Why carbon trading and why now?

This is an abridged and updated version of our editorial from January this year

Kevin Rudd calls climate change one of the greatest moral challenges of our time. He may regret raising the bar so high. In choosing this style of language, the prime minister takes his cue from the environment movement, which insists on framing the issue in terms of moral culpability. They never tire of carping about Australia’s high emissions per capita and ‘inaction’ over the last twelve years. As the public will come to understand, neither of these mean much. The volume of our emissions is too small.

To date, higher emitting countries have adopted a consistent approach to the climate agenda. This can best described as pussyfooting around. The outcome in Bali was more of the same. None are prepared to inflict real pain on their peoples for the sake of global warming. The big-talking Europeans are short of their Kyoto targets, and it’s easier for them than places like the US and Australia. Many EU states switched to cleaner energy sources, like nuclear, decades ago (for reasons unrelated to climate) and they’re not major energy exporters. The Americans are entitled to doubt their bona fides.

Much of Europe’s cuts, such as they are, accrued from dismantling clapped-out industrial plant in the former eastern bloc. Still, Europeans as a whole are making a meal of it, and their emissions trading scheme is a joke. As for the British, while they claim to have met their Kyoto targets, unlike the continent, a team of Oxford economists led by Dieter Helm dismisses such claims as ‘illusory’.

In the meantime, China and India, leading the developing pack, cling to the UN’s ‘common but differentiated responsibilities’ formula. They plan to take a back seat, however much their rocketing emissions exceed ours. Stuck on the moral pedestal, they blame the developed world. Naturally enough, the US refuses to play on an uneven field or pay what amount to green reparations. The Americans also rightly draw a distinction between developing countries advanced on the path to industrialisation like China, and others mired in misery like most African states.

Nor can it be assumed that the US position will change easily after Bush’s term. No matter who enters the White House in January, the next UN protocol needs to get past the senate (where Republicans have issued a strongly greenhouse-sceptical report). Indeed, legislation to introduce emissions trading foundered in the Congress just last month. Even many Democrats were cool on the idea.

And in Bali a core of other important countries, including Canada, Japan and Russia were grudging on any kind of targets.

Agitation over climate change resembles a parallel universe. In the first place, while delegates sweltered in Bali, the European Central Bank joined the US Federal Reserve in pumping billions of dollars into the world’s banking system to stave off a downturn in the American economy (on which world growth depends) and, here, Treasurer Wayne Swan lambasted port infrastructure constraints impeding coal exports from Queensland.

In the second place, European and Australian delegations in Bali favoured (only in principle) near-term developed country targets which would hobble the American economy and put a dent in the international coal market. The first of these actions happened in the real world; the second on fantasy island.

It‘s easy to explain this outbreak of foot-dragging. Consider that UN’s panel on climate change forecasts global average temperatures rising by a range of 1.8 degrees to 4 degrees over the coming century, and its worst case scenarios are based on speculative assumptions about growth rates and the world’s adaptive capacity. Political leaders are left weighing up a remotely possible chance of climate cataclysm against an absolutely certain prospect of damage to their economies.

Make no mistake, the sort of targets pushed by the UN entail economic pain. Hence the big talking and pussyfooting around. Since coming to office, the Rudd Government has deferred everything until economist Ross Garnaut delivers his report. This was a useful let-out in Bali. Garnaut laid it on the line from the start. The world’s response to climate change, he says, could end the ‘Platinum Age’ of accelerated world growth over recent years.

Repeated claims by the Climate Institute and others that we can enact deep cuts - even achieve carbon neutrality - while barely noticing are nonsense. Worse, they’re a cruel hoax. The pain will be felt most deeply by blue-collar workers, and other riff-raff who don’t seem to matter.

Dr Philip D Adams of Monash University estimates that an emissions trading scheme will cost us 1.3 per cent of GDP by 2030, ‘equivalent to a reduction of around $21.5 billion a year in today’s dollars’. And as reported by Alan Mitchell in the Australian Financial Review (12 December 2007), former ABARE director Dr Brian Fisher says Labor’s renewable energy target alone, aside from anything else, will cost the economy $1.5 billion and 3600 jobs in 2020.

Rosy scenarios ignore the danger of sectional dislocation, even if the aggregate growth outcomes look benign.

The Climate Institute calls on Australia to step up as a world ‘leader’ in emissions reductions. Conceding that this entails slower growth for some industries, they typically fail to quantify these impacts or express any concern for the losers. Such adjustments will hurt real people, even if they live beyond the golden circle.

Green flacks may demand that Australia set the pace. These shadowy fanatics would happily cut a swathe through some of our most important industries. But our minuscule share of global emissions - only 1.4 per cent and set to fall in relative terms even if we do nothing - ill befits us for an avant garde role. It’s a bit like expecting Luxembourg to have led the recent EU treaty negotiations. There’s no reason why we should take the plunge while the world just dips its toes. Nor should our workers be offered up as guinea pigs.

Our touchstone should be prudent and cautious engagement.

Fear-mongering, abetted by political opportunism, however, have now spun the energy industry into a state of uncertainty and investment paralysis. In the interests of certainty, prudent and cautious engagement are about to be tossed aside for early action. We have been collectively frog-marched down this dubious route. Despite bipartisan commitment to carbon trading in the form of a ‘cap and trade’ scheme, a deal of respected opinion is ebbing away from this approach. Some prefer carbon taxes or hybrid trade-tax schemes, others old-fashioned research and development subsidies.

Last November, for instance, the venerable Committee for the Economic Development of Australia (CEDA) published a collection of papers which ‘questions the common view that a carbon trading system is better than alternatives such as a carbon tax or a hybrid scheme.’ The contributors include world authorities on climate economics from here and overseas.

When Kyoto’s agenda took off more than a decade ago, the objectives were to cut energy consumption in absolute terms and induce shifts to cleaner sources. Carbon trading was thought to achieve both. Time has brought the first objective into sharper relief, however. As climate change policy moves from the fringes to the mainstream, concerns about the implications for growth and living standards have come to the fore. Hence the surge in scepticism about carbon trading.

There is rising interest in ways to stimulate cleaner technologies without the accompanying clamp on consumption. Contributors to the CEDA collection propose different ways to price carbon, but some creative thinkers are challenging the need for any type of carbon price.
Writing in the Harvard Law and Policy Review, authors Michael Shellenberger and Ted Nordhaus, and others, explain in detail why carbon trading won’t induce the new technologies we need. They argue instead, putting it simply, that public investment in clean technologies, on a large enough scale, will trigger similar investments from the private sector. The carrot of public investment makes the stick of a carbon price redundant. Not only is this course more compatible with dynamic growth, they say, but it’s saleable politically.

Power generation produces around 36 per cent of Australia’s carbon emissions. Suppose we chose to secure our energy industry with a plan combining public investment in research and development with a phased timetable, consistent with technological progress, for the retro-fitting or replacement of old plant and the deployment of new sources. Would this approach damage our growth prospects less than carbon trading? Would it have a less dislocating impact on vulnerable workers? We will never know. The idea won‘t get a hearing. We’re saddled with an agenda conceived by ponderous UN bureaucrats and green ideologues.

Sleepwalking to carbon trading may turn into a rude awakening if the shockwaves reverberate through critical suburban and regional electorates. Then voters will ask why their communities are losing jobs while higher emitting countries do nothing. They’ll ask why they’re paying higher energy and petrol prices. They’ll question what any of this has to do with the world’s climate, drought and water shortages. Ultimately, they’ll demand to know why their government sold out their interests.