ESSA

ESSA

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


Dean Pagonis

By

February 21st, 2012


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.


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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The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Brendan Law

    Well said Dean! I agree with you fully, a bit unlucky that now had to be the crunch time for our country to introduce this scheme, but definitely promising signs ahead for where we want to go. Unfortunately, we’ll also need to see how larger emitters react and respond to this, such as China, USA, India. We’re small fish in the ocean unless someone else helps out.

  • Artemis Niaros

    I agree with you dean, however it seems to me that there never really is an appropriate time to be forwarding a scheme to address the (ironically) overdue requirements of our suffering planet. There’s always another more important project (and more beneficial in the short term) to undertake, someone else who should pay, another country that is more responsible. If not now, when??

  • Artemis Niaros

    Also in relation to the above comment – these emerging economies may be larger emitters but they do so partly in order to fuel their export driven economies from which we benefit. Sure they could do so in more environmentally conscious ways but there’s no incentive

  • Chairman

    I agree with you that Australia, nay, the WORLD needs to do something about carbon emissions. However, is the Carbon tax the only option? and why are you convinced that it is the best option?

    Is it possible to create a greener, more sustainable future without increasing the costs of living greatly? What about the ripple effect through the economy, the carbon tax will affect everyone and everything since it is used so broadly!
    The economics of what you’ve outlined sounds great in theory, but realistically, is it viable? It sounds like a situation of no pain, no gain?

  • http://www.linkedin.com/pub/dean-pagonis/1b/117/319 Dean Pagonis

    Artemis – I agree that it is difficult to judge the timing of such over-arching reform; I am just raising the point that this is a global problem that needs a global solution, so a local scheme is inadequate to bring real environmental benefit. China, America, India must get on board, and I hope they do, sooner rather than later.

    Chairman – numerous papers by prominent economists illustrate that a carbon emissions trading scheme is the cheapest and most efficient way to reduce emissions – I can send you some if you like. Of course there will be costs that will affect the broad economy, it is an economy-wide scheme that must change the whole structure of our economy to work. Further, a market system requires incentives for change that bring so-called ‘pain’; without these mechanisms (ie putting a price on pollution), we would continue emitting at the same levels and no progress will be made. As you say, to get the necessary gains, we must create a market that helps facilitate that outcome.

    As a side note: the argument that compensating people for the cost of living increases distorts the incentive effect of the carbon price is wrong. By pricing carbon, it is becoming relatively more expensive to emit carbon to produce, say, electricity, compared to using other ‘cleaner’ technologies, such as solar or wind, no matter what absolute compensation is given to the consumer.

  • Kristy

    I agree that it is a Global problem, however in my cynical view there will never be a common global solution. As Artemis points out, there is always a scheme that will be more beneficial in the short term and there will always be people saying ‘if they aren’t doing it why should we?’. Ultimately, someone has to make the first move, to take responsibility and be the ‘poster-child’ for significant emission reductions, whatever the cost.

    Why not Australia? Personally I am ashamed by the attitude of the opposition and the governments of China, America and India as well as all the rest, that it is not our responsibility.

    As for the Australian public and the cost of living, I am aware that this is ignoring the real issues but it upsets me that people complained about the $800 dollars or so that the Carbon tax was expected to cost the average household. How about buying one less iPad, or not getting that bigger flat screen tv? Isn’t saving the planet a bigger priority?

  • lolimar

    Something that I think doesn’t seem to be mentioned a lot is whether greenhouse emissions really are a ‘cost’ in the traditional sense to begin with. Assuming away that ‘excessive’ greenhouse gases are a problem there is still the point that particularly with regards to carbon dioxide a significant proportion is probably acceptable. An emissions trading scheme as far as I know (and apologies if I’m misinformed about this), would not take into account this, and so effectively some of it is really just a lodestone of extra cost.

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