Welcome back carbon pricing

| October 28, 2015

Back in 2008, Labor and the Coalition agreed that an emissions trading scheme (ETS) was the appropriate policy to reduce green house gases. We are now on a trajectory where both will once again be in agreement. Kevin Parton explains why.

The main component of government climate change policy is direct action. This is not the natural policy of a conservative government, which would be a market-driven, carbon pricing policy. The reason we have direct action is largely political.

While in opposition, Mr Abbott had successfully convinced the Australian public that carbon pricing was the major cause of their economic ills, and once elected the Abbott government was determined to get rid of it. With Mr Turnbull as prime minister there may be little change in the short term, but in the term of the next government, whichever party is elected to lead, we can expect a return to carbon pricing in the form of an emissions trading scheme (ETS). After outlining the various policies, the following analysis explains why.

Direct action is where the taxpayer pays higher taxes so that the government can offer incentives to green house gas polluters to reduce their emissions. Carbon pricing, in the form of that massively unpopular carbon tax, is where the government taxes those few (ie about 500) polluting firms and distributes the revenues in the form of both lower taxes and incentives to firms to invest in new non-polluting technology.

An ETS is a carbon pricing scheme under which businesses which produce greenhouse gases as a by-product of their production processes must purchase either a permit for each tonne of carbon dioxide equivalent they emit, or an offset that reduces emissions elsewhere by one tonne. An offset could be a tree planting scheme that absorbs or “sequesters” carbon dioxide. The price of permits is determined in the permit market and the price of offsets in the offset market. However, the price in these two markets must be close to each other, because if, for example, permit prices move upwards, purchasers will find offsets relatively cheap and move towards the offset market, reducing the price of permits and increasing the offset price, until equivalence is reached.

Back in 2008, Labor and the Coalition agreed that an ETS was the appropriate policy to reduce green house gases. We are now on a trajectory where both will once again be in agreement.

Australia is currently on track to meet the emissions reductions targets set by the United Nations Framework Convention on Climate Change (UNFCCC), but these targets are weak compared to the US and China. Australia seems to be slipping behind. It will be instructive to see whether we adopt tighter emission targets in the Paris climate negotiations in December.

Direct action policy is only a short-term solution. You can, in theory, restrict emissions under any of the policy alternatives. The difficulty with direct action used alone is that it gets very costly to tighten the emissions target, and it gets very restrictive in terms of the amount of government involvement necessary. Mr Turnbull is unlikely to support such a scenario.

Economic pressure will encourage all parties to adopt an ETS, because most economic analysis shows that this is the most efficient, least-cost policy. Also, as we shall see at the Paris summit, an ETS will be the international standard. Every country that is seriously tackling carbon emissions has an ETS.

Having said that, in reality, policy to reduce green house gases will be an amalgam of various policies as it is in Europe, where an ETS is the principal policy, but where some elements of direct action also exist in the form of incentives to firms to adopt non-polluting technology.



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  2. Allan Catlin

    Allan Catlin

    November 19, 2015 at 4:14 am


    Carbon pricing seems to me to be the most effective way we can slow climate change. Direct action can compliment that process. It should not be seen as an alternative. Politics sometimes interferes with our best options when dealing with universal issues.