For a brief period after the election of the Rudd government, Australia wasn’t right at the rear of the pack in the race to cut emissions of CO2 before irreparable damage is done to the global environment. The ratification of Kyoto and a strong performance at Bali deprived both the Bush Administration and would be backsliders in Japan and Canada of a crucial ally.

But, with the release of US plans for cuts in emissions, and the deplorable 5 per cent target of the CPRS (with a conditional maximum of 15 per cent) we are now further behind than ever.

Its obvious now, that even the watered down CPRS will never get the support of the Libs/Nats. And its hard to see the Greens settling for the quarter loaf on offer here. So, it’s time for the government to do a drastic overhaul of the legislation and come back with something serious.

The idea that we could just decide that it’s all too hard is untenable, and not merely in terms of environmental responsibility. Just like the EU, the US is now talking about carbon tariffs on non-complying countries. Some commentators think the WTO will stop this, but it’s equally likely that by declaring carbon dumping to be an unfair trade practice, the WTO may judge it can divert other protectionist pressures.

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I was in Sydney last night for Earth Hour and the difference from the usual city lights was impressive. This exercise is certainly helpful in reminding people of the issue.

On the other hand, I think the implied message of virtuous self-denial is the wrong one. A typical household would save more CO2 emissions by laying out a few dollars to replace one incandescent light bulb with a compact fluorescent than by turning everything off for Earth Hour once a year, not to mention coming out ahead financially. And what’s true for lighting is true for consumption in general. Efficiency improvements and substitution (videoconferencing for business travel, for example) can do a lot more than any plausible reduction in living standards.

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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

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, 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.

The government’s ETS legislation came out yesterday, and I prepared a short response for the Australian Science Media Centre Here is is.

The draft legislation sticks fairly closely to the White Paper, which has proved to be a compromise that satisfies no one. The government proposed a watered-down scheme in the hope of attracting public support from industry, and the Parliamentary votes of the Coalition. This approach appears to have failed, leaving the options of allowing the bill to fail, or seeking the support of Greens and Independents.

By far the worst feature of the proposed ETS is the 15 per cent reductions target presented as the maximum we will offer, even if other countries agree to an effective global program to reduce emissions. If this target were raised to 25 per cent, the government could probably secure the necessary support to pass the Bill. Those who have argued that no such global agreement will emerge have no good reason to oppose such a change.

The South Australian government has announced a High Court challenge to Victorian rules that limit the extent to which trade in water rights can transfer water allocations from one catchment to another, and, in particular, from one state to another. Victoria’s rule limit the extent to which upstream irrigators can be bought out, with the water being allowed to flow downstream to South Australia for irrigation or urban use there, or as an environmental flow.

IANAL, but this would seem to fall under Section 92 of the Constitution which requires free trade between the states. In any case, I hope that the combination of political and legal pressure forces Victoria to drop this rule, which primarily benefits irrigation companies, while harming those Victorian farmers who would like to sell their rights and diversify into some other type of agriculture (those who simply want to get out of agriculture can sell their land and water rights as a package).

With resurgent debate over the relative merits of carbon taxes and emissions trading, attention has turned again to Europe where the market price of emissions permits has fallen sharply as a result of the financial crisis and recession. Most commentators have seen this as a strike against emissions trading, but actually it’s a positive. The big concern about price uncertainty arises when we are very uncertain about the cost of reducing emissions. Under cost uncertainty, setting the emissions target too low could impose unexpectedly high costs on the economy.

What’s happening here is that we are uncertain about the rate of growth of the economy. An emissions target is countercyclical since it imposes a relatively high cost when the economy is strong, and a much smaller cost when the economy is weak. This is a Good Thing.

My view, for what it’s worth, is that a well-designed emissions trading scheme is the best available option. But given the weaknesses of the government’s proposed scheme, I’m prepared to consider alternatives.

Note also that different macroeconomic shocks give different outcomes. Warwick McKibbin has done some work showing that an upward shock to growth in one country will benefit other countries less (and perhaps not at all) under global emissions trading than with a price cap or hybrid policy. That’s because the growing country will demand more emissions permits, pushing up the global price.

It’s easy to see that McKibbin’s modelling result is consistent with the analysis here. By symmetry, a negative shock in one country will harm others less under emissions trading than under the price-based alternatives. And the same logic applies to sectors within countries. It’s easy enough to see then, that for any economy with a fixed aggregate target, or for the world as a whole, emissions trading will tend to reduce the benefits of booms and the cost of slumps.

I’ve thought some more about the home insulation component of the stimulus package and I’ve come to the conclusion that (drum roll!) my immediate reaction was correct. In the absence of a corresponding lowering of the aggregate emissions target, the package will have no effect at all on emissions. The Australia Institute has come to the same conclusions, and IPART (the NSW utility regulator) has made the same point in a more general context.

Some minor qualifications to this. As Joshua Gans points out here The Russell Girl divx the effect of the scheme will be to reduce the demand for permits and therefore the equilibrium price. If the “safety-valve” price in the CPRS is binding, the scheme will reduce the government’s obligation to supply permits at the safety valve price. And, if home insulation is a cost-effective method of reducing emissions, which householders are neglecting for reasons such as credit constraints, the scheme could allow the target to be reached at lower social cost. This might, in the long run, encourage more ambitious targets

But there is no need to wait for the long run. The Greens and any other Senators who care about saving the planet should demand a reduction in the emissions target, equal to the savings from the scheme, as part of the stimulus package.