The uselessness of additional action under the CPRS

There was a bit of dispute a month ago over the claim, made here and elsewhere, that the design of the CPRS made both voluntary action to reduce CO2 emissions, and government initiatives such as the Rudd government’s home insulation scheme, have no effect except to reduce the price of permits.

The issue seems to have been settled by this Victorian government brief, leaked to the Age

, which states:

The Victorian government’s policies to cut carbon emissions will make no difference in achieving national greenhouse targets …

The leaked brief, obtained by The Age newspaper, says the government must rethink policies including subsidising solar farms and buying hybrid cars for its fleet because they will not assist in meeting targets in the proposed federal Carbon Pollution Reduction Scheme (CPRS).

The Rudd government can and should fix this.

45 thoughts on “The uselessness of additional action under the CPRS

  1. Rudd should fix this, but it’s unlikely he will. After all, “carbon capture” simply means “the coal industry has the ear of government to the exclusion of all other voices”.

  2. The reasoning in the press release is strange. Voluntary actions leading to reduced demand for brown coal fired electricity means the generator needs to buy fewer permits. Lowering the spot price of CO2 is an advantage of an ETS over carbon tax; the whole point of the exercise is less CO2 in total not whether the price is high or low. I don’t know if Victoria will go the dodgy offsets route as the draft ETS legislation seems unclear on this issue.

    I agree though that hybrid cars and solar power stations will make bugger-all difference. Latrobe Valley generators spew out up to 1.25 kg of CO2 per kwh of electricity, nearly three times as much as combined cycle gas. I doubt if there’s enough gas left in Bass Strait to replace brown coal for long however. Some other form of major electrical generation is needed for Victoria that is longer term than gas, vastly cleaner than coal, cheaper than solar, more reliable than wind and more expandable than hydro.

  3. John, hopefully the Victorian government’s brief will put a lid on Labor’s ETS and the nonsense surrounding free permits. Thumbs up to the Brumby government coming clean.

  4. “The Rudd government can and should fix this.”

    Fix what?

    If there is a problem, it is that the targets are too soft, not that voluntary actions will have no effect on total emissions.

    If the government decided to set a CPRS target to reduce emissions by 50% by 2020, or even 100%, it would still be true that voluntary actions in a cap and trade system have no effect, except on price.

  5. JQ, sadly they won’t. Until there is carbon tariffs on Australian products.

    This is coming. Not well thought out. Huge hypocrisy, trade tariffs masquerading under a ‘nice’ reason.

    But it will happen.

    Standard neo-liberal Govt using spin to cover what they are really doing. When the BCA start complaining about losing business then watch the Govt turn around.

    The EU: “we are putting tarrifs on your aluminium because you use brown coal to create it, we only want to buy it from, strangely EU, carbon efficient sources”. The hypocrisy is dripping, as you expect from the EU, but they will do it.

  6. If all these news releases were part of glaciers they would of started growing again,in fact some glaciers have,with or without Press releases from our benevolent government.

  7. Prof Q, could you propose a mechanism *how* this might be fixed, preferably without adding too much extra complexity to an already complex scheme?

    In any case, my personal take is similar to Uncle Milton’s – the problem is the weak targets. However, a lot of people have argued that recognizing voluntary effort is important in continued public support for action on greenhouse.

  8. I’ve tried getting letters into the papers about the need to have substantial emission reduction targets (ie 80% by 2050, baseline year 1990), but the Aus et al won’t touch that with a 40 foot bargepole. Real targets would concentrate the minds on the trifecta of reduced lazy consumption, increasing efficiencies in what energy consumption processes there are, and the embracing of current alternative energy technologies with a view to innovation of those technologies.

    Solar cells keep improving but without a massive uptake to push down prices, the rate of innovation is too slow for now – too many good approaches fizzle out between research scientists’ labs and the market place for want of risktakers to fund it. Same with wind, wave, and hybrid fuel systems.

