Carbon trading hasn’t worked – mandate clean technologies

Foggy weather   

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 20 million.

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 gesture.

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 both.

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’, explains McKibbin, ‘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 Council’s lightweight 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.

Cui bono?

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 technical improvements.

Perhaps the Prime Minister should have established a task group on this instead.

 TNC  23 April 2007                    Like to respond?                                   Top  

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