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.

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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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Peter Fray
Peter Fray
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