Ross Garnaut has endorsed the government/Greens proposal for a carbon price scheme but substantially revised his approach to industry compensation.

In another update to his climate change review, Garnaut today released a paper on mechanisms to reduce Australian emissions. As expected, the paper endorses the Labor-Greens approach of a initial fixed-price scheme, followed by a move to emissions trading. Garnaut had supported that model when it was initially advanced by the Greens in 2010. As part of the framework for assessing models, Garnaut proposes a test for mechanisms to reduce Australia’s carbon emissions: “First, they must be a fully proportionate contribution to a global solution. Second, they must impose the least economic cost. Third, the costs of the domestic mitigation effort must be distributed equitably across the community.”

Garnaut goes to some lengths to emphasise that, contrary to the claims made by opponents of carbon pricing, the economic impact of a carbon price scheme in Australia is likely to be small and well below that of naturally-occurring factors such as interest rate changes, currency fluctuations, oil price rises and droughts. He also suggests a carbon tax is likely to be significantly more efficient than many other taxes and warrants consideration as part of a tax reform program, quite apart from its benefits in addressing climate change.

His updated mechanism is an emissions trading scheme, starting with a fixed, indexed price between A$20-30 per tonne, indexed at 4% pa, moving to floating price after 3 years, pending an independent review of international emissions trading conditions. That matches the Labor-Greens proposal, although that is based on a 3-5 year initial fixed price, rather than 3 years.

On compensation, which remains undetermined even at the policy proposal stage by the government’s climate change committee, Garnaut proposes using about half the revenue from permit sales to compensate households via income tax cuts and via the transfer payments system for low-income earners. Garnaut also flags that compensation be paid via assistance to improve energy efficiency in low-income households, but acknowledges potential problems with that approach — although not that the government is likely to be extremely wary of programs that risk a repeat of the home insulation or Green Loans sagas.

Crucially, though, Garnaut has made his biggest shift in the update process so far, and in effect given in on the issue of industry compensation for the three-year, fixed period. While originally a critic of the high levels of compensation offered under the CPRS, today’s paper in effect echoes Julia Gillard in saying that the compensation model of the CPRS has been the subject of extensive work and has credibility with industry, and therefore should be used as the initial compensation model rather than starting over from scratch. However, Garnaut calls for the round of handouts added to the CPRS model by Kevin Rudd in early 2009 as a “global recession buffer” to be removed, in effect restoring the original level of CPRS compensation.

After the three year fixed period, however, Garnaut calls for an independent body like the Productivity Commission to determine industry compensation levels, based on a comprehensive system of principles, in effect removing politicians from the debate. He sees household compensation as eventually consuming most of the revenue from the scheme, along with funding of about $2-3b for technological innovation — the same recommendation as in his original report.

The update is an unexpected win for Labor in what is looming as the key battle of the new carbon pricing regime, over industry compensation. Previously Garnaut was an ally of the Greens in their fight against generous handouts to polluters. Garnaut hasn’t now sided with the enemy in that battle, but his support for CPRS-style handouts for the initial stage of the scheme will bolster what is clearly Labor’s preference — to carry the CPRS compensation arrangements into the new scheme to minimise industry opposition.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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