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Sep 24, 2010

Back to the future on a carbon trade-off

The debate has been returned to its starting point of more than a decade ago -- a trading scheme versus a carbon tax, writes Giles Parkinson.

So, the minister for climate change in the new Labor minority government is who, exactly? The official listing nominates Greg Combet, the Coalition would have us believe it is Christine Milne, and for a fleeting moment last week it seemed to have been Marius Kloppers.

But the person seeking to exercise the greatest influence over the climate debate in the first two weeks of the new government has been Martin Ferguson. No doubt the Minister for Energy and Resources (and Tourism) thinks this is as it should be, given the nature of his portfolio and his desire to do the best by both industries.

Ferguson, in an interview with The Australian Financial Review, gave his assent to an emissions trading scheme, pulled up the drawbridge, and fired a shot across the bow of banking types who would dare imperil the destiny of other economic sectors in the pursuit of an easy-traded dollar.

The weight of his comments offer a valuable insight into the battles ahead for a government that will rely on the support of the Greens and the independents — given the Coalition has effectively dealt itself out of the debate — and that has now decided that it doesn’t want climate change to be a festering sore at the next election.

Kloppers’ intervention gave the signal for the debate to resume, but Ferguson was clearly keen to make sure it didn’t get out of hand. Yes, a traded carbon price for the energy sector is a necessity — he has heard that message loud and clear from an industry that has tens of billions of dollar of investments to make and no signal to do so. But that is as far as Ferguson the progressive is prepared to travel.

Beyond energy, we return to Ferguson the inherent conservative, keen to restrict the ambitions of a carbon pricing scheme and to protect the remainder of his portfolio.

And most major business lobby groups are happy to play along, taking a safety-first approach when, if they analysed the nature of Kloppers’ remarks, it should be clear that early and broad action is by far the cheapest and most efficient measure.

Given the science that these policies are responding to, half measures make as much sense as being half pregnant. Nevertheless, the debate has been returned to its starting point of more than a decade ago — a trading scheme versus a carbon tax. Can’t decide? Hey, let’s have both, but in very small portions.

This is, of course, a well travelled path. One of the first documents the Labor government received upon its election in 2007 was the National Emissions Trading Taskforce conducted by the states and territories. This had started out as a study into a scheme affecting the energy sector only, but the overwhelming response from industry was that it needed to be extended to other sectors. Since then, of course, we’ve had the Garnaut review, a green paper and a white paper that all came to the same conclusion.

But it’s interesting to revisit what was said in 2007: “Emissions trading will be the central pillar in Australia’s strategy to reduce greenhouse gas emissions. However, emissions pricing alone will not be enough. The problem is too large, too widespread and too complex — other policy measures will be required to complement the emissions trading scheme.

“Australia faces a unique opportunity for co-operation among all levels of government to deliver a comprehensive, coherent and streamlined national climate change strategy. Action on stabilising and then reducing Australia’s greenhouse gas emissions should not be postponed. Leaving the emissions reduction task too late risks being forced to make abrupt, disruptive adjustments at a later date. A smoother adjustment path will be more manageable and less costly.”

Nothing much has changed. Yet here we are, back with the original premise of an energy sector only scheme.

The Climate Institute noted last week that putting a direct price tag on emissions in the stationary energy sector alone would require the sector to reduce emissions by 30% by 2020, just to meet the 5% reductions target. To meet a 25% target would require emissions to be slashed by more than two thirds. To offset this would require either direct regulation of emissions or a carbon tax, which all the models suggest is good at setting a price but bad at hitting a target. It’s seen as a blunt instrument that would end up costing more.

Europe has been down a similar path. When industry understood that a carbon price was inevitable and they were faced with regulation and a carbon tax, they were quick to push for an ETS. The difference in Europe was that the framework was relatively simple compared to the complexities of the CPRS, and Australia should be able to avoid the disastrous over-allocation of permits because it already has an effective measuring system.

