ETS is the right policy, it just might not be the right time

Source: Stefan Wernli

After passing through both Houses of Parliament, Australia will officially have an emissions trading scheme on July 1st 2012, which will take the form of a carbon tax for its first three years before moving to a flexible price carbon trading market in 2015.

It was hailed by the Labor caucus and the Greens as a momentous occasion; a public policy initiative deemed as significant as the floating of the dollar or  the introduction of compulsory superannuation.

Whether you agree with these assessments or not, the policy will have a substantial effect on the Australian economy. By putting a price of carbon emissions, it aims to meet the bipartisan target of cutting emissions by 5% from 2000 emissions levels, and shift the Australian economy towards what is dubbed as a ‘greener’ future.

The opposition, led by Tony Abbott, is vehemently opposed to the tax, pledging to repeal the legislation if given a mandate by the Australian people in the 2013 election. Abbott has been an ever-present in all media platforms arguing that this is just a “big tax on everything” that will have “all economic pain with no environmental gain”. He has offered his ‘Direct Action’ plan alternative, which includes investments in renewable energy, replanting of trees in public spaces and supporting emissions reductions by business and industry via an Emissions Reductions Fund.

The economics of this policy debate is pretty simple. Currently, carbon emissions are an externality that emitters do not account for in production. This externality means that the economy is not currently producing at its socially-efficient level, with over-production ensuing as the cost that carbon emissions have on the environment (climate change) is not accounted for. By initially implementing a carbon tax, before moving to the emission trading scheme, the government’s policy is effectively ‘internalising’ that externality, allowing the market to move towards that socially-efficient level. Furthermore, by slowly reducing the amount of carbon emission permits available in the market, the policy will continually reduce carbon emissions over time and promote investments in renewable energy technologies. As most economists have argued, this is the simplest and most efficient way of reducing carbon emissions in the long run.

The problem for the government is that the politics are a little more complex. With cost of living pressures still a politically sensitive topic for the voting public (despite Australians enjoying some of best standard of living in the world), it has allowed the opposition to brand the carbon pricing scheme as just another tax (on top of the mining tax and flood levy) that will put more cost pressures on families. Furthermore, the opposition has pointed to that fact that the rest of the world is lagging behind in relation to climate change action, and therefore cutting Australian emissions will have no discernible impact on the real goal of cutting global emissions to prevent climate change and its consequences. Moreover, the fact that Julia Gillard promised to the Australian voting public that there would be no carbon tax under a government she led still does not sit well with voters. This is the reason why current polling points to a comfortable Coalition victory in the next election.

This leads to my personal view: I’m convinced that the policy is the right one if we are to cut emissions in Australia. However, I am still not entirely convinced whether it is the right time for such actions. I do believe that Australia must play its part if we are to reduce global emissions and subsequently avoid the horrible consequences of climate change. But the failures of UN Climate Change Conferences since 2009 did not inspire confidence, and now with the economic turmoil ravaging Europe and the US, avoiding recession and creating jobs will be the major focus for politicians over the next few years (especially with US elections next year), rather than climate change policy.

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