    And then there is the funding of the technologies most likely to introduce the conservatives’ favorite expression – the so-called unintended consequences. Carbon sequestration and deep-sea burial, clean coal and other euphemisms for the pretence of action – what a shambles.

  9. Away from whether AGW as a theory, and just looking at the politics of the CPRS passage through parliament: if the bill gets scuttled, and with an embarrassment of a 5% target I don’t see too many Greens wanting to support it, my question is what is Rudd’s strategy beyond that?

    Do Labor want to let it die at the hands of the Greens and Liberals so that they can go all Pontius Pilate over it? Or do the Labor government backers of it actually believe that a 5% target reduction by 2020 (against the 2000 base year) is worth a double dissolution? Because if it is rejected in the current form, I doubt Labor can take it back to parliament in a stronger form with stronger targets. So rejection either means it dies until the end of the current term of government or they get a double dissolution trigger. And I for one, will not trust Labor and Rudd if they go to an election on such a trigger.

  10. I think the concerns about voluntary action are somewhat serious, but don’t forget the (Keating) adage “Never get between a State government and a bucket of money.”

    Also, buying some hybrid cars whilst bending over backward to enable Hazelwood Power Station to keep operating should make one leery about the efficacy of voluntary actions.

  11. I have been trying to tell you all for some time now how subsidising solar and hybrid cars is a load of economic tosh. It’s the same tosh my native South Australians are spouting with outlandish opportunity costs with water. Left/green environmentalism has unleashed a monster that’s devouring any rational discussion of marginal cost vs marginal benefit. With each feelgood subsidy that’s so costless to each announcer, the fallacy of their composition becomes more obvious by the month. In SA we’re down to garden mulch subsidies. It’s all become as rotten and corruptible as financial bailouts.

  12. The obvious solution is to abandon the cap and trade approach and opt for a carbon tax.

    A carbon tax gives investors in alternative energy greater price certainty.

    A carbon tax gives energy consumers greater price certainty.

    A carbon tax allows private emission reduction initiatives to contribute to lower emissions. And a carbon tax can be adjusted to achieve long term targets.

    A carbon tax does not feed the market middle men to the extent that emission trading does.

    A carbon tax provides predictable amounts of revenue to government which can be used to reduce other taxes.

    A carbon tax is easy for everybody to understand.

  13. While I’m in favour of seeing some real encouragement of higher uptake of existing energy alternatives, it doesn’t have to be through massive subsidies to that market.

    Indeed, a removal of existing subsidies to fossil fuel driven energy production and to the smelters would be a start in rebalancing the market forces towards a more level playing field for alternative energy industries.

  14. Even with a carbon tax there is every chance that the tax will be set so low it will have similarly low outcomes. Though it does seem that extra measures would deliver benefit. Personally i would have loved substatial target, requirement of permits being enforced and no nonsense offsets, but i suppose it is not going to happen.

  15. Uncle Milton @4, and others. Of course, the fundamental problem is that the target is too weak. If the target were right, there would be no need for additional voluntary action (indeed, by definition such additional action would imply too much mitigation).

    But, in the CPRS as it is, and in any alternative that might plausibly exist, the target is bound to be too weak. So, it is important to allow scope for voluntary action to improve on the mandatory targets.

  16. John,

    Are you saying that there needs to be scope for additional voluntary action as a part of any carbon trading scheme? Or are you saying that there needs to be scope for additional voluntary action under the aprticular scheme that has been proposed becasue the target is too weak?

    In other words, is there a principles-based reason for additional abatement to be excluded from teh scheme, or is it just a second-best response to an inadequate target?


  17. Second paragraph should have read “is there a principles-based reason for additional voluntary abatement to be included in the scheme, or is it just a second-best response to an inadequate target?’

    Sorry about that.


  18. TerjeP, this has been said before but I might as well say it again: There’s no point comparing a hypothetical, perfect carbon tax to the actually existing, substandard ETS.