Greg Combet, of course, is aware of this, and next week the real climate change minister will be able to put his own stamp of authority on the portfolio. Crucial to this, of course, will be the make-up and the intent of the climate change committee. One only hopes that there are enough members whose names fill in the alphabet between Ferguson and Milne to ensure an appropriate separation at the boardroom table. A name such as Malcolm could have been rather useful.

This story first appeared on Climte Spectator.

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14 thoughts on “Back to the future on a carbon trade-off

  1. Fran Barlow

    Note MOD: Your link identifier “Climte Spectator” needs correction.

    A sound and saleable approach to CO2 emissions pricing entails the following features:

    1. Specification of the true community cost of emissions
    2. A clear path and timeline to reach the cost in 1.
    3. Revenue neutrality so that the revenue raised by the imposition of a carbon price is returned to those parts of the public on or below average income in either cash or services, less perhaps other costs associated with administering the system, building new energy systems, or other suitable mitigation measures that can be undertaken at the CO2 cost. Thus a mitigation meausre that costs $23 per tonne or less would be permissible if that were the cost at the time. One that was above this price would not. This is a reality check.

    This is not only equitable, but undercuts arguments about the policy being a ruse to increase levies on the population.
    4. Simplicity of system design with minimal transaction costs

    It seems very clear that the true community cost of CO2 emissions is at least $AUS100 per tonne, and very probably more, as a matter of practice. It should be made clear to everyone that whatver suite of measures is adopted will lead within five years or so, to an effective price in this range.

    An early start could be made by removing subsidies for dirty fuel usage. Diesel fuel rebates and assistance with LPG conversion should be withdrawn. Last time I looked, diesel fuel rebates cost the taxpayer in the order of $AUS5bn, the vast majority of it to mining.

    One should also change the tax treatment of dirty energy so as to make it no longer tax deductible. Make companies pay for their dirty energy out of after tax income. If an energy source is cleaner than the common industry benchmark, then it is, to that extent, tax deductible. Thus if gas fired energy sources were 50% of the CO2 intensity of coal, then 50% of the cost would be deductible. If a biodiesel product had an LCA 5% of the net emissions of conventional diesel, 95% of that would be deductible. Ditto with a petrol product.

    This would imply a CO2 price of around $30 per tonne (though a lot more in the case of diesel — best guess about $144 per tonne)

    One suspects that this would force very substantial changes in the way business was done, especially given that we would be on a path to a figure about three times that cost.

    One could temporarily add a carbon tax in a couple of years time of about $20 per tonne and then ramp it up to $70 by 2015. If vehicles that could not be put onto the grid had been reconfigured to use biodiesel by then this would not affect their usage very much.

    A BTA could protect us against fugitive emissions chicanery, pending an ETS.

    Alternatively, if one or more of our trading partners were willing to do a deal on a cross-jurisdictional ETS, we might simply make the cap reflect the commonly decided price.

    If much of our industry had retooled by then, we would win out of that.

  2. mpe

    I’ve read one of the key reasons Europe went for emissions trading was that the European Commission had the power to create it, whereas it did not have the ability to levy a tax against member states. So a carbon tax was not really an option.

  3. John Bennetts

    Fran,

    Much as I tend to agree with much of what you are trying to propose, your proposal is neither sound nor saleable. Indeed, it is far more scary than necessary.

    1. Establish a public cost which each tonne of CO2-e represents. Review this (say) annually, as a public information tool. Publish it, but do not worship it, because it is only a number.

    2. Remove stupidly generous oversupport of solar PV and wind, thus freeing up dollars for rational adjustment.

    3. Establish a cap-and-trade GHG market based initially on $x/tonne CO2-e emissions. This will naturally ramp up as the cap is reduced to 2020 and beyond.

    Sounds like the ALP proposal before Kevin got the chop? Yes, but without the freebies to existing polluters. Instead, it uses a ramped transition from nought percent (now) to a market-determined price for progressively reduced national target emissions each year as the program continues.

    4. Establish a Hardship Commission or similar to determine where adjustments are economically and socially justified.

    5. Institute a carbon tax at the point of entry for GHG emissions embodied in the manufacture of imports.

    6. Institute a carbon tax rebate for the GHG tax paid in Australia in respect of exports – eg diesel fuel rebate on ore, or embodied CO2-e in manufactored goods.

