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Economists criticise the emissions trading plan

February 19th, 2009

I’m one of ten economists who has signed a statement criticising the inadequacies of the Rudd government’s emissions trading scheme. The statement is over the fold.

The weakness of the scheme and the fact that emissions reductions achieved through voluntary action or the newly announced home insulation scheme don’t attract credits have led to a revival of the debate over the merits of a carbon tax, as an alternative to emissions trading. Of course, it is possible to have both, as in hybrid schemes such as that proposed by Warwick McKibbin.

The question of whether to go with a carbon tax, emissions trading or a hybrid turns on two main issues. First, with a tax, or with a hybrid scheme where the emissions price is capped, we get price certainty at the expense of uncertainty about how much emissions will be reduced. With a pure emissions scheme, or a hybrid scheme in which the tax acts as a price floor, we have certainty about achieving at least the target level of emissions reductions, but uncertainty about how high the price might be. As I’ve argued before, the risks of not cutting emissions enough outweigh the risks of setting the price too high.

The other question is more pragmatic. Which approach gives the best chance for Australia to contribute to a global agreement that will actually stabilise the climate. In the past, I’ve been of the view that a pure emissions trading scheme is the way to go in this respect, and I still can’t see that an international agreement is likely to be reached without general adoption of emissions trading schemes. . But there’s no doubt that developments over the past year or so have strengthened the case for making a carbon tax part of the mix.

Now, here’s the release

Media Release

February 18, 2009,

Economists speak out against flawed Carbon Trading Scheme

A group of ten Australian economists today slammed the Rudd government’s proposed carbon emissions trading scheme, and called for a science-based policy to achieve 25%-40% cuts in emissions by 2020.

Statement

The Australian government is to be congratulated for its decision to take part in the global effort to reduce greenhouse gas emissions. However, the proposed Carbon Pollution Reduction Scheme cannot be regarded as consistent with the government’s expressed goal of a global agreement to stabilize the climate. Among a number of serious flaws, the proposed target of a 5 per cent reduction in emissions (with a 15 per cent reduction conditional on a global agreement) is simply inadequate to deal with the problem.

In our view the CPRS fails on the following criteria:

First, while there can be no doubt that a high carbon price will result in a significant transformation of the Australian economy, it must be remembered that such transformation is the actual goal of an emissions trading scheme. It is ironic that while the usual purpose of compensation packages is to ease the pain of such transformation, in the case of the Rudd Government’s package compensation is being used to prevent such a transformation. The CPRS actually rewards the major corporate emitters for failing to act despite having been on notice since at least 1997 that the emission reduction targets would be adopted.

Second, the most significant consequence of the global financial crisis is to increase uncertainty and, in turn, reduce new investment. The creation of more ambitious emission targets would provide certainty that would stimulate major investment in renewable energy infrastructure. The consensus scientific and economic opinion is that the consequences of failing to address climate change will dwarf the costs of the current financial unrest.

Third, the Rudd scheme structures the compensation opportunities for energy-intensive, trade-exposed corporations in such a way as to provide an incentive for these corporations to expand production and emissions. This will effect further restructuring of Australian industry that consolidates its energy-intensive character to the disadvantage of low-energy, energy-efficient industries.

Fourth, the proposed compensation of trade-exposed energy-intensive industries is underpinned by the implicit notion that government should ensure a level, and thus competitive, playing field. Yet the proposed compensation package will benefit industry sectors dominated by international corporations which hold considerable market power. The proposed compensation package will further enhance that market power not create competitive markets.

Fifth, the Rudd government has designed a scheme in which every tonne of emissions saved by households frees up an extra permit for the aluminium or steel industry to expand their pollution. In addition to destroying the moral incentive for households to ‘do their bit’ to reduce emissions, this design feature renders all other policies aimed at reducing emissions pointless. For example, households who spend $7,000 installing photovoltaic solar panels might believe that they are helping to reduce emissions but in fact the only impact of such investment will be to slightly lower the demand, and in turn the price, of the fixed number of pollution permits issued by the government.

Sixth, the Rudd scheme fails to cost the complex administrative arrangements that will be required in order to effect the auctioning, the free allocations and the redistribution of permit revenues across the economy.

The CPRS is based on neither sound economics nor sound science. We call on the Government, or the Senate, to make major improvements to the proposed ‘solution’ to Australia’s rapidly rising greenhouse gas emissions.

