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Editorial: April 2007
Carbon trading hasn’t worked – mandate clean
A delusional fog seems to have descended on climate change policymaking
in Australia. How else to explain the breathless urgency attending moves
to carbon trading? It’s not just that carbon trading has a dismal track
record. It bears repeating that we produce a puny 1.4 per cent of global
emissions. Assuming global warming is mostly man-made, even if we were
to adopt a national scheme, and even if we hit a drastic target – say a
60 per cent cut by 2050 – the impact would still be next to zilch. As we
have argued, atmospheric carbon will be stabilised by the giants of the
northern hemisphere or not at all. We could reduce or raise our
emissions by 100 per cent and it would make virtually no difference.
Of course, environmentalists will always insist ‘we must play our part’.
Speaking on the ABC’s 7:30 Report, for instance, Professor Graeme
Pearman, Sustainability Science Coordinator at Monash University,
recently delivered the stock
reply: ‘If you look at the emissions of
Australia, they’re not that different from the emissions of the UK or
from France, or from Sweden. All of these countries have emissions that
are approximately the same. So each of these countries could put up
their hand and say, “We’re going to opt out of doing anything, because
no-one else is doing it”. We have to share the responsibility for
actually doing this emissions reduction.’
Australia can’t answer for Europe, and Professor Pearman ignores a host
of factors distinguishing us from countries like Britain and France.
Consider their longer industrial histories. Consider that their
fossil-fuel reserves have already been substantially depleted or
abandoned, spurring a decades-old switch – unrelated to climate change –
towards energy alternatives like nuclear. Consider their status as
powerful players in the European Union, a grouping of 27 nations with a
combined population of close to 500 million. The EU emits about 14 per
cent of the world’s carbon, ten times as much as Australia, population
It’s premature to say we should do nothing. We shouldn’t, however, be
rushed into an outcome that is wrong for Australia. And yet a wrong
outcome is what we’re about to get. As the media repeats ad nauseam,
‘some type of carbon trading scheme is inevitable’. Every sensible
person knows, for reasons alluded to above, that absent a functioning
multilateral framework, independent action is pointless. There is a
growing consensus that the Kyoto Protocol just doesn’t measure up (by
2012, emissions will grow 40 per cent with Kyoto and grow 41 per cent
without). All eyes are now on the post-2012 sequel to the protocol.
Nonetheless, the government, languishing in opinion poll purgatory, has
lost control of the agenda, while Labor believes it’s onto an election
winner. Neither will resist the clamour for a dramatic, comprehensive
Driving us NETS
The Prime Minister’s emissions trading
task group is set to report at
the end of May, and the broad outlines of an outcome are coming into
view. If media reports are accurate, the Commonwealth Treasury is a fan
of proposals long advanced by the Business Council of Australia’s
Climate Change Roundtable. Aside from fringe radicals who demand state
mandated emission cuts, the ‘early action’ brigade advocates some type
of ‘carbon pricing’. That, it is widely believed, offers the best hope
of balancing maximum cuts to emissions with minimum costs to the
economy. Some, like the Business Council, propose permit (or quota)
trading, some favour a carbon tax, while some prefer a combination of
Carbon taxes have already been ruled out by the major parties.
Doubtless, taxing emissions could deliver an efficient price signal for
fast and deep reductions, hence its appeal to alarmists like the Greens
and Doomsayer of the Year, Dr Tim Flannery. But emissions taxes raise
some difficult problems – not least how they would interact with other
taxes in the economy, whether players with market power will just shift
the burden to consumers, social equity considerations arising from, in
effect, another indirect tax, and questions of compatibility with any
future multilateral framework.
In any event, imposing an economy-dampening tax to extinguish half our
1.4 per cent of global emissions is madness.
Incidentally, last year the Australian Bureau of Agricultural and
Resource Economics (ABARE) estimated that by 2050 our share of total
emissions will fall to 1.1 per cent even if we did nothing, in a world
where emissions from the developing countries are expected to grow by 75
per cent in just three years.
