Taking the toolkit approach. Photo: Gary MedlicottIn the topsy-turvy world of Australian politics, much of the environment movement is more attached to neo-liberalism than the Coalition government. While US President Barack Obama might have used air quality regulations and a moratorium on building new coal mines to get around a grumpy Congress, in Australia we are often told that only a “market-based mechanism” can be trusted to solve climate change. It can’t.
This week the Climate Change Authority, to which Tony Abbott appointed Wendy Craik (ex-head of the National Farmers Federation), Kate Carnell (ex-Liberal chief minister and ACCI head) and John Sharp (ex-National Party minister and current National Party Treasurer), released a report which it provocatively titled Towards a Climate Policy Toolkit; Special Review on Australia’s Climate Goals and Policies.
What on earth could be provocative about a “toolkit”, I hear you ask. Well, for those who have spent a decade arguing that an economy-wide emissions trading scheme linked to global carbon markets delivers “least cost abatement”, plenty.
The idea that an emissions trading scheme is the “one true climate policy” is one of the last vestiges of the Kevin Rudd era and the highfalutin rhetoric about “evidence-based policy” and great moral challenges. To be clear, an emissions trading scheme is neither sinner nor saint, it’s just a policy idea with a patchy theoretical and empirical track record. A well designed ETS might be capable of driving rapid reductions in greenhouse gas emissions at low cost, but we can’t say for sure because nowhere in the world has a well designed ETS been used to achieve such an outcome. But there are plenty of economists who aren’t worried about practice getting in the way of theory.
The CCA report is the last of three that were negotiated as part of Clive Palmer’s deal with Greg Hunt to pass his Direct Action legislation through the Senate. Not surprisingly, the CCA took as its starting point the climate legislation that currently exists and tried to build a bridge forward. While it might be possible to design a more elegant bridge by ignoring our inelegant starting point, such a design would be as irrelevant as it was well designed.
Big changes in policy impose significant transition costs on industry, consumers and the bureaucracy. Abbott’s determination to rip up the carbon price while retaining the expensive compensation was as costly as it was unnecessary. But the fact that the former prime minister was indifferent to the economic cost of his political symbolism is not a strong argument for why the current or future leaders should be similarly reckless.
Further, if the CCA did recommend the complete abolition of the Abbott government’s direct action scheme and its replacement with an emissions trading scheme along the lines of the one that cost Malcolm Turnbull the leadership in 2009, there would be zero chances of such a policy making it past the Liberal party room, let alone the Senate.
So what has the CCA recommended and why were its recommendations so controversial that two of its own board members have written a public critique?
In addition to straying from the “true path” of economy-wide emissions trading, the CCA has committed several other crimes against neo-liberalism. It proposes that good old- fashioned regulation is sometimes the most efficient way to solve a problem, it recommends that different sectors of the economy be treated differently (we used to call that “industry policy”), and that some industries be protected from unfair foreign competition (dare I say protectionism?).
Significantly, the diversity of mechanisms proposed by the CCA mirrors the diversity of challenges faced by Australian industry. As those who designed Rudd’s carbon pollution reduction scheme eventually discovered, the issues faced by the owners of rubbish dumps that leak methane are quite distinct from the problems faced by a chemical factory or a coal-fired power station.
One of the more novel proposals from the CCA is the creation of an “emissions intensity” trading scheme for Australian electricity generators as distinct from an emissions trading scheme for the whole economy. The differences between the two are both subtle and significant.
An economy-wide ETS sets an upper limit on the number of tonnes of pollution that can be released across the whole economy. In theory, companies need to buy a permit for each tonne of CO₂ they emit, but under Rudd’s CPRS, for example, big polluters were to be given 94.5 per cent of the permits they needed for free.
An EI scheme that covers only the electricity sector, on the other hand, doesn’t set a cap on the tonnes of pollution that can be emitted. Rather, it sets a cap on the tonnes of pollution per megawatt-hours of electricity produced. Confused? Don’t be. Just think about cars.
Imagine if the government set a cap for the average fuel efficiency of the car fleet owned by big Australian companies of 10 litres a 100 kilometres and legislated that the fuel efficiency standard would decline steadily to zero by 2040. If a company’s car fleet was using an average of 12 litres a 100 kilometres, the firm would either have to replace its thirstiest cars with more efficient ones or, buy “credits” from another company whose car fleet was averaging less than 10 litres a 100 kilometres. The only way for a company to meet a zero emissions target by 2040 would be to switch its whole fleet to electric cars.
This week, the CCA recommended that the emission intensity of the Australian electricity sector should fall to zero “well before 2050”. Put another way, the CCA recommended that all of Australia’s coal-fired and gas-fired power stations need to shut down and be replaced with 100 per cent renewable energy in the next 25 years. In the meantime, the CCA plan would require coal-fired power stations (which are already well above the proposed starting level of “emission intensity”) to buy credits (sound like a carbon price?) from low emission generators like solar and wind (sound like a subsidy?)
So if a Climate Change Authority with a majority of members appointed by Abbott is recommending a scheme that breaks with the tenets of neo-liberalism, supports a carbon price (by another name) and says we need to shut down all coal and gas-fired power stations “well before 2050”, why did some of the ALP appointees to the authority attack the integrity of both the report and their fellow commissioners?
Professor David Karoly and Clive Hamilton rightly argue that that government’s 26-28 per cent emission reduction target is inadequate if Australia is to pull its weight in global efforts to avoid dangerous climate change. They highlight that unless we take urgent action today, then we will use up so much of our “carbon budget” in the next few years that it will become nearly impossible to avoid blowing that budget in the future, and they are right.
The uncomfortable irony of the rejection of the CCA road map forward is, however, that if the current government doesn’t introduce an EI scheme in 2018, as the CCA recommends, then even more of the carbon budget will be used up in the next few years making it even harder to stay within the long-term carbon budget.
But, we are where we are. Australia has been dragging its feet on climate action for more than a quarter of a century. Neither Rudd’s 5 per cent emission reduction target for 2020, the current government’s 26-28 per cent target for 2030, or the CCA’s previous recommendation target for 40-60 per cent on 2000 levels by 2030 are consistent with a purely scientific approach to the problem. And, of course, neither major political party nor the CAA wants to discuss the fact that Australia sees building enormous new export coal mines as an essential part of our commitment to helping the world reduce greenhouse gas emissions.
A significant majority of the CCA members believe that giving the Coalition a way out of the climate policy cul-de-sac it is in, is worth the effort. While the decision of some members to criticise the report has attracted a lot of attention, the important question is whether or not a majority of the Parliament will agree with the majority of the CCA and conclude that in this climate progress is more important than protest. Time will tell.
Richard Denniss is the chief economist for The Australia Institute.