The release of the Opposition’s Direct Action Plan on Climate Change has sparked off a political slanging match. The Opposition says its plan is cheaper and more effective than what the Government has put forward. The Government maintains that its Carbon Pollution Reduction Scheme (CPRS) is good policy and that the Opposition’s plan is a joke.

Last week a Crikey reader emailed:

I have been trying to follow what the govt & opposition’s proposals are for ‘combating” the global warming issue. I still don’t have any idea what each side is proposing, what it is going to cost the taxpayer (includes me!), whether it is any use in the broader scheme of world economies and world climate change….So I would love an article about ETS, CPRS, and whatever else, for dummos like me about all this if you can organise it.

So what is on offer and where does the truth lie?

What are the proposed objectives of the plans?

At this point, both parties have adopted a target of reducing Australia’s “net” emissions by 5% below 2000 levels by 2020. Theoretically, this means there should be no difference in the environmental outcomes from the two plans. However, there is an important point of difference in the nature of the “net” targets.

For the Government, Australia’s net emissions will be calculated as gross domestic emissions less removals by domestic sinks (e.g. sequestration via reforestation) less carbon credits imported from overseas. Under the Opposition’s plan, all abatement will be domestic. That is, net emissions will be calculated as gross emissions less removals by domestic sinks — there will be no imported permits.

This aspect of the Opposition’s plan should please those concerned about “green jobs”; generally, the more we import abatement the fewer “green jobs” are likely to be created domestically. Excluding imports also avoids problems with the environmental integrity of imported permits. The downside is that the exclusion of imports is likely to increase abatement costs. This is obvious if you ask why polluters import permits — it is because it is more expensive for them to cut emissions than someone else overseas.

How are the parties proposing to meet their targets?

The Government approach:

The centrepiece of the Government’s plan is the CPRS, a standard cap-and-trade emissions trading scheme. Under the CPRS, a limit will be put on net emissions from so-called “covered sectors” (e.g. electricity, transport fuels, industry, waste). Tradeable permits are then either sold or given to polluters, with each permit representing one tonne of greenhouse gas emissions.

The total number of permits issued will equal the scheme’s emission limit. Offset credits will also be available in the form of imports from overseas and credits generated by domestic sink enhancements (e.g. reforestation). At the end of each financial year, polluters covered by the scheme will be required to relinquish sufficient permits to cover their emissions. If they don’t have enough permits, they will face penalties.

The reason for having an emissions trading scheme is that it should result in emissions being reduced at least cost – the trade in permits allows the market to find the cheapest sources of abatement. Emissions trading schemes also tend to be more equitable than other options as polluters are required to pay for their emissions (i.e. they embody the polluter pays principle).

One of the major criticisms of the CPRS is that it will be neither efficient nor equitable. The Government is proposing to give billions of dollars worth of free permits to coal generators and emissions-intensive trade-exposed industries (e.g. aluminium producers). It is also cutting fuel excise to muffle the price signal in the transport sector and has excluded several major pollution sources (e.g. agriculture and deforestation). These features of the CPRS are inequitable and undermine its efficiency — it can no longer lay claim to being a least-cost instrument.

In addition to the CPRS, the government has established a collection of additional measures. The main one is the Renewable Energy Target (RET), which mandates that 20% of Australia’s electricity must come from renewable sources by 2020. Like the CPRS, the RET is riddled with design flaws. For example, every kilowatt of electricity generated from a solar panel is multiplied by five for the purposes of the scheme. The RET also includes heat pumps and solar hot water systems. As a result of these features, 20% of Australia’s electricity will not come from renewables by 2020 — the number is more likely to be about 15%.

On top of the CPRS and RET are several “bucket of money” R&D and other mitigation programs (i.e. large funds that provides subsidies for various initiatives). Some of these are worthwhile, others less so. The Green Car Innovation Fund, for example, looks more like an old style subsidy for an inefficient industry than a legitimate attempt to promote efficient economic reform. Questions have also been raised about the design and administration of the household insulation and Green Loans schemes.

The Opposition’s approach:

The Opposition’s Direct Action Plan on Climate Change is in keeping with the modern conservative approach to environment issues. Where centrist parties tend to support market-based approaches that embody the polluter-pays principle, conservatives usually support “beneficiary-pays” programs. Under beneficiary-pays programs, taxpayers offer polluters subsidies to reduce their emissions rather than polluters being required to pay for the damage they impose on the environment.

The cornerstone of the Direction Action Plan is an Emissions Reduction Fund, worth $3.2 billion (nominal) over the period 2011-12 to 2014-15. The resources in the fund will be used to support “direct action” on mitigation. By 2020, the fund is supposed to invest about $1.2 billion/year in various measures.

The main target of the Emissions Reduction Fund is soil carbon. Landholders will be able to engage in mitigation auctions, under which they tender for subsidies for “all verified new additions in soil carbon”. Through this process, the Opposition thinks they will be able to find 85 million tonnes worth of soil-related sink enhancements, or somewhere between 50-60% of the abatement required to meet the 5% target.

The fund will also provide incentive payments to encourage polluters to reduce emissions below a counter-factual business-as-usual baseline. Under this part of the plan, if the emissions from a business exceed their baseline, their will incur a financial penalty. If they are below the baseline, they can sell the difference to the government via the fund. And if they remain at baseline levels, businesses are not penalised and do not receive the subsidies.

Several other measures will receive assistance from the fund. These include subsidies for the planting of 20 million trees (including in urban areas), reducing waste emissions, improving energy efficiency, and promoting the use of coal seam methane. There is also an additional pot of money to provide $1000 rebates for solar panels and solar hot water, $100 million for a solar towns and schools initiative, and $50 million to support geothermal and tidal energy.

The problems with the Opposition’s plan are the same as those associated with all bucket-of-money, beneficiary-pays programs — they rarely work, are often rorted, generally result in higher abatement costs and aren’t equitable. This has been proven by research around the world, including by the OECD in the early 2000s. The Howard Government tried the same thing during its tenure in office, mainly though the Greenhouse Gas Abatement Program and Low Emissions Technology Demonstration Fund. The results from both programs are consistent with the research on the cost-effectiveness of similar measures and could generously be described as underwhelming.

The table below provides a brief overview of key differences and similarities between the climate policies offered by the Government and Opposition.

Differences Similarities
Government’s plan is mostly polluter pays — Opposition’s is mostly beneficiary (i.e. taxpayer) pays. Both have a relatively weak target (5% below 2000 by 2020). In theory, there should be no difference in environmental outcomes.
Government’s CPRS has a cap on net emissions from covered sectors – Opposition’s plan does not cap emissions from any sector. Both look to agricultural landscapes for a large proportion of their abatement.
Government allows import of overseas credits — Opposition’s does not. Both rely on the Renewable Energy Target (RET) program for a substantial proportion of the abatement in the electricity sector.
Government’s CPRS has limited coverage of soil carbon offsets — Opposition’s relies on soil carbon for 50-60% of abatement in 2020. Both rely on regressive schemes to promote renewable energy (i.e. the poor subsidise the electricity of
the rich).