    Any carbon tax that successfully made its way through the existing political landscape, riddled with vested interests and rent seekers, would just as adulterated and compromised as the CPRS.

  19. The Rudd government can and should fix this.

    Sadly the Rudd government won’t. Even worse, it sees it as a feature not a bug.

    I’d commend to you Guy Pearse’s “Quarry Vision” in Quarterly Essay #33. The extremely weak targets in the CPRS represent the consensus view of our governing elite (the politicians, bureaucrats including Ross Garnaut, unions and business) who (a) don’t accept what the scientists are saying about the urgency of mitigating climate change (b) refuse to believe that Australia could, should or needs to change its carbon footprint.

    In particular he makes the point that undergirding the CPRS is the assumption that there will be cheap offsets purchased from poorer countries. The Rudd government has no problem with 100% of carbon “reduction” obligations being achieved by purchasing permits from poorer nations, particularly Indonesia and Papua New Guinea.

    Consequently there will be no real change to the way we use and generate energy, or transport goods and people, or live our lives. In fact, we could well increase the amount of carbon we generate, but hide this from ourselves by the purchase of yet more offsets.

    A story has just been posted on the SMH website in which Ross Garnaut says exactly that:

    Prof Garnaut defended the ability of Australian polluters to access offshore carbon credits – such as support for Indonesian rainforests – without reducing local emissions.

    The overall objective was to reduce global emissions, he said.

    “If it suits Indonesia to do more and Australia to do less, then there’s nothing environmentally wrong.”

  20. Pr Q says and quote the Age:

    There was a bit of dispute a month ago over the claim…that the design of the CPRS made both voluntary action to reduce CO2 emissions, and government initiatives…have no effect except to reduce the price of permits.

    The Victorian government’s policies to cut carbon emissions will make no difference in achieving national greenhouse targets

    The Rudd government can and should fix this.

    That assumes that the loopholes in the CPRS are bugs when, from the point of view if its designers, they are features.

    I predict that the Rudd govt will eventually drastically modify the current CPRS. I make the assumption that Rudd has a machiavellian two-tracked political plan for Greenhouse policy.

    Track 1: Lame inititative: The token CPRS is accepted with a shrug of resignation by the Left wing GREENs and the whole issue just goes away and falls into the lap of international authorities. Disengaged voters are reassured that Rudd is not a Greenie extremist. Rudd can then say that “something is being done” to the voters.

    Track 2: Radical back-up: The token CPRS is rejected by Left wing GREENs. More engaged voters start to agitate for drastic action. He goes back to the drawing board and comes back with a much more radical plan, to acclaim at Copenhagen and at home.

    Eventually the AUS electorate will probably have to wear a carbon tax. No doubt this will cause economic inefficiency but it has more political efficacy.

  21. And further to Gianni’s point, the purchase of carbon off-sets from through the CDM is bound to be rorted by foreign companies selling phony credits for projects that:

    – would have occurred in any case or for
    – do not really reduce carbon emissions.

    Just as the ETS is bound to be rorted by domestic companies as permits flood the marked.

    What do we want?: Carbon Tax!
    When do we want it?: Now!

  22. Changing to carbon tax won’t necessarily eliminate offsets since they will be claimed as carbon tax deductions. For example I believe Rio Tinto claims tree planting offsets under State based schemes. They will want some kind of quid pro quo for that outlay. The amount of CO2 absorbed by trees is of course unverifiable as to amounts and timing. Worse are clean development offsets which may be an accounting fiction since the sellers claim they are not using their full ‘entitlement’ to emissions.

    Hybrid schemes combining elements of taxes and caps may offer some assurances. A staged permit auction restricted to actual emitters could run in tranches at fixed prices ($20, $25 etc) with oversubscriptions allocated prorata. That may stop collusive underbidding and guarantee a minimum revenue. Then there is the unpleasant business of actually shutting down a cement works or generator who hasn’t bought enough permits. Alas I think it will be tougher than bringing in GST.

