The ETS Green Paper

There weren’t, unfortunately, too many surprises in the Green Paper on the Emissions Trading Scheme released by the Australian government yesterday.  It is a limp response to climate change, and likely to be ineffective in actually reducing emissions.  As canvassed in earlier posts, among its key design deficiencies are:

1.  The use of excise tax reductions to offset petrol price increases–a nonsensical idea, which won’t offer more than a few cents of price relief; which makes a mockery of the central idea of a ‘price signal’ that the ETS is designed to generate; which embeds the current unsustainable level of transport emissions (running at about 17% of the total); which diverts the revenue raised from permit sales away from critical uses, to reduce inequities, or to stimulate investment in public transport or other structural transformation; and which completely misreads the willingness and ability of the Australian people to change their behaviour to reducing transport emissions and adjust to higher prices.

2.  The exclusion of the agribusiness sector from the ETS for five years, with only the commitment for a ‘review’ at that time–which will ensure that land clearing continues, and in all probability, accelerates as the deadline approaches; and which will delay yet further the root and branch (to use an appropriate analogy) of agriculture in this country which is so long overdue (more to come on this).

3.  The provision of free permits to industries, such as aluminium and brown coal, which have the highest emissions profile–a policy of breathtaking hypocrisy, which can’t be justified by any economic argument.    The experience of the EU ETS has already shown how retrograde the allocation of free permits is–it simply provides a cash windfall for those who receive them, in this case businesses who have already profited enormously from their blatant and continuous disregard for the public good.  In effect those businesses which have done most damage to the environment and have been most recalicitrant are being rewarded precisely for the high degree of their irresponsibility.  These are companies which have seen for more than 15 years what the effects of their actions are, which have ignored these plain indications, and which are now being rewarded for their unethical behaviour and allowed to continue it!  A remarkable piece of political chicanery.

4.  The principle of compensation to industry is embedded in the Green Paper–as argued is yesterday’s posting, this is conceptually and ethically incoherent–and even then it has not been tied to structural change.

5.  Most of the key numbers are still missing–in particular, the cap, which is the critical number.  If the government holds to its current target of 60% reduction by 2050 (repeated again yesterday) it will fall far short of the reduction being demanded by the latest UN estimates.  Ridiculously, the Treasury modelling won’t be released until October–which makes a mockery of the public consultation process that is supposed to be completed before that time. 

6.  Very little attention has been given to the details of the trading platform that will be required: there are large, expensive complexities there that are not being flagged in the national discussion.  The EU ETS experience has shown how hard it is to get this right; and the result there has been that, despite its operation now for a number of years, there is little evidence of any effect in reducing emissions.  The ETS is going to be much more difficult and costly than the public is being given reason to think.  The government has to be transparent about this, even in this so-called design phase.

In this context, there is good reason to continue to argue for a carbon tax, rather than for carbon trading.  In theory the emissions outcomes could be similar.  A tax sets the price, and monitors the amount of the emissions reduction produced by it.  Trading sets the amount of emissions reduction, and allows the price to be set in the market.  However, the transaction costs associated with a trading system are far greater than those associated with a tax.  Moreover, a tax can be implemented quickly; the system to collect it is already in place; there is no ambiguity on the price, which can then be incorporated into business planning; and it yields substantial revenue (probably more than the sale of permits, particularly if a proportion are being offered for free) which can then be applied to reduce inequitable impacts, the “double dividend”.  To those who argue that the price set might be economically inefficient, the response is that its effects can be monitored and can lead to incremental adjustments.  Its only drawbacks are that it is not a market-based solution (only a difficulty if you subscribe to the current uncritical obeisance to free-market principles); and that it is perceived as being politically unpopular.  One might have expected a Labor government to resist the first, but there is increasing doubt about this government’s credentials in that regard; and on the second, as is becoming clear, they are politicians with the best of them.

Kenneth Davidson’s cogent commentary in The Age today is required reading.

Climate test for the Australian Government

The Australian Government’s Emissions Trading Scheme (ETS) Green Paper is due to be released tomorrow (Wednesday).  It represents a critical test of the government’s credibility and willingness to govern for the whole community, present and future.

It’s important to remember that an ETS is not a comprehensive response to climate change, although it’s being portrayed as that by elements of the Australian press.  It is one part of the strategy, and may not be even the most important part.  It consists essentially of three parts: a national cap on emissions of greenhouse gases;  the allocation, or sale, of permits to emit these gases, the total of which equals the cap; and a platform to trade these permits.  The trading element is designed, in theory, to provide abatement of greenhouse gases at the lowest social cost, the  ‘economically efficient’ outcome.  But trading in itself does nothing to the level of national greenhouse gas emissions: that is accomplished only by the cap.

A critical element of a successful outcome is the inclusion in the ETS of all major national emitters.    That provides for both coverage of all major emission sources, and for a volume and flexibility of trading that ensures the most cost-effective abatement outcome.  Special pleading by industries and sectors is dominant in the public discourse at present.  The proposal of agribusiness to be excluded from the scheme, or to seek massive compensation, is one such voice.  Another is the export-oriented industries.  It is likely that most sectors can, and will, make some kind of case for special treatment. 