    7. Devise similar plans for transport, primary and manufacturing industries which generate GHG’s. This may be precdeded by a year or three of actual empirical carbon tax if the cap-and-trade is legislatively too complex, but I don’t see that this will be necessary.

    8. As all 4 components are bedded in, merge them to permit cross-industry sales of emission permits. Not immediately, when they are bedded in.

  4. John Bennetts

    And Fran, a carbon price of about $20 to $30 per tonne of CO2-e seems about right for starters to me. That should shake off some of the low hanging fruit, especially regarding electrical demand reduction.

    That equates to roughly $70 – $100 dollars per tonne of coal, or $35 to $50 per wholesale megawatt-hour (MWh). This will show up on domestic retail bills as 3.5 to 5 cents per unit (kWh). Current domestic electricity is about 16 cents per kWh, so this is 20 to 30 percent increase of Joe Average’s electricity bill each month or quarter.

    This starting point is thus not immense nor unmanageable. It is not the end of civilisation as we know it; it is the equivalent of an additional tank of fuel in the family car each 4 months or so.

    Even if we had to go to $50 per tonne of CO2-e, it is manageable. Climate change and uncontrolled rising and warming of the oceans are not.

  5. Acidic Muse

    Has Crikey been surreptitiously purchased by the Business Spectator as a new front via which to pedal their right wing propaganda or what?

    Surely the amount of recycled Spectator content now appearing on Crikey is not conducive to maintaining the integrity of it’s “independent journalism” branding?

  6. Fran Barlow

    John said:

    [Establish a public cost which each tonne of CO2-e represents. Review this (say) annually, as a public information tool. Publish it, but do not worship it, because it is only a number.]

    Well that’s not much different from what I said. I’m not religious or a fetishiser of rubrics either, as my timeline implies. Saying “it’s only a number” strikes the wrong tone however. Numbers are very important. Losing 10% each year or profiting 10% each year is also “only a number” but it is meaningful.

    [Remove stupidly generous oversupport of solar PV and wind, thus freeing up dollars for rational adjustment.]

    I’d also remover unstupidly generous state support of solar PV, wind and any other system that did not fit into the Co2 budget. OTOH, we do have a problem in that people have purchased systems in part on the strength of state promises of stupidly generous oversupport of stuff like this, so we have to find a way back from that. Perhaps you would grandfather the benefits or give people a one off benefit to give up their FiT.

    [Establish a cap-and-trade GHG market based initially on $x/tonne CO2-e emissions. This will naturally ramp up as the cap is reduced to 2020 and beyond.]

    Again, I have no problem with this. I support a cap and trade system along the lines suggested by Garnaut-Grattan. Yet we must deal with the politics and start early, and having a good ETS means having it much later than a not bad change in tax treatment and subsidy (which we should really do for tidiness’s sake) and a carbon tax, then no. Let’s get a ubiquitous scheme running and rtransition to an ETS when almost everyone is on the same page. Again, we could allow those who preferred the tax to keep it and have others migrate across.

    [Establish a Hardship Commission or similar to determine where adjustments are economically and socially justified.]

    Too bureaucratic. Income and assets tests are a good enough guide for us to do this. How we apply benefits, particularly at the bottom end of the distribution of course would need some fiddling. I’m for spending goodly chunks on supporting sustainable and high quality public housing in locations near to services and idealy within 25kms of the relevant GPO in the cities. We could then ensure that benefits given were at least in part non-liquid or only semi-liquid, meaning that we aren’t simply giving them more money to spend on stuff that is not conducive to them living in dignity, taking care of their kids etc.

    [Institute a carbon tax at the point of entry for GHG emissions embodied in the manufacture of imports.]

    Which is what I had in mind when I said: A BTA could protect us against fugitive emissions chicanery, pending an ETS.

