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.

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