If the Government is serious about the ETS (and it should be, having been largely elected on the promise of addressing climate change) it will resist these calls. To do otherwise will be to vitiate the effectiveness of the ETS, perhaps fatally.  Large emitters outside the ETS will go on emitting without a carbon price constraint.  Emitters inside the ETS will be required to bear greater, and perhaps crippling, abatement targets and costs.  Such an outcome would make a mockery of both the ETS as an effective market-based emissions constraint, and of the Governments political commitments on climate change.

The argument by businesses that some compensation is due to them for making such changes is particularly specious.  The simple fact is that business has benefited for decades from a massive subsidy provided by the community at large, in their ability to pollute without penalty.  Those costs should have been internalised and carried by business long ago.  That has been clear for at least two decades, and has been ignored by the vast majority of businesses in the interests of short-term returns to shareholders.  The wealth that has accrued to shareholders from this subsidy is immense.  Now is the time for business to begin paying the community back.  The only compensation that should be paid is by business to the community, for the unconstrained, decades-long use of a public good: the environmental services of the atmospheric system.

If there is to be support offered by government for the impacts of the ETS on business, it should be tied to structural change.  The economy must make as rapid a transition from the high to a low carbon economy, for the sake not only of the economic strength, and the jobs that go with it, of this country, but to implement this countries obligations to the world, as one of the highest per capita emitters.  Only those businesses who are prepared to make the structural changes that are implicit in these obligations should be financially supported by the community.

In a similar way, for export-oriented industries to argue that they should receive special treatment because they can’t pass on the new carbon costs to international consumers, as domestic companies can, is particularly outrageous.    Domestic consumers have already been paying these costs, in the degradation of the public good of atmospheric quality and climate stability.  Companies themselves must now absorb these costs within their own cost-structure, by making the required investments to increase efficiencies and move to a low carbon configuration.  To argue that export-oriented industries are somehow disadvantaged because international consumers are not likely to be as compliant to cost-driven price increases as domestic consumers is both disingenuous and unethical.

Finally, the ETS must be coordinated with a comprehensive national plan on climate change, which includes investment in renewable energy and in other low carbon technologies, and which enables the national discussion to proceed.  Nothing coherent on climate change will be done without that national discussion being permitted and encouraged.  The Rudd Government has so far not been particularly transparent on its own views or receptive to community discussion and input; the Government’s interactions with the public at large have been notably token and selective.  As Hugh Mackay recently observed, the Australian community is increasingly well informed about climate change issues, and open to making the changes necessary, at the individual and household level.  Fostering that collective resolve is the core competency of the art of governing.  The Government needs to learn it quickly, and put it in place, if Australia is to develop a coherent climate change response. 

Garnaut and after

The Garnaut Climate Change Review, released this week, is a responsible and measured analysis of the implications of climate change for Australia and policy options available to it.  Most of the best-regarded economic and policy elements are there: an emissions trading scheme, with initial permits sold to emitters; the allocation of this income (the ‘double dividend) to address distributional inequities and to spur investment in renewable energy; acceptance of the need for deep cuts in emissions; the adoption of a conservative ‘maximin’ managing of the probabilities, in which strong action now preserves options for the future; the clear recognition that climate change can only be addressed by the international community, of which Australia is a part; and the equally clear recognition that Australia must play its part, whatever the rest of the international community does. There is a strong recommendation to include as many sectors as possible in the plan–that is, not to allow special pleading. 

There is a degree of cautious optimisim in the Review, derived largely from confidence in the flexibility and creativity of Australia’s market economy and in the depth of renewable energy resources available to it.  At the same time, Garnaut refers to his approach as intended to ‘nourish the slender chance’ that the International community will in fact act, and act with sufficient commitment, to meet the challenge–an assessment with which few could argue.  Even in Australia, Garnaut recognises, developing consensus will be difficult.  All in all, from the viewpoint of economic analysis and policy development it is an admirable piece of work, and one which, if actually adopted and implemented by government, would place Australia literally in the forefront of international action on climate change.

The ink was scarely dry on the document, however, before the weasel words (in the absence of water) began to rain down thick and fast.  The Government quickly noted, after perfunctory politness, that the Review was only ‘one input’ into its policy, thus clearing the way for rejecting key provisions, such as (it is clear) the cap and the sectors to be included–notably petrol, because the Opposition, with a display of political cynicism probably unequalled in the history of this country, made the spearhead of its deeply uninformed critique the exemption of petrol from the ETS.  Special pleading poured onto the airwaves.  The New South Wales treasurer distinguished himself, even among such deep ignorance, in labelling the Review a ‘Chicken Little’ approach–thereby confirming the appropriate reading level of his particular expertise.  The exporters, of course, were at the forefront, arguing (an argument which Garnaut accepts) that they had to be exempt because they couldn’t pass on their increased costs to an international consumer base that doesn’t accept the need for them; if such support were not forthcoming, they threatened, they would move offshore–that is while there is an offshore, economically and literally, to go to.  Unions were uneasy, and have become more so, at the prospect of increased costs forcing job losses.  The brown coal manufacturers publically argued, apparently without shame, for the support of their (notoriously dirty) industry, on the grounds that otherwise there would be massive reductions of the workforce, the decline of Latrobe valley communities, and brown-outs in Melbourne.  The admirable ACTU president, Sharon Burrows, on the other hand, risking the wrath of her members, sturdily maintained that no sector should be allowed special pleading; that we were all in this together.  As indeed we are.

