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ESSA

Carbon cost: reflecting upon the repeal


Brody Viney

By

July 18th, 2014


Brody Viney ponders the intersection of economics and climate change policy.


The carbon tax. Briefly here; now it is gone.

On Thursday, with a motley crew of new crossbenchers finally pulled into line, Tony Abbott achieved the act that has fundamentally driven his rise from an outlying frontbencher to Prime Minister over the past five years.

The repeal of Labor’s carbon pricing legislation – set to move from a fixed price to a flexible trading scheme in just a year’s time – caps off a tumultuous and divisive period in Australia’s public debate, one that is fuelled by partisanship, misinformation and all manner of political drama.

Amidst the chaos it has been easy to forget what is at stake, and why climate change is such a pressing problem not only for our environment, but also for our economy. It is pertinent to do a quick review – though I’m not going to bother establishing the already well-worn fact that climate change is real. If you take issue with that, you can argue with John Oliver.

The idea of climate change as an economic challenge rose to prominence in 2006, with the release of the 700 page Stern Review on the Economics of Climate Change by Nicholas Stern, chair of the Grantham Institute at the London School of Economics (among other roles).

The Stern Review found that the costs of mitigating the worst impacts of climate change will be between one and two per cent of global GDP per annum. By contrast, without action the impacts of climate change will strip between five and 20 per cent from global GDP annually, forever. In light of this significant threat (and with a cost benefit ratio of as much as ten to one) Stern recommended immediate and dramatic global action.

The key plank of this action was to be the introduction of emissions trading. One year later, both of Australia’s major parties took plans to introduce a trading scheme to the 2007 federal election.

That, it would appear, was a long time ago indeed.

Earlier this year, Australia received another reminder of the economic consequences of inaction against climate change. The Committee for Economic Development of Australia (CEDA) released a report in June which highlighted two major areas of threat: firstly, the cost of dealing with more extreme weather events such as droughts and cyclones, and secondly, the potential loss of capital investment as risk assessments increasingly consider climate change impacts and carbon intensiveness.

CEDA’s The Economics of Climate Change highlights how dealing with recent major environmental disasters has required special flood levies and billions of dollars in repair bills, while carbon-intensity risks have been factored into the lending strategies of the likes of Deutsche Bank and the Norwegian Sovereign Wealth Fund. As industry and governments internationally (including China and the United States) move to become low-carbon economies, it concludes that Australia cannot afford to be left behind.

As CEDA Chief Executive Professor Stephen Martin urges, “It’s not too late for a rethink on an emissions trading scheme” – after all, it’s the policy approach described by The Economist as “very close to the economic ideal”, internalising an externality using a market mechanism. The majority of economists back a pricing mechanism over the government’s proposed direct action policy, and it has the support of figures such as Ken Henry, Bernie Fraser and Ross Garnaut.

Yet the Abbott government has ploughed forward with the repeal, potentially setting Australia back a decade.

Introducing a pricing mechanism is a complex public policy challenge; we can think of this as a high ‘transaction cost’ for drafting, passing and implementing legislation. From Rudd’s election in 2007, it took until 2009 to have legislation before Parliament, and it took a further two years for the proposed trading scheme to begin operating fully. Similarly, Gillard’s scheme was introduced in 2011 but was only set to become fully flexible in 2015.

This means that even if Labor wins the 2016 election and implements a new scheme, it won’t be operational until around 2020.  If the Coalition wins a second term, that stretches the date out to 2023.

Emissions trading schemes already operate in Europe, New Zealand, some U.S. states and some Canadian provinces, while China and South Korea are both looking to implement schemes after 2015. If they are successful, Australia will find itself well and truly trailing the pack, and thoroughly exposed to the investment risks CEDA has outlined.

The government is celebrating. The cost of the carbon tax to our economy has been removed, and Australians, they posit, should rejoice.

But I will not be celebrating with them. The cost of the tax may be gone, but the cost of carbon emissions to our economy is just getting started.

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.

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