Economists criticise the emissions trading plan
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
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.
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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