These improvements should include:

• Lifting the targets to 25-40% by 2020 based on the latest scientific evidence

• Abolishing the free permits granted to the biggest polluters

• Ensuring that individual action results in lower emissions, not lower carbon prices

Unless these major flaws in the CPRS can be fixed the government should introduce a carbon tax as a matter of urgency.

In the meantime, we would strongly urge all Australian governments to immediately introduce incentives to maximise investment in the development and use of renewable and low-emissions technologies.

Dr James Arvanitakis           University of Western Sydney

Dr Lynne Chester                 Curtin University of Technology

Dr Richard Denniss              Executive Director of The Australia Institute,?Adj Associate Professor ANU

Assoc Prof Steve Keen       University of Western Sydney

Dr Andrew Mack                   Macquarie University

Prof Barbara Pocock            University of South Australia

Prof John Quiggin                University of Queensland

Dr Stuart Rosewarne           University of Sydney

Dr Ben Spies-Butcher         Macquarie University

Prof Frank Stilwell                University of Sydney

 

For further comment: Prof Frank Stilwell        02 9351 3063

 

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  1. O6
    February 19th, 2009 at 11:53 | #1

    Isn’t this going to introduce a classic Voltaire’s hazard, i.e. you are making the best the enemy of the good’? Debate about the best way of reducing emissions through financial inducements is likely to delay the introduction of any scheme at all.

  2. jquiggin
    February 19th, 2009 at 12:13 | #2

    Obviously, there’s a trade-off here, but the debate is going to happen anyway, so I think we should set out the desirable position and go from there.

  3. Uncle Milton
    February 19th, 2009 at 12:14 | #3

    Your criticism of the CPRS comes down to the targets are too weak and too many concessions have been given to corporations with high emissions.

    What makes you think a carbon tax – not a theoretically ideal one, but one that would emerge from the same political and lobbying process that produced the CPRS – would be any better?

    The history of Australian tax design is littered with special deals for special people. It’s not for nothing that the ITAA is 10000 pages long. Payroll taxes, land taxes, the GST, stamp duties are all full of carve outs, exemptions, rebates and many other departures from purity. I don’t know why a carbon tax would end up any different.

  4. Hermit
    February 19th, 2009 at 12:44 | #4

    Canberra has shown itself to be more receptive to direct lobbying by the suits than to lengthy discussions over the internet. Therefore those companies who use cheap offsets either voluntary or sanctioned by State governments will wangle themselves carbon tax deductions for those offsets. A tax based CPRS then becomes as ineffective as the European cap and trade scheme.

    As it stands the ETS fails on three key criteria; a nontrivial target, reduced scope for evasion (eg offsets) and broad coverage. However as we speak Australia is helping with real global carbon cuts by exporting 20% less coal. If Rudd won’t budge from 5% domestic cuts by 2020 via carbon imposts we could still get that easily by say a 20% MRET under a no growth scenario.

  5. Bruce Bradbury
    February 19th, 2009 at 12:48 | #5

    “this design feature renders all other policies aimed at reducing emissions pointless”. I don’t agree. The point that you make in the next sentence (that this will lower the carbon price) is an important one. For a given level of carbon abatement, people deciding to reduce their own carbon pollution will lead to less disruption to polluting industries and hence less economic cost. In turn, this will make it more politically feasible to further lower the carbon targets. (Mind you, the carbon price cap might undo all this if it is binding).

  6. Bruce Bradbury
    February 19th, 2009 at 12:51 | #6

    A question for those more familiar with the policy proposal: Is the compensation to large polluters a lump sum compensation (eg based on their past behaviour) or do they have to keep on polluting to get it?

  7. Steve
    February 19th, 2009 at 13:12 | #7

    “I don’t know why a carbon tax would end up any different.”

    Agreed. You can’t compare carbon tax **theory** with ETS **implementation**.

    “Implementation” is the keyword that gets missed in most expert analyses. At the end of the day, its not about ideas and plans, its about actions, its about messy, bloody, riddled-with-compromises implementation.

    The time to debate the theory of carbon tax versus emissions trading was 1997. Now we are up to ETS implementation.

    I liked the parts of the statement that focussed on ways to improve the CPRS, but thought the carbon tax idea was a waste of breath. Nobody is going to implement a carbon tax “as a matter of urgency”.

    It will need a couple of years worth of green papers, white papers, argy bargy, lobbying etc before anyone will think about it. That’s time we can’t afford to lose.

  8. jquiggin
    February 19th, 2009 at 15:05 | #8

    #7 I’m pretty sure they have to keep on polluting.

