“There would have been advantages in a comprehensive global agreement on emissions entitlements … that ‘added up’ to the global temperature objective and to the emissions budget that was implicit in that objective. We would have arrived at a set of national commitments that would, if implemented, solve the problem [of climate change]. And we would have had a firm basis for international trade in entitlements … Such an agreement remains the holy grail.”

— The Garnaut Review 2011 (pp.38-39)

Well have you heard of the great crusade?
We ran into millions, and nobody got paid
Yeah, we razed four corners of the globe,
For the holy grail.

— Hunters & Collectors

The federal government’s key climate policy adviser, Professor Ross Garnaut, last week handed down his final report containing recommendations on a new carbon pricing scheme for Australia. Amid predictable exchanges of hysteria and jubilation from the warring factions in the carbon price debate, a more fundamental set of concerns about Garnaut’s advice has been missed.

Although Garnaut has made some sensible adjustments following his review for the Rudd government three years ago, his latest tome reveals that his heart remains firmly fixed in the heady days of 2008, when the idea that climate change could be “solved” by a global emissions trading scheme backed by an international treaty imposing binding emissions targets on all major carbon emitters had yet to be exposed universally as a fantasy.

Garnaut’s key recommendations for the evolution of Australia’s scheme assume that the international community will stumble on this holy grail in the near future, despite powerful indications to the contrary.

As a result, Garnaut has recommended an Australian scheme that is fit for an alternative world — a world of perfect scientific knowledge, altruistic states and powerful global institutions in which markets are disciplined by policy made rationally in the public interest. Australia’s long-term environmental and economic interests would be better served by a scheme that is designed for the messy and complex world of scientific uncertainty, unco-operative sovereign states, regulatory and market failures, weak global institutions and the corrupting influence of powerful vested interests.

Garnaut has long argued that the “top-down” model of global climate action involving treaties, targets, timetables and trading is the best and most efficient way to preserve a liveable climate. Countries can, he thinks, define an ultimate long-term goal (like holding average temperature increases to 2° above pre-industrial levels) which can then be translated into time-bound global and national emissions targets. Each country can then develop schemes for trading in their allocated “emissions entitlements” (rights to emit a defined quantity of greenhouse gases).

Confident that their combined efforts will “add-up” to the ultimate global emissions and temperature goals, countries can then link-up their trading schemes into a mega-scheme, allowing those countries where emissions could be cut most cheaply to sell their surplus entitlements to those in which emissions cuts prove expensive. This would, in turn, “establish a single price for entitlements in all countries” and “remove distortions in international trade in goods and services associated with variations in the costs of reducing emissions across countries”. It was this logic that led Garnaut to back an emissions trading scheme for Australia in his 2008 review.

Alas, the intervening three years have exposed the extent to which this elegant, ideal model is removed from the messy realities of global and domestic politics. The Kyoto Protocol has failed to cause meaningful emissions abatement at anywhere near the “binding” levels agreed to by developed countries and negotiations in Copenhagen towards a successor treaty based on the top-down model effectively collapsed.  While countries everywhere are taking diverse actions to cut emissions, most of those (outside of Europe) that were planning emission trading schemes have abandoned or delayed them.

Garnaut acknowledges these changes in the international climate zeitgeist and charts the corresponding shift towards a “bottom-up” model of international co-operation, characterised by countries’ voluntary, non-binding and imprecisely defined emissions reduction pledges, as exemplified in Copenhagen Accord and the Cancun Decisions.

Garnaut flags two key problems with these types of commitments: those announced by countries to date “are unlikely to add-up” to the global cuts needed to meet a global temperature goal; and they provide “a less firm foundation for international trade in entitlements”. This is putting it mildly. In fact, currently pledged reductions, even on optimistic assumptions about the level of emissions reductions they imply, wouldn’t even come close to the reductions required to meet the 2° goal (which many prominent scientists think is too risky anyway). In these circumstances the notion of international trade in entitlements loses much of its (theoretical) value.

It is these problems in the contemporary, bottom-up approach that have led Garnaut to recommend in his latest review that the first phase of Australia’s new scheme entail an annually rising fixed carbon price (effectively a rising carbon tax). Such a scheme could provide a strong basis for starting Australia’s necessary low-carbon transformation, yet neither requires nor benefits from emissions targets, emissions caps or international trading in entitlements. This is sensible.

But Garnaut is on far shakier ground when discussing how the scheme should evolve.

Garnaut recommends that Australia switch to a pure cap-and-trade scheme — with an emissions reduction target, annual emissions caps and international trade in entitlements — after three years of the rising fixed price (i.e. in July 2015, assuming the scheme begins in July next year). He notes that the switch date could be pushed back if there are few opportunities for trade in entitlements, but his advocacy of a default switch after three years suggests he thinks the world is likely to revert to a top-down model of emissions targets and trading in three years or soon thereafter. Yet, elsewhere in his report, Garnaut says that such a regime “remains beyond reach for the foreseeable future” because only a bottom-up process involving non-binding commitments has any prospect of being acceptable to the United States and to major developing countries such as China and India.

