment will decrease in carbon intensive industries and increase in others, potentially new industries that we cannot envisage yet,” Pearce concluded. “Over the long-term, we expect that the labour market will return to equilibrium.”

Of course, as Keynes famously said, in the long term, we’re all under six metres of seawater.

Pearce points out the basic truth that no one in this debate is telling except the Greens: there is no way to address climate change that does not involve some pain for someone. No economic reform of any kind is pain-free. But the medium and long-run benefits — in this case, both the long-term benefits of avoiding climate change, and the new jobs and economic growth that will be created in a low carbon economy and in low-emissions industries in the medium-term — will outweigh the short-term costs.

That’s why Greg Combet’s attack on the Greens overnight is so ironic. Far from being irrelevant to the debate, the Greens are the only ones being honest. The Government, trying to pretend that there is some way of constructing an effective ETS that will retain our current carbon-dependent industrial and power generation framework, has neutered its ETS via handouts to polluters and low targets.

The Opposition is engaged in the same pretence, but hasn’t yet had to give effect to the tensions inherent in that pretence because it has declined to say what its preferred approach is. Releasing the report this morning, Andrew Robb said it would be several weeks before the Opposition said what its policy would be, which begged the question of why he’d called a press conference in the first place. Michelle Grattan rightly asked him to explain why the Coalition was still talking about the need for more work when it had settled on the Shergold-model ETS in Government. This will hand more ammunition to the Government which is eager to point out to business that it is offering certainty and the Coalition isn’t clear what it is offering.

The only real resolution of the basic problem that addressing climate change will cost some people their jobs while creating others is either to sell the long-term benefits of a transition to a low-carbon economy or find some magic bullet way of not costing any jobs while creating others.

Both Labor and the Coalition appeared to have decided that the recession has taken the first option off the table. Despite the apparent fury of the debate between the Government and Opposition, they both think that there is a magic bullet in the form of complementary measures.

Complementary measures are the other stuff you do in addition to a price-based mechanism like an ETS, which from an economic point of view should be all you need to drive the transition. The Government has a Renewable Energy Target of 20% by 2020, solar rebates and home insulation programs. The Opposition is keen on biochar and building energy efficiency and Greg Hunt was talked about a “clean energy target”.

Pearce concludes that we need more complementary measures because “the price mechanism alone may not be enough to cost-effectively manage the transition to a low-carbon economy.” There he parts ways with Ross Garnaut, who thought pretty much any complementary measure was a waste of time if you got the ETS right. Pearce, more realistically perhaps, seems to understand that the chances of politicians getting an ETS right is about zero.

I’ve been saying for a while that the ETS debate is lost and the policy focus should be on other options, like a carbon tax, and a bigger array of complementary measures — all of which will cost a lot of taxpayers’ money and aren’t as efficient as an effective ETS. But that’s the price we need to pay for the failure of our political class to undertake this major economic reform.

The best outcome from the Coalition’s paper would be for it to conclude that the Government’s ETS is too flawed to be remedied by amendment and push for a less complex price mechanism and lots of complementary measures. This would have the desirable effect of killing the Government’s ETS. As the Greens have pointed out, the Government’s scheme, based on a 5-15% reduction target range, would lock Australia into an emissions target too low to prevent massive damage from climate change, and below the level that international negotiators want to pursue to achieve real outcomes later this year at Copenhagen.

The defeat of Penny Wong’s legislation is therefore critical to ensuring Australia does not undermine the chances of an international agreement with its low target. Going to Copenhagen empty-handed is better than going there with an agenda that actively undermines the chances of an effective agreement.

Peter Fray

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