    Certainly, in the case of imports from developing countries, one could hypothecate this money to some sort of CDM or MDG project in a developing country in or near the place targeted by the BTA. We could ensure that children were getting education and families were getting support to cause their kids to be in school rather than work, and/or we could support low CO2 footprint industry theri, or better housing.

    [Institute a carbon tax rebate for the GHG tax paid in Australia in respect of exports – eg diesel fuel rebate on ore, or embodied CO2-e in manufactured goods.]

    Nope. I would not do that. That would violate the no-discrimination rule the WTO uses for tariffs.

  7. John Bennetts

    Fran, you seem to be happy to erect and then hide behind your own walls.

    Stupid support of wind and solar PV. Yes, that has happened, and needs correction. You choose to say that this is “unstupid”, whatever this may mean. It is definitely stupid. When the value of domestic solar rooftop PV has been assigned a genuine value, anything above that is theft. I do not give a crap for those greedy people who decided to construct solar PV or micro-wind generation stations on their properties. The value of solar PV or wind hulks is negligible – possibly less than nothing. I care nothing, because the future of the planet is at stake. I own northward facing roofs of at least 400 square metres, as well as being the owner of a small farm which could hold at least 10, perhaps 20, wind generation installations. Quite possibly, the best commercial course for me is to install solar PV and wind to the tune of 50kW peak. I have chosen to do absolutely nothing.

    I am going to stop here, because your discussion is so tortuous as to render realistic discussion worthless. If we had infinite time and a couple of cups of coffee to discuss our differences and points of agreement, we may indeed be closer. At this time, however, I do not see your point. It’s far too convoluted to be worthwhile.

  8. Fran Barlow

    John Bennets said:

    [At this time, however, I do not see your point. It’s far too convoluted to be worthwhile.]

    That much is plain from both your contributions. It’s regrettable that you got to the most salient portion at the end.

    For the record, you and I are in very substantial agreement. I was for removing both stupid and “unstupid” subsidies to PV, wind and other things too, but the political reality — one with which we must deal is that people have relied on state promises to act and as with any other kind of state promise, we must be cautious in steppingf way from it, especially when the people involved are not huge corporations but individual householders who have acted in good faith.

    When governments blunder, successor regimes have to ensure that the mess is cleared up with minimum harm to those who have done no wrong.

  9. Jeremy Yapp

    John, don’t take bat & ball and go home – I was enjoying that. Fran is right: you two are in substantial agreement. Your points of both agreement and disagreement were interesting and instructive for me.

    I’d suggest as a first step that the government should mandate legally-binding targets in the order of a 60 to 80% reduction of carbon emissions (on 1990 levels) by 2050, with similarly binding interim targets every 5 or 10 years. Maybe build in an upper limit of how much of this reduction can be outsourced to regional or global offsetting. Then we start discussing how to mitigate.

    Fran, I don’t think a Hardship Commission would be too bureaucratic. In fact I think it’s essential. Make it an advisory body, filled with professionals working for peanuts (and maybe a CBE when they retire). Fuel poverty might be a massive problem before long, and ensuring that the transition to a low carbon economy is fair will be essential.

    But the question of whether to remove PV subsidies is neither here nor there compared to the more important problem: what energy mix (and what level of consumption) do we need to help avoid dangerous climate change? Answers on a postcard please.

  10. John Bennetts

    Jeremy, the bat and ball will stay right where they are.

    I doubt that you will have much success convincing people to reduce their level of energy consumption just because it is a good thing to do. Similarly, I doubt whether voters will put up with a government which is in office, State or Federal during energy shortages – especially electrical. Essentially, the demand is there to be met and will have to be met, subject to small adjustments due to rising prices, especially in liquid fuels.

    I happen to support the nuclear option, which will divide the debate right down the middle. A carbon price of $20 will make nuclear very attractive commercially, as well as all those nice things such as safe, non-polluting, reliable, scaleable, reasonably quick – say 5GW by 2020 and 1 or two GW per year thereafter nationally, with no need to build huge dams, new transmission lines to the desert, etc. I respect and wish well those who favour demand management, wind and solar, however I do not see these, alone, as the answer to society’s and the Earth’s demands.