  9. nanks
    February 19th, 2009 at 17:34 | #9

    “jquiggin Says:
    February 19th, 2009 at 3:05 pm
    #7 I’m pretty sure they have to keep on polluting.”

    – This is only to make it fair JQ – otherwise they’d be getting something for nothing.

  10. Michael of Summer Hill
    February 19th, 2009 at 17:51 | #10

    John, I agree entirely with the above for reasons energy-intensive corporations had prior knowledge of the forthcoming regulatory environment but chose instead to ignore the signs and not upgrade their technical processes. Why should taxpayers be expected to now bail out those corporations who failed to implement a plan of action. Time to ‘stop the rot’.

  11. February 19th, 2009 at 21:50 | #11

    “The CPRS actually rewards the major corporate emitters for failing to act despite having been on notice since at least 1997 that the emission reduction targets would be adopted”.

    I don’t think anyone can plausibly assert that notice was given then. The people in favour of these schemes were talking them up around then, but they didn’t have the standing to give notice. It’s like saying that people should have drawn inferences about the later USSR in 1913, from the known views of the Bolsheviks (I’d have used that other fellow’s book effort as an illustration, but I didn’t want anyone tuning out from Godwin’s Law).

    “The creation of more ambitious emission targets would provide certainty that would stimulate major investment in renewable energy infrastructure”.

    I think “stimulate” is overstating it, and “permit” would be more accurate. Even that sort of certainty would not be followed by such investment if either the resources or the rewards for it were lacking – and the former appears to be pretty much the case for the foreseeable future.

    Surely the fifth point is just precisely the outworking of “such transformation is the actual goal of an emissions trading scheme”, with a scheme with the criterion “certainty about achieving at least the target level of emissions reductions”? It’s double dipping to raise this as a separate objection over and above objecting to the criterion in the first place.

    The sixth point, “fails to cost the complex administrative arrangements that will be required in order to effect the auctioning, the free allocations and the redistribution of permit revenues across the economy”, is one of two inherent features of every Australian measure. As such it is a blind spot so deeply entrenched in Australian politico-bureaucratic culture that not only is it insuperable, those charged with implementing policy will literally not understand the objection and will just tune it out. The other feature is the way those at the top are always changing things and equally blindly destroying certainty (so that is also unattainable in this area whatever the criteria) while, apart from the police, Centrelink and possibly immigration, those at the bottom help the public survive by working the system. This proposal too would work to increase uncertainty in just precisely that way. Oh, and we already know what will happen to revenues no matter how things work out; they will be treated as a windfall to be allocated at politicians’ unfettered discretion, while all administrative and compliance costs will be thrown on the public without ever registering.

  12. Ikonoclast
    February 20th, 2009 at 05:39 | #12

    The Howard government left us a disastrous legacy and the Rudd government clearly has no capacity to clean it up.

    Australian democracy suffers from a serious and systemic inability to react to and correct problems of the most serious nature.

    I have always been an advocate of a carbon tax along with the removal of all fossil fuel subsidies. I said from the outset of the debate (in JQs blogs) that a permit system would be distorted and rorted. I have been proven correct.

    However, Uncle Milton makes a very good point about tax law also being distorted by lobbying and special interests. Uncle Milton is right and I have been very naive. Tax law would also be distorted. This indicates that we will never react appropriately to this crisis. Every attempt will be disorted and circumvented by special interest groups.

    P.M. Lawrence also makes an excellent point. He says, “those at the top are always changing things and equally blindly destroying certainty (so that is also unattainable in this area whatever the criteria).”

    That statement needs to be qualified a little. There is never complete certainty and human changes are not the only events that prevent certainty. Change at times is also needed. We need to change our carbon polluting ways for example.

    However, what P.M. Lawrence is pointing to are the unecessary and continual tinkering changes which infect Canberra legislation and policy these days. Superannuation policy is a case in point. How many times has super policy been changed in the last 10 years? Is not everybody lost and bamboozled by what super policy means for them now?

    Getting back to carbon policy we need to say this. A logical, effective and efficient policy needs to be devised, then implemented, then NOT CHANGED so that people have some certainty.

    There is a case to be rigid about carbon policy. If we don’t stop CO2 pollution we are doomed. Scientifically and economically we understand what is needed to stop it. Therefore, put the policy in place and don’t change it.

    Poor people who are negatively affected can be compensated for it through the welfare system. Rich people (and comfortably-off people like me) should be told to shut up and cop it sweet.