  23. I dont have a problem with companies purchasing or planting forrests for the purpose of carbon d-emissions. At least this is accountable, one can see that a forrest is there, carbon is being absorbed and so on.

    I just dont really believe ETS will work. It seems designed to allow end-runs by various institutional subterfuges. So complicated its hard to properly account.

    Simpler to just slap a big carbon tax on everything and force people en masse to move to non-carbon energy. USe the money collected to compensate the unemployed capitalists and labourers and to invest in non-carbon energy.

    Look how behaviour changed when the oil price went up. This was much more like a tax than a price hike since it hit the consumer right in the hip pocket nerve. Straight away people started to ditch their cars, ride to work etc.

    Same principle would occur if energy bills were doubled overnight. Solar power and conservation and various alternatives would be picked up pronto.

  24. This thread should be called;

    The uselessness of the CPRS

    On a per capita basis Australians might be high carbon emitters, but in world terms the amount of carbon we put in the atmosphere is insignificant, only 1.2% of the worlds carbon emissions.

    World carbon emissions are growing at a rate of 2.5% per year.

    If Australia cut its carbon emissions to zero, it could theoretically nearly halve the 2.5% annual increase in world carbon emissions for a short time, but the reality is a 100% reduction is not going to happen and a 5% to 25% reduction is going to be useless and do nothing to stem the increase.

    Australia is going to risk a large fall in its living standards on the false premise it is ‘actually’ going to reduce carbon emissions.

    No matter what Australia does, it is laughable to suggest Australia’s actions can curb the large growth in world emissions, especially with the huge populations of China, India and other 3rd world countries ramping up living standards.

  25. “Changing to carbon tax won’t necessarily eliminate offsets since they will be claimed as carbon tax deductions. For example I believe Rio Tinto claims tree planting offsets under State based schemes. They will want some kind of quid pro quo for that outlay.”

    You are right in one sense Hermit that we MUST NOT GO THERE with any slippery slope deductions, once you have come to the logical conclusion that we need a level playing field CO2E tax at the mine and well head that is administratively simple and unavoidable. Hold that thought that there shall be NO deductions whatsoever for what is essentially a straight fossil fuel taxing regime. Just because you use the taxed product for plastics, fertiliser, chemicals, etc manufacture or whatever, there is NO deduction for that initial CO2E tax based on the most efficient technological burn to produce a kw of electricity. You pay the same rate AS IF you were going to burn it for that most efficient kw(which can be adjusted as technology permits) The next logical step is to ask yourself AT WHAT LEVEL should that be, now that the greatest threats to mankind in Bush, Howard(fill in whatever as appropriate) have been removed and there is no apparent giant asteroid on a collision path with earth. Well warmenistas have their immediate answer if they think there’s that hidden asteroid of our making. They can ask themselves if they’d like to replace ALL current taxing (short of anomalous fags and booze excise perhaps)with a carbon tax to get the maximum hypothetical price effect, before resorting to those bad old quantitative habits again.

    Well warmenistas, there’s the challenge for you to imagine you have your ultimate head. When I imagine it, I think well it has lots of plusses when you think about sweeping away all those other tax induced problems we see about us, but immediately I conclude why not tax other resources as well? Just for starters, living as I do at the end of the MDB, I can see how if it takes around 1800L of water to produce a dollars worth of rice, a resource tax on water of 4 or 5c/kl would probably finish such profligate private use. Yes general resource taxing is as important as CO2 taxing in that regard but what exactly is resource use? Natural environment is a resource more generally and that means land. How and why would we want to tax that resource was my next question to answer. Where are you guys up to?

  26. Tony G,
    But don’t you see it’s symbolic. Symbolic rituals are a very important part of belief.

  27. Joseph Clark Says: March 24th, 2009 at 1:50 pm

    But don’t you see it’s symbolic. Symbolic rituals are a very important part of belief.

    A CPRS scheme is both symbolic and pragmatic.