As Garnaut pointed out, there is no guarantee, to say the least of it, of decisive action by the international community in the short- or medium-term; despite the fact that the UN recently argued that there is a matter of perhaps seven years in which to act.  Just why this is so is displayed in the Australian debate, in microcosm.  The politicians, on both sides, are doing what politicians routinely do: jettisoning as quickly as possible principles and realities for political power.   The daily spectacle of politicians exhibiting abysmal ignorance on the technical content, shameless and cynical action in pursuit of power, ad hominem attacks, childish taunts and soundbites on climate change matters, instead of the national leadership of deliberative processes in the community, is not just a disgrace but actually a criminal disregard for the people who put them there, and for the future generations who will have to live with its consequences.  Industry and union leaders who have leapt into special pleading appear in no better light: they are transparently attempting to defend what they conceive to be their own interests without regard for the implications of their actions–which, ironically,will bear down on their own members along with everyone else.  The first and largest and most intractable challenge to a coherent response to the Garnaut Review will be the inability of all the special interest groups in the country to place their interests in the larger context:  to think for the whole, and to have the courage to act for the whole.

I think this may be largely driven not so much by ignorance and ignoble motives (although, as noted, there is plenty of both about) as by fear.  People have come to believe that the so-called ‘quality of life’ enjoyed in Australia is critical to their sense of well-being: any change or reduction in it is simply not to be contemplated.  This entrenched attitude, which even Garnaut appears to accept, tightly constrains the options for action.  For example, it precludes the idea of reducing energy use, because that would make life, it is argued, relatively unbearable; hence the policy option is to maintain the level of energy use but to seek renewable sources for it.  Yet, as Ian Lowe has pointed out in his recent essay (see my post of September 17, 2007), there is evidence to suggest that if the standard of living of world’s population could be set at the standard of living of Australia in the 1960’s–an inconceivable improvement for the two billion or so people who live on less that $2 per day–world energy use would be approximately sustainable.  As one who grew up in the 1960’s I say that in this there is nothing to fear.

And that points, I think, to a fundamental problem with the Garnaut report, despite its evident qualities, outlined above.  Garnaut deliberately frames his analysis primarily in terms of market instruments; not unreasonable for an economist.  This approach is intended to allow for the operation of market forces in achieving the changes in social and economic coordination that will be required to meet the climate change challenge.  It aligns with his incremental, emergent strategy of dealing with high levels of uncertainty, with respect to both the underlying scientific evidence of climate change and to its effects and mitigation.  None of this is unreasonable. 

But it is unlikely to be big enough or fast enough–as Garnaut himself implies.  The fact is that an effective response to climate change must be structural.  And although Garnaut and others will argue that the kinds of market instruments they propose will induce the required structural change, there is reason to doubt their effectiveness.  There is no question that, without social consensus, their implementation will be resisted tooth and nail, fanned by the political and social special interests described above; lags will be inevitable; special pleading will produce subsidies and exceptions that will slow, and perhaps undo, the gains.  And, most fundamentally, there is no evidence to suggest that market mechanisms alone, or even primarily, can produce a fundamental change in the externalities of business as usual; indeed, Nicholas Stern (of the UK Stern Review) rightly referred to climate change as the biggest example of market failure in history. 

Market instruments will therefore be part of an effective strategy, but not its centre.  It is critically necessary to begin thinking about what a low carbon economy and society looks like, and how the transition to it can be best undertaken.  This is not just a task for economists and social analysts–although it is a task for them, and very few are thinking about it–but for the entire Australian polity, at national, state and local (perhaps above all local) levels.  It will require us to think through how we decide to live our lives, what values and ethical frameworks we are commited to, what kind of life we want to live, in this country and in the world.  It will require us to consider how to engage whole communities in these deliberations.  It’s not impossible–indeed, Australia, more than most nations, is reasonably well placed for it, given the egalitarian ethos of its culture–but it requires a degree of wisdom that will test to the limit our claim to civilised society. 

This is, in my view, the principal limitation of the Garnaut Review.  It is in truth one input–but not just or most importantly into government.  Rather it is a platform, and a fine one, to begin the collective process of understanding this critical challenge by the entire Australian community; a process which will only find its way through to a solution if it values all of its elements and thinks together for the whole–for this country, and for a world overwhelmingly less fortunate than us.  The impacts of global climate change are already falling on those least able to afford them, across the world.  Behind our parochial concerns sit the human rights of climate change–the subject of my August 23, 2007 posting, and to be continued.

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