Federalism of the co-operative and unco-operative variety is back in the news. As the July 1 start date for the federal government’s carbon pricing scheme looms, the uppity conservative state premiers’ league is out in force, crying foul about the “tax” and fervently slashing “redundant” and “costly” state-based climate change schemes. Meanwhile, federal programs such as the Renewable Energy Target are under the microscope, with the Coalition and big business calling for an end to this kind of “green tape”.

Victoria’s Baillieu government recently accepted the recommendation of a review of the Victorian Climate Change Act to scrap the state’s 20% emissions reduction target by 2020 — the latest in a long line of anti-environmentpro-fossil fuels policy developments during its first 16 months in office. Queensland’s newly elected Newman government has opted for a more expeditious approach, axing just about every Queensland government program with a tinge of green — from the $430 million Queensland Climate Change Fund (which provides $30 million a year for climate change initiatives) to the $50 million Smart Energy Savings Program (which helps businesses improve energy efficiency).

Amid this carnage, it is worth considering just what is the appropriate role of complementary state and federal policies in tackling climate change in the context of the new carbon price.

For better or worse, economic theory features prominently in the substance and the rhetoric of discussions on this issue. So it’s not a bad place to start. Here’s what some of our most respected climate econocrats have to say about the matter (in each case I’ve emphasised the caveats using italics) …

First, the Productivity Commission. In its submission to the 2008 Garnaut Review, the PC asserts:

“With an effective ETS [emissions trading scheme], much of the current patchwork of climate change policies will become redundant and there will only be a residual role for state, territory and local government initiatives … Once an ETS is in place, other abatement policies generally change the mix, not the quantity, of emissions reduction.”

Not surprisingly, the PC’s view was echoed by Ross Garnaut in his 2008 report. “With the advent of a broad-based emissions trading scheme,” he wrote, “other emissions reduction policies become largely redundant.”

The logic behind both statements rests on the fact that there is an annual limit on emissions from sectors covered by the emissions trading scheme, which is given effect through the “cap” on the number of permits that are available each year. While the number of permits is capped, their price is determined by market forces, and this allows the market to find the “least cost” means of reducing emissions. “Other” abatement policies focused on specific sectors (renewable energy, for instance) or regions (state-based emission reduction targets, for instance) therefore “generally” do not create additional abatement because they free up other permits to be used in another sector or region. They might encourage or require emissions reductions, but not necessarily at the “lowest cost” under the national ETS. (Hence, they “distort” it.)

But the generalisations and equivocations in the PC and Garnaut statements hint at a more complex picture — one in which there remains a legitimate role for state climate policies. There are, indeed, three sets of circumstances in which state climate policies (or other federal policies) can be justified alongside a federal emissions cap.

The first is where the policy leads to genuinely additional abatement. The federal cap only covers a limited number of emissions-producing sectors – notably energy generation, industrial processes, landfill waste and fugitive emissions (for example, methane released from coalmines). Sectors not covered by the scheme include agriculture, forestry and (via changes to the fuel tax and rebate regimes) parts of transport.* Any state or federal government policies that reduce emissions in these sectors will result in abatement beyond that brought about by the federal cap. As the PC points out in its Garnaut Review submission, policies to target these sectors make sense to the extent that they would reduce the costs of achieving an overall national emissions reduction target.

Emissions embodied in the fossil fuels we export, which far exceed our domestic emissions, are not subject to the carbon price either. This gives states (which largely control mining policy) a critical role in influencing global greenhouse gas emissions. (Garnaut and the Commission have less to say about this sensitive issue!)

*Read the full article at Inside Story