Out they’ve come over the last two days, lured by the imminent announcement of the carbon price details — more corporate shills, more politicians, more unionists, more polluters, with their hands stuck out, making that distinctive bleating noise of the rentseeker in full cry. It’s like a zombie film, with a shuffling, clumsy but somehow inescapable horde of the undead — braindead, more correctly — roaming the streets, demanding “compensation”.

Ralph Hillman rose at the Press Club a short while ago to repeat his long-discredited claims about the impact of a carbon price on the coal industry, a sector which faces only one real problem, how to count all the money that’s going to roll in from China in the next few years. Instead, Hillman wants handouts from taxpayers for an industry that is the chief dealer to the cheap energy and cheap steel junkies of the planet.

Andrew Wilkie has joined in. Having declined to participate in the Multi-Party Climate Change Committee, he’s now pulled the classic swing vote stunt of issuing demands right at the death. Wilkie has his own version of “think global, act local” by demanding special measures for his own electorate and its industry. Nicely played.

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This stuff will be incessant for the rest of the week and then really ramp up next week, when the rentseekers who missed out will lift the pitch and volume of their bleating. To cut through all the propaganda, self-interested analysis and political race-calling, it might be useful to keep in mind some basic principles in judging Sunday’s announcement. These are some criteria by which to judge a carbon price scheme.

1. Will it contribute to the possibility of an international agreement to curb emissions? Even a highly effective Australian scheme will make no difference to climate change — we’re a mendicant when it comes to preventing the impacts of climate change on our economy. So we need to maximise the possibility of an effective international agreement by appearing to take seriously the task of curbing our own emissions.

Fortunately, this is an easy hurdle to get over. Even a relatively innocuous carbon pricing scheme can be sold internationally as effective action. There’s no international version of the Productivity Commission to point out that we’re not doing much — until the scheme runs for a few years and it becomes apparent our emissions aren’t falling.

2. Will it reduce emissions by at least 5% by 2020, and hopefully more? The problem with the Rudd government’s CPRS was that it so muffled the price signal from the ETS under compensation that industry had no incentive to shift from business as usual until well into the 2020s. If the industry compensation measures are limited, then even a relatively low starting price will be effective, as long as business knows the price will increase in coming years — they can then make investment decisions based on that. The only real problem with a low starting price — assuming it will increase — is that it probably makes necessary the retention of interventionist and inefficient renewable energy programs that politicians like, such as renewable energy funds or the Renewable Energy Target.

Clearly, any CPRS-like scheme in which high levels of compensation continue up to 2020 will fail this test.

Those are the two critical tests. A scheme that passes these deserves support. Everything after this is secondary in importance, but worth considering anyway:

3. How fair is the industry compensation? Handouts to big polluters aren’t fair. They’re a reward for whingeing and rentseeking, further encouraging Australian business to put their energy into demanding handouts from government rather than innovation and entrepreneurship. But fairness isn’t a threshold issue for the carbon price, as long as it works. That was the problem with the CPRS — the levels of compensation weren’t merely unfair, they thwarted the operation of the scheme. But it’s now accepted in Australia that the price of reform is slinging money at people even when it isn’t justified. If the carbon pricing scheme within which the compensation will be provided will actually reduce emissions, unjustified compensation is simply the cost of our dreadful generation of reform-averse and inept political leaders, and not a reason to reject the scheme.

That said, there is more and less unfair. The steel industry is under the hammer from a high dollar and import competition. Its demands for compensation, while misplaced, have far more validity than those of the coal industry, which will grow significantly even with a high carbon price. There’s also an element of industry policy in all this — the only reason the steel industry is being taken seriously in its demand for compensation is because of the lingering conviction that the industry — on a long-term historical trend to shifting overseas — should continue to be propped up locally.

And then there’s the matter of the companies in our electricity sector, either state governments or multinational corporations, who have purchased and operated emissions-intensive assets for over a decade knowing that a carbon price would eventually be required and that, as producers of the most emissions-intensive energy, they would be the ones facing the highest costs. Their claim to compensation or “adjustment measures” is even less than that of the coal industry.

4. How fair is household compensation? Many of the same arguments apply here. Given the impact of a carbon price on household budgets will be small — significantly less than that of the GST — the only case for compensation is for low-income earners and pensioners, who have far less capacity to absorb the cost and spend proportionately more on emissions-intensive activities that will see prices rise. Middle and high-income earners receiving compensation is, like any form of middle-class welfare, unjustified, but again not a basis for rejecting the scheme. It’s just the political cost of bad politicians.

5. How efficient is household compensation? Ideally, household compensation should be delivered in a way that minimises economic and administrative costs or even, as Ross Garnaut argued in recommending Henry Review-style tax reform measures, actually has benefits in areas like productivity. It should also be delivered in a way that has the lowest cost in terms of foregone abatement opportunities. Exempting petrol for everyone isn’t particularly efficient, because there may be some abatement opportunities foregone that cost less than others (and middle and higher-income earners can afford to pay higher petrol costs anyway). But reducing fuel tax concessions, by reducing the current pro-emissions bias in the tax system, will increase the effectiveness of a carbon price economy-wide.

6. Does it make any provision for adaptation both in Australia and overseas? The grim reality is that world emissions will continue to rise, and Australia will be an early casualty of the resulting rise in global temperatures. Efforts to curb emissions don’t have to exclude an acknowledgment that Australia faces a substantial economic cost from warming that will happen regardless of what the world decides to do in the short-term. The best form of adaptation is to give those who face its costs greater resources to do so, via a sovereign wealth fund or some other mechanism of inter-generational transfer. Australia also has a specific responsibility toward Pacific states which are already dealing with the problems of rising sea levels. This is a foreign aid problem that is not merely a moral responsibility for Australia, but a direct political responsibility whether we like it or not.

All that remains is to see the actual package. Until then, everything else is speculation and self-interested rhetoric.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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