    It is symbolic since it signifies that AUS cares and is prepared to be a good global citizen. Sybmols are sometimes powerful political motivators.

    The AGW problem requires concerted effort from all parties, to prevent the free-rider problem from sabotaging the social contract. So it is important that AUS comes to the Kyoto party, to signify to laggers that this is serious.

    It is pragmatic in that there is some probablity of runaway climate change ie so-called tipping points where small increments in carbon could induce massive changes in climate.

    So even though AUS’s carbon footprint is relatively small, our mititgation of it might make all the difference as the earth moves towards tipping point ie irreversible climate change.

  28. Jack,

    Getting your kids to turn the light off after they have a shower might be a cheaper way to postpone the tipping point.

  29. Jack,
    I just dont think we can ignore the fact that we export coal by the shipload so that some other nation can use it to pump CO2 into the atmosphere. Why are we susbsidising the coal industry and not subsidising more sustainable industry here? Its very very hypocritical and our effort in these carbon reduction plans is so small as to be mere tokenism. Stop the subsidies and put the tax where it counts – on coal.

  30. “Why are we susbsidising the coal industry and not subsidising more sustainable industry here?”

    It’s a very, very good point Alice and we shouldn’t be subsidising ANY particular pet project of politicians. Now notice if we tax resources generally including those various grades of coal on a CO2E basis, in lieu of all those other distorting taxes we’ve built up over the years, then it won’t matter who owns or buys the coal, they’ll all pay the same tax upon extraction and we won’t need the costs of a FIRB to boot. Next point anyone?

  31. The first premise is: Australia’s proposed cuts are not deep enough. The second premise is: we can reform the CPRS so that voluntary actions produce deeper cuts.

    But this does not yet imply that the reforms in question should be made. What needs to be demonstrated, or even just argued, is that the deeper cuts thereby produced can be “deep enough” (perhaps when combined with other measures). Otherwise this discussion is a waste of time.

  32. This discussion is based on the premise that a government will not be seen as a polluter in its own right. If governments (including local) are viewed in the light that they will need to be involved in the trading scheme then they will have great incentives to reduce their own pollution through reduction of electricity use, vehicle emissions etc. they can be part of teh answer too through plantings , solar power on buildings and other measures.

  33. There’s no point comparing a hypothetical, perfect carbon tax to the actually existing, substandard ETS.

    Tim – what you are effectively saying is that a bad policy should not be compared to a better policy because bad policy is the best that our political system can produce. On that basis we may as well never comment on anything any government ever does.

  34. Terje the perfect hypothetical carbon tax should be compared to the perfect hypothetical ETS. The realistic likely carbon tax should be compared to the sub standard ETS we have.

    Alice, I am intersted if anyone ever measured the carbon emissions reduction that would occur due to reductions in Australias carbon export (conidering the rest of the worlds ability to meet Australias short fall). Especially compared to the costs to Australia to reduce the same amount of emissions locally. As well as big coal to worry about, i suppose other countries would be adverse to Australia apprently bullying them to become green.

  35. Further to Robert Merkel’s comment, I think any serious advocacy of a voluntary action mechanisms needs to be accompanied by proposals for the institutions and mechanisms to recognize it.

    For example, are we going to have an Australian version of the Clean Development Mechanism Executive Board making judgements about what should count and what shouldn’t?

    @ Mitchell Porter: “we can reform the CPRS so that voluntary actions produce deeper cuts”

    A more pragmatic response would be that the thirst for action by organisations ranging from state governments down to community groups should be reflected on national carbon accounts and associated schemes (ETS etc.)

    Surely that’s not asking too much?

  36. I am another supporter of a carbon tax. It seems the simplest and most efficient way of putting a cost on CO2 emissions and giving alternatives a fair playing field.

    BUT, what do we do about international trade? Do we tax export coal? Do we impose tarrifs on imports from countries that tax lower than us.

    Does this put a tax scheme in Rudd’s too hard basket?

