DO you want to know a secret? Australia will end up producing more greenhouse gas emissions than most other countries.
will still make use of our abundant fossil fuels, even if we burn them
more cleanly. But we will use our fossil fuel income to buy emission
rights from other countries, such as financing tree planting in the
That will make it less costly to cut global carbon emissions. And an
efficient plan is more likely to tackle global warming than a high-cost
Yet grand schemes are often undone by such political loose threads.
Take the Government's porky that its fiscal stimulus plan to put
ceiling insulation in every Australian home will cut the nation's
greenhouse gas emissions by nearly 50 million tonnes by 2020.
That's now turned into what some claim to be the "fatal flaw" of the
Rudd Government's proposed emissions trading scheme, or ETS. Neither
ceiling insulation, solar panels nor riding a bike to work will
actually cut one tonne of overall carbon emissions, at least not at
Such efforts will simply provide room for "big polluters" to pump
out more greenhouse gases underneath the Government's overall emissions
cap out to 2020.
It's political dynamite for environmentally conscious citizens who
expect their inner-glow actions to directly turn down the global
thermostat. But then nothing they do will save the planet, given that
Australia accounts for only 2 per cent or so of global emissions.
And the shocking idea is actually a design strength of the
"cap-and-trade" scheme proposed first by the Howard government and
adopted by Kevin Rudd. Such schemes generally aim to control the amount
of carbon emissions. Or they aim to control the price of carbon
But it is difficult to do both. So the cap-and-trade scheme directly
targets the key variable for combating global warming -- the amount of
carbon emissions. And it aims to achieve any targeted emissions cut at
a lower cost to the economy, profits and jobs than other schemes.
As the Government reduces the amount of emissions permits each year,
their rising scarcity drives up their price, and hence the cost of
emitting carbon. Businesses that can most cheaply reduce their
emissions and can sell their permits to those businesses that find it
The cap-and-trade scheme sets a (declining) overall quantity of
emissions. The market then sets the economy-wide cost of meeting this
quota by determining the (rising but fluctuating) price of emissions
A richer economy will be better placed to install less-polluting
plant and equipment. People in good paying jobs are more likely to
invest in solar panels, even if encouraged to do so by rising
electricity prices under a rising carbon price.
Ceiling insulation, solar panels and bike riding will make it easier
to cut emission targets after 2020. Remember, this is a policy task
that will take decades.
The alternative could be a carbon tax. For a given tax or higher
carbon price, any cut in emissions from bike-riding citizens would flow
through to lower nationwide emissions. Yet, while it could control the
carbon price, a carbon tax would have a less direct handle over the
quantity of emissions.
It would be simpler and perhaps less administratively costly. But it
also would lose the efficiency benefits from permit trading. That is,
unless the ETS is badly designed or overtaken by events. And that's
what we're debating now.
For instance, the Government's own adviser, Ross Garnaut, complains
that the Government's proposed compensation for emission-intensive
export industries is riddled with rorts and could blow the budget.
Malcolm Turnbull this week pointed out the costs of excluding
agricultural carbon offsets from the ETS: it dulls the incentives to
develop bio-sequestration of carbon.
It's still not clear what the Obama administration will have cooked
up by the time of the global Copenhagan climate conference in December.
Barack Obama yesterday backed "a market-based cap on carbon pollution".
Yet a couple of weeks ago, his energy secretary seemed to favour a
And it's impossible to ignore the global financial crisis. Some
suggest that arguments against delaying the ETS during an economic
downturn are as misguided as those for delaying cuts to import
protection during hard times.
They argue that recessions are good times for such adjustments
because there is plenty of unemployed skilled labour and investment
capital to flow to the new industries. Yet, by the time the ETS is
bolted down in 16 months time, the economy will be "accelerating
strongly", providing a "favourable environment for new growth
industries to expand".
That's a bold call. Cutting import protection yields an economic
efficiency dividend, whatever the rest of the world does. In contrast,
cutting carbon emissions hits Australia's comparative advantage in
cheap fossil fuel-based energy. And, unlike tariff cuts, the cost is
higher if we move unilaterally. And this is surely no ordinary
recession. By the middle of next year, the Reserve Bank forecasts the
economy will be posting annual growth of only 1.25 per cent. And the
risks are on the downside.
While there will be more jobless workers to be hired by low-carbon
industries, there's unlikely to be much investment capital around to
finance them. That's unless the Chinese want to invest in our solar
industry rather than our mines. This is a global credit-crunch
recession. There's a shortage of capital.
Other than for election advantage over John Howard, there was no
compelling need for Rudd to promise to bed down a fully-blown ETS by
mid-2010. Now the Government appears to have got the wobbles
The fuss over the emissions payoff from ceiling insulation shows
that the ETS scheme is little understood -- and that the Government
struggles to explain it. In any case it's not clear that the scheme's
design is optimal, or which way the US or China will move.
Rudd could still go to Copenhagen promising to unconditionally cut
emissions by 5 per cent by 2020 and by up to 15 or even 25 per cent if
the rest of the world agrees. But let's see what comes out of
Copenhagen before we lock down a scheme that may or may not be
compatible with what other key economies do.
Michael Stutchbury, Economics editor
| February 26, 2009
Source: The Australian