    However, I am dreaming. It will never happen. Our society is now systemically incapable of responding to challenges to adapt. Our system (late stage carbon fuelled capitalism) will go extinct.

  13. nanks
    February 20th, 2009 at 08:00 | #13

    I tend to agree Ikonoclast – and add the following anecdote. Many years ago I was commenting to a friend – a very experienced senior Australian academic, now sadly dead – on how convoluted the various university processes were and how the policies were so ridiculously complex and changed so often that no one could possibly understand them. His comment – ‘that’s the point’. Tax law is ridiculously complex so that it can be rorted. Super is complex so that it can be rorted.
    Old news I guess – Brer Rabbit escapes in a tangle of briars.

  14. Alanna
    February 20th, 2009 at 08:59 | #14

    Ikononclast# says
    “The Howard government left us a disastrous legacy and the Rudd government clearly has no capacity to clean it up.”
    I couldnt agree more but now I notw John Howard has come back from retirement to defend his economic policies. I just cant believe it. He was one of the main architects of the financial de-regulation that contributed to the asset price boom and the profligate lending (in his first stint as Treasurer) because of his purely ideological opposition to government and regulation. In 1979 he commissioned the Campbell Inquiry to investigate a move to less deregulated financial environment, and stacked it with pro deregulation parties, but acted even before they released their findings. Financial deregulation occurred so rapidly thereafter that in 1985 fifteen new foreign banks entered and credit extended to the corporate sector grew 25% in the five years to 1989. The corporate sector, just like now, became dangerously overgeared before the 1987 crash.

    And now, this small minded ideologically biased anti government anti regulation politician (from the outset), who has no capacity to examine the more than apparent failings of his own views, is still stubbornly insisting his economic credentials were sound.

    Time and history will make its own judgement the contribution of John Howard.

  15. Alanna
    February 20th, 2009 at 09:01 | #15

    However, Iconoclast I disagree with statement that the Rudd government has no capacity to clean it up.
    The Rudd government has a huge mess to clean up and it is more than one government may be capable of. The worst possible scenario is for another extreme right wing government to gain power.

    Give Rudd a chance. He is more balanced than what came before him.

  16. observa
    February 20th, 2009 at 11:47 | #16

    Well there’s nothing like a catastrophic crash in global derivatives trading and the ongoing fallout to make any man wary of offering up a whole new smorgasbord of derivatives to see if all the experts in the field can get it right next time round. Particularly so if the object of the exercise appears to have such paltry returns to begin with, which is clearly the case with the Govt’s CPRS targets. It’s all very well arguing the targets can be ramped up later, but the concessions to existing emitters, coupled with current bailouts and subsidies to anything largish that looks like faltering on the employment front at present, doesn’t exactly fill one with optimism on that score. As for a power generator in a heat wave announcing it has to shut off due to overreaching on its emission permits, what could any diligent but pragmatic permit inspector say? The same as our 10 economists now. The writing’s on the Wall Street and so many others that it’s high time for a level playing field carbon tax instead.

    If you struggle with that conclusion after investing so much hope and energy in an ETS, there’s no need to, because that’s always an option to pull out of the drawer and dust off at any time in the future, should straight carbon taxing fail to deliver. Indeed we could even benefit enormously from the positive experiences and mistakes of others, if it is required in future. In fact it’s worth at least one country trying a carbon tax, given the results of ETS to date and where will we be should that turn out like global central banking? If you’re concerned about a further delay in devising and implementing a carbon tax, well it’s an ill wind that blows us all some good there in the form of a global recession/depression. Why don’t we be the ones to give carbon taxing a go? After all we’ve proven we can leap tall WSTs in a single GST bound, whereas we haven’t been quite so adept at handing out and managing MDB water rights.

    Ah yes, property rights. Hands up those who had an instant rapport with Bob Brown calling for ‘our’ FIRB to block Chinalcos move on Rio, not to mention Ozminerals and any plethora of troubled and overgeared resource assets nowadays? Those hands concerned about opportunities for transfer pricing, etc, wouldn’t belong to the same people who think it’s perfectly sensible to create emission property rights and flog them off to all and sundry to be whisked off and traded anywhere beyond our jurisdictional reach would they? What a massive contradiction in outlook there. Hold that thought for now and I’ll show them subsequently how that can be easily remedied by the taxation path rather than their troubled, contradictory alternative.