  37. Here are three things that can be done address the issue that additional action does not make a difference.

    1) We can have decent targets

    2) We can have a price floor in the ETS — it has many of the advantages of a carbon tax, but many of the advantages of an ETS, such as the fact that countries can credibly meet their targets, remain.

    3) We can have a more flexible approach to setting scheme caps into the future. With the CPRS approach, the scheme cap is set five years into the future, and then gateways of upper and lower bounds for the cap are set for as long as the minister wants afterwards. Instead we could have just have five years of gateways. That way, if there is a lot of voluntary action, the cap could be reduced in the following year.

  38. 1. What is being discussed here as a ‘design feature’ is really one of the most basic properties of a cap and trade ETS. An ETS is a quantity control – you set a target and that’s what you get.
    2. Under an ETS all emission reductions are voluntary and so ‘voluntariness’ can not be used to select some subset of reductions that go beyond the target.
    3. Unless a safety valve permit price comes in to play people can act to reduce Australia’s emissions below the target by buying permits and not using them.

  39. The proposed CPRS raises an issue that has not been widely considered in the economcis literature – namely – what are the implications of having an ETS with a clearly suboptimal target?

    Under such a scenario the alleged advantage of ‘quantitative certainty’ becomes an obvious weakness in that you lock yourself into failure.

    Arguments that this is a ‘design feature’ rather than a new problm to be solved seem surprising to me.

    Why not take the strength of an ETS, in the form of quantitative certainty, and combine it with some downward flexibility?

    Doing this would not be as hard as some argue. At the macro level you could just take the projected, post CPRS, emissions from the household sector and use them as a baseline. If household emissions were lower than that then you simply issue fewer permits in the following year. There are better ways of doing this, but given how far down the track we are the options are a bit limited.

    For those who say voluntary is small beer it is important to remember that voluntary does not just mean individual action, but can include policies such as the $4billion insualtion package, the Victorian governments$100 million solar farm and Anna Blighs proposed investment in solar hot water.

    A simple question for those who think voluntary isnt worth worrying about – why is the government so determined not to fix it? The only explanation that makes any sense is that the big polluters are banking on a lot of voluntary action on the part of governments to help reduce the cost of the abatement task.

    But why should the taxpayer fund such investment if the beneficiary is the polluters rather than the atmosphere?

  40. The proposed CPRS raises an issue that has not been widely considered in the economcis literature – namely – what are the implications of having an ETS with a clearly suboptimal target?

    This issue is at the core of the problem. It also has implications for sectors not covered by the ETS. For example, there is quite a bit of uncertainty about how much emissions could be reduced from land use change. If emission reductions were treated as an ‘offset’, then the emissions reductions lead to no extra public goods. If emission reductions outside covered sectors are additional to the CPRS, then the public goods are realised, and “net welfare” is increased.

  41. JQ. I don’t understand what you are saying in 17 as to how the CPRS should be changed. How can the CPRS “allow scope for voluntary action to improve on the mandatory targets”.
    Also I’m still having trouble seeing why the current CPRS is a problem (apart from the targets for reduction not being aggressive enough). If there is significant voluntary action, then the price power stations pay for the permits is reduced, so the amount they increase the power bills is reduced, so my income after power bills is increased. Surely a good thing. And I can choose to spend the money saved on reducing greenhouse gases. There are still bargains around where I can pay less than $20 per tonne of CO2 reduced(tax deductible so the cost to me less than $10/tonne).

  42. El Mono @ 37,

    Looking at the 2008 ABARE commodity statistics: we export just over 60% (w/w) of coal produced in Australia, all of it black. The remaining 40% is approximately 50/50 black and brown, for domestic end-uses, predominantly electricity generation.

    But to answer your question, the indirect emissions from the use of our export coal overseas are about the same as our whole domestic direct emissions (both are somewhere around 550-600 Mt CO2-e) — ref: article by Chris McGrath “Regulating GHG emissions from Australian coal mines” from Env. & Planning Law Journal.

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