The only reasonable conclusion from this internal contradiction in the report is that Garnaut is so ideologically committed to the search for the holy grail that his rational judgment about the design of Australia’s domestic scheme has become clouded.

Switching to the cap-and-trade scheme Garnaut advocates and allowing the import of cheaper emission entitlements from overseas (to the extent there are any) in the absence of a holy grail-type international scheme would be a grave mistake climatically and economically.

The Australian emissions target and annual emissions caps necessary to support such a scheme would likely be arbitrary and soft. The resultant low prices would weaken the already minimal incentive for investment in low-emissions technologies in Australia. To the extent that Australian companies could access cheaper overseas entitlements for compliance purposes, these would depress the carbon price further still and subject it to additional volatility, since inevitable shocks and flaws in the linked overseas markets (just look at Europe’s troubles) would flow through to the Australian scheme. More importantly, allowing Australia to import overseas credits simply delays the necessary structural shift to a low-carbon economy in Australia.

Further, as Garnaut points out in his supplementary note (annexe B) on compensation arrangements, any tightening of scheme caps in the context of international entitlement trading reduces the scheme revenue that the government would generate because we would be, to some extent, paying other countries to reduce our emissions. This revenue decline will, in turn, reduce the scope for the public investments in clean technology and network infrastructure that will be needed to enable Australia’s low-carbon transformation.

These problems would be compounded by Garnaut’s recommendation to scrap the Commonwealth’s existing renewable energy target (which has enabled the development of wind power projects) and abjure the use of feed-in-tariffs (payments to renewable energy generators that have been introduced with success overseas to develop viable solar power industries). Though Garnaut advocates investing some scheme revenue into research and development of new low-emissions technologies, he thinks the carbon price will ensure the diffusion of clean technologies once they are commercialised. But neither the carbon tax rate nor the emission targets currently on the table would be sufficient to promote large-scale renewable energy generation in the short-medium term without additional direct support for solar- and wind-generation technologies that are commercially available but not yet price-competitive with fossil fuel generation.

Finally, the report gives Australia a free pass on its emissions-intensive exports — particularly coal. Garnaut uncritically accepts the international consensus that countries should be responsible only for the emissions produced within their borders and not for the emissions embodied in fossil fuels exported and burnt in other countries. But if we switch to a domestic cap-and-trade scheme and trade entitlements with other countries despite the insufficiency of those countries’ emissions caps and targets, our coal exports will be allowed to continue to rise while the developing countries that burn them will not be subject to sufficient emissions constraints.

As Guy Pearse has argued compellingly, this coal export “loophole”, in which no one is held accountable for the massive and rapidly growing emissions from Australian traded coal, will only grow absent a clear policy commitment from Australia to close it. Maybe it was too much to expect Garnaut to rain on Australia’s coal export parade, but he doesn’t even frame this as a problem. Instead, Garnaut simply laments that the collapse of various “clean coal” projects around the world may “diminish the viability of coal as a long-term energy source in Australia’s export markets as well as in Australia”.

In an impassioned speech at the release of his final report, Garnaut strayed well beyond the dry formalities of carbon scheme design, advocating large-scale income tax reform, berating troglodyte businessmen and decrying the “old political culture” in which vested interests from emissions-intensive industries hold sway over the national interest in cutting emissions. It is a pity that the scheme he outlined would do little to shift the political-economic power structures in Australia away from fossil fuel industries and that his accumulated passion was not channelled instead into painting a different vision for Australia’s energy, economic and environmental future.

A combination of a rising fixed carbon price that continued indefinitely (or at least well beyond the three-year default period suggested by Garnaut), with no international linkages, would force Australian companies to start reducing their own emissions. If such a scheme were introduced as part of a package that included nuanced policies to expand Australia’s renewable energy production, promote land-sector abatement, and wind back our contribution to the global coal trade, Australia could make a major shift towards a zero emissions economy and have a significant effect on fossil fuel consumption globally. The growing pot of government revenue from the rising carbon price could be used to help finance nation-building green energy and transport infrastructure projects, and to assist people and communities transition out of emissions- and energy-intensive industries.

It’s not as elegant as a global emissions trading scheme, but it could actually work.

Who knows? Maybe one day in the distant future the conditions for a top-down global order of treaties, targets, timetables and trading will emerge to “solve” the problem of climate change. But if we don’t start doing something profoundly different now, we might well ask: how many corners of the globe will we need to raze before we stumble upon Garnaut’s holy grail?

*Fergus Green is a lawyer and policy analyst specialising in climate change. He has written widely on international and domestic climate policy issues in the print and online media.

Peter Fray

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