This reality puts paid to the so-called ‘hybrid’ model promoted by
Professors Warwick McKibbin and Peter Wilcoxen. They argue that it is
wrong to target emissions in any given year rather than focusing on
cumulative carbon concentrations and smoothing the cost of action over
time. ‘The uncertainties surrounding climate change’,
‘are large, numerous and mostly intractable.’ In this respect, he’s
certainly right. Accordingly, he and Wilcoxen reject Kyotoesque targets
and timetables. Their model ‘combines the best features of a tax (to
guarantee short run cost certainty) with the best features of permit
trading (to set a long term emission target and find the least cost way
of achieving it)’. All very interesting, but the tax or ‘safety-valve’
component is political poison, and rightly so.
That leaves so-called ‘cap-and-trade’ emissions trading (let’s call it
ET). This is the type of national emissions trading scheme (also known
by the acronym NETS) prescribed by Kyoto and supported by the Business
Council, among others. Under this scheme, the government fixes an
overall emissions cap (or maximum) and allocates permits at a set price
or by auction. The total number issued depends on the targets adopted.
For instance, Kyoto requires Annex B states (developed countries) to
reduce emissions by around 5 per cent below 1990 levels by 2012. Permits
can be traded between participants (such as, but not restricted to,
energy utilities and industrial plant) and confer a right to emit a
measure of carbon. Participants who can reduce emissions cheaply will do
so, it is argued, and sell their excess permits to those who can’t. The
idea is to soften the economic impact of the cap.
This sounds fine in theory. But the concept is vulnerable to a fatal
flaw. What if the government gets the number of permits wrong? What if
the traded permit price falls below the level necessary to induce
emissions abatement? The only large-scale attempt to implement a
cap-and-trade scheme came to grief on this score. Unfortunately for ET
fans, the European Union’s Emission Trading Scheme (EU ETS) has been a
flop. In an aptly titled article ‘Carbon trading: a good idea but not
easy to implement’, Matthew Lockwood of the UK’s Institute for Public
Policy Research explains what happened: ‘In April 2006, when it became
clear that 20 of the 25 member states had set caps for 2005 that were so
generous that they were above actual emissions, the carbon price
immediately collapsed from 25 [euros] to around four per tonne, where it
now languishes.’ Evidently, few member states resisted the opportunity
to hand their key industries an advantage over foreign rivals, so they
dispensed permits like confetti.
Wide fluctuations in permit prices undermine any long-term incentive to
pursue abatement measures. And yet no democratic government will ever be
free of intense pressure to advantage its domestic economy. Just observe
the experience in Australia where, despite calling for meaningful action
on climate change, state governments have exempted major energy users
like BlueScope Steel and Alcoa from their own carbon abatement measures.
A NETS is likely to extend similar protection to our high-emitting
trade-exposed industries. This is sensible, but renders a pointless
exercise more so (if that’s possible).
The more fundamental question is whether any government, even a
well-intentioned one, is equipped to get the cap right. How well can a
government agency determine the appropriate price for a widely traded
security? Then there is the problem of enforcement. Under a NETS, it
will be illegal to emit more carbon than your permits allow. How will
the relevant agencies monitor, enforce and verify compliance? These
questions are in play following the EU ETS experience.
Still, ET fans, usually so pessimistic about the planet, are
uncharacteristically optimistic when it comes to their project. Those
bumbling Europeans botched the ‘first phase’ of the EU ETS, runs the
party line, but they will get it right during the ‘second phase’. Not
according to Ronald Bailey, who
reports that the proposed allocations
submitted by European governments for the 2007 round were 15 per cent
higher than actual emissions! More likely, ET is an inherently
speculative undertaking, with low prospects of success. Many
environmentalists will downplay the flaws of ET because signing on to
Kyoto is a cornerstone of their belief system.
Ironically, the McKibbin-Wilcoxen critique of cap-and-trade schemes and
the orthodox green
critique of ‘hybrid’ schemes are both cogent, and
serve to undermine the whole notion of emissions trading.