    Probably the greatest argument for a carbon tax is the pressing need for taxation reform overall, coupled with the need for bipartisanship in tackling CO2 emissions and I’ll address the latter point first although they’re inextricably linked, the moment carbon taxing is mooted as a bipartisan option. You don’t have to be a fan of AGW theory to see the benefits of a carbon tax in a carefully constituted mix of taxation reform. Indeed, like me you might simply be agnostic about AGW theory, yet understand intuitively that unlocking the carbon sequestration of millennia is the very means by which we can so readily impact our natural environment in turning it to our needs and wants. It’s the very substance that turbocharges capital in that process and yet we face the obvious with peak oil. In that respect paying a truer social cost for the life blood of capital via carbon taxing may not concern even the most ardent skeptic of AGW theory, if overall taxation reform is a reasonable outcome. Much of the opposition to AGW comes from the inevitable hypocrisy that surrounds those who take the quantity control road and it is a festering sore that won’t go away and holds them up to ridicule and the media spotlight. Here’s a typical example –http://www.timesonline.co.uk/tol/news/environment/article5734082.ece
    It’s pretty hard to continually sell the quantity control message that it’s all OK folks, because we planted some trees in outer Mongolia for the privilege. Sitting down together and working out the price we’ll all pay in a level playing field marketplace, would obviate all that continual ridicule in the longer term. True that requires some overall taxation soul searching in a Rawlsian sense, but the payoff will be far greater for the exercise, rather than tacking on ETS to a taxation system that’s well past its use by date.

    Think Rawlsian redesign of our constitutional marketplace (CM) due to thoughts wandering toward a carbon tax and some would say you wouldn’t want to start from here. That’s nonsense. If not here, then where? If not us, who then? As I’ve pointed out before, in the absence of increasing revenues, the maximum carbon tax we can have is one that replaces all other forms of revenue raising and we could all contemplate that CM. The moment you do I’d suggest you come to the conclusion it wipes away many of the problems of our inherited system, but it’s far too radical for most tastes and ignores the obvious. Why single out carbon and not other resources for social pricing. The moment you think about resource taxing you immediately turn to the use of land as a resource and how and why you’d also tithe that socially for the privilege of its private benefit too. Notice that ditching income/company tax immediately solves that problem of a taxeating (opportunity cost) FIRB and any concerns over the Chinalcos or whomsoever else has the rights to extract resources from ‘our’ natural environment. Pay the social tithe and who cares about all that delicate dancing on eggshells with Zenophobia (yes I can spell). Also notice that if we can’t rely on central bankers, et al to get credit right, at least we’ve removed any incentives to drive the price of housing through the roof due to interest deductibility, negative gearing and capital gains tax holidays. All that 10000 pages of income Tax Act and the taxeaters needed to give them a ring to see if they like it and out there seeing if they like you. Not nearly so many needed to monitor the mine, quarry, well- head and Google Earth I’ll warrant. It’s not hard to think about more wombats and less hairy-nosed taxes and a couple more pieces of the taxation jigsaw to set up a widely comprehendable, level playing field CM that gives true countervailing market power to the natural environment, that is so sadly lacking now. An ETS doesn’t even begin to address that but it’s always an option to pull out of the drawer should circumstances be more amenable and some sensible pricing fail to deliver.

  17. BilB
    February 20th, 2009 at 15:29 | #17

    Thanks for taking a strong and public position on GWA, JQ. My family appreciates this drive for action.

  18. KC
    February 22nd, 2009 at 18:38 | #18

    I too am disappointed with the Carbon Pollution Reduction Scheme. After the Business Council of Australia published its submission on the Green Paper, the BCA’s consultant (Port Jackson) wrote an article commending Professor Garnaut’s recommendation for giving the trade exposed industries a subsidy equal to the difference between the actual carbon price faced by the industry and the carbon price that would be faced if all countries implemented carbon reduction measures. Instead, the Rudd government seems intent to compensate trade exposed industries as if the carbon pollution reduction scheme does not apply at all to trade exposed industries.

  19. scott
    March 3rd, 2009 at 11:30 | #19

    Why is the question simply “whether to go with a carbon tax, emissions trading or a hybrid”.

    What about performance standards and industry regulations? Wouldn’t setting performance standards on generators, vehicles and industry be far simpler, easier to administer and have more predictable impacts than any of the above.

    There would be no price uncertainty for business and no cap uncertainty for government. There would be incentive to innovate for the long term, and no money wasted on paying for permits which might be cheaper in the short term yet have no investment value in terms of technology improvement in the long term.

    Why limit yourself to market based instruments?

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