Err in haste, repent at leisure
Leaving aside the patent flaws of ET, the more immediate question is
whether Australia should contemplate ‘early action’ at all. By far the
most thorough, balanced and objective
submission to the Prime Minister’s
task group was from the Productivity Commission, which, of course, has
no vested interest in the outcome. Refreshingly, the commission’s
starting point is that unilateral action by Australia will have no
impact on climate realities. This compares favourably with the Business
contribution containing no such acknowledgement.
The commission proceeds to weigh up a series of possible rationales for
early action in any event, namely avoiding climate change, meeting the
Kyoto target, being a good world ‘citizen’ and influencing others,
reducing investment uncertainty, and facilitating the transition to a
lower emissions economy. After sifting through the evidence, the
commission concludes that only the last of these justifies early action.
And its enthusiasm for this rationale is lukewarm at best. However, the
commission’s reasoning ultimately suffers from circularity, in the sense
that transition to a future international regime warrants early action,
but that depends on the regime: ‘Assessing this potential requires,
among other things, judgements about the likely timing and make-up of an
international regime.’ In short, the submission contains little if any
endorsement of early action.
On a more general level, the commission pours cold water on the
underlying assumptions of the Stern Review. The commission calls Sir
Nicholas Stern’s particular view about aversion to risk and the low
discount rates he employs into doubt, thus joining the growing body of
literature questioning Stern’s assertion that an immediate and
far-reaching response to climate change is necessary on economic as well
as scientific grounds.
The hard reality is this: unilateral action would be pointless, and a
multilateral scheme spanning nations and continents at varying stages of
economic development, with different political cultures and competing
strategic interests, is a pipedream.
So why are our leaders about to drop a NETS on us?
The Business Council is nervous about the paralysing impact on
investment of continuing speculation about a carbon tax or NETS, and
would rather see the whole thing settled, even at cost to some of its
members. To a lesser extent, it’s about public relations imperatives
embodied in the notion of ‘corporate social responsibility’. For its
part, Treasury is rightly concerned about economic inefficiencies
produced by the mish-mash of federal and state-based abatement measures
like the Mandatory Renewable Energy Target (MRET), Generator Efficiency
Standards, NSW Greenhouse Gas Reduction Scheme, the Queensland 13 per
cent gas scheme and others. Treasury is keen to sweep them all aside to
level the national playing field.
Then there are the progressive ideologues, many of them academics,
journalists and commentators, and most environmentalists, who campaign
to transform social values as they relate to economic activity. For
them, NETS is a chance to throw a progressive blanket over the economy.
Hot on their heels is the new class of eco-hustlers, the carbon traders
and analysts, carbon credit dealers, renewable energy developers and
green designers, all clambering aboard NETS to make a buck. They enjoy
access to the media on the pretext that they are performing a community
service. On some days the Sydney Morning Herald reads like a promotional
brochure for these interests.
While many environmentalists argue for NETS on the ground that
Australia’s exclusion from carbon trading is costing us billions of
dollars, a lucrative market for commodity traders, if achieved, doesn’t
necessarily translate into emission reductions. Moreover, if unchecked,
this green revolution will, on a significant scale, displace income
earning prospects away from investors, proprietors and workers, mostly
semi-skilled or unskilled blue-collar workers engaged in fossil fuel
related industries, towards well-heeled groups like the eco-hustlers.
The Productivity Commission cites ABARE research estimating that if we
took independent climate action, even in conjunction with global action,
by 2050 our coal and iron/steel industries will be respectively 32
percent and 53 per cent smaller than otherwise. In contrast, ‘services’
will only be 6 per cent smaller. Is this a desirable social outcome?
Whether climate change can be addressed without resort to ET is a big
subject for another occasion. Even most ET fans accept that without
heavy investment in technological innovation, ET alone is not
sufficient. They just think a ‘price signal’ is necessary to stimulate
this investment. But if ET proves to be a white elephant, technological
innovation is all we have. More attention should be devoted to the
option of clean technologies, like carbon capture and storage (CCS), as
a stand alone response, mandated by governments according to a mutually
agreed timetable for the development, application and dissemination of
Perhaps the Prime Minister should have established a task group on this