I confess to being a little taken aback by the swing back towards campaigning for immediate adoption of a cap-and-trade emissions scheme that appears to be gaining ground in sections of the environment movement. This, in my opinion, is a misguided strategy that risks stifling progress at a critical moment instead of opening the space for the most ambitious action possible in this term of government.
As I understand it, this is driven by two misunderstandings – firstly that an emissions trading scheme is automatically a more ambitious outcome than a tax and, secondly, that the Greens are currently in a position to effectively demand that the government moves a long way from its pre-election weak position on climate policy as embodied in the CPRS.
This may be an unfair oversimplification, and I welcome anyone telling me so in comments, but my point in making it is really to spend a bit of time looking at that first assumption – that emissions trading is automatically more ambitious than a carbon tax – as it is central to the debate over the coming year.
For the longest time, many of us (including myself) have looked at comparative climate policy from the perspective of the ideal – we compare, for example, a well-designed emissions trading scheme with a well-designed tax. From this perspective, we quite rightly decide that a policy which delivers environmental certainty and lets the market determine the cost is better, from an environmental perspective, than a policy which sets a price and lets the market determine the outcome. If there is the real prospect of an emissions trading scheme with a cap consistent with what science and global equity requires, environmental certainty is indeed something to aim for.
But what if the only environmental certainty you are likely to have is the absolute certainty that we are screwed? What if your certainty is a low target which is extremely difficult to lift and well below what is environmentally necessary? Doesn’t environmental certainty suddenly flip from being a benefit to a major problem?
In other words, what if, by campaigning for an emissions trading scheme as a primary goal, assuming it be ambitious, environment groups are actually helping to dampen ambition instead of creating the space for a stronger outcome?
Bear with me here – I hope I’m not about to get bogged down in technical detail.
I’ve had it put to me repeatedly recently that a given carbon price will deliver a given outcome, whether it is delivered through a tax or a trading scheme. In other words, if your modelling tells you a 5% target will lead to a price of around $20/tonne and you decide instead to fix the price at $20, you will deliver the 5% target and no more. Therefore, the argument goes on, if you can deliver a certain level of ambition through a tax, surely it would be better to deliver that same level of ambition through an ETS.
There are several reasons why this is simply not the case. They are each aspects of the lock-in argument the Greens mounted against the CPRS – that the CPRS as designed acted as a cap on action rather than a stimulus.
The first point is that models for the price of carbon implied by particular targets often over-state the expected price. When the trading scheme comes into effect, the price tends to dramatically underperform, as happened in Europe. This too often means that expected behaviour change and shifting investment doesn’t occur and targets are met mostly through cheap and dodgy offsets. The flip-side of this coin is that, if the modelled price had been introduced as a tax, much more abatement may actually have been delivered than the models predicted because, in reality, that price is actually in line with a higher target.
The second point concerns the impact of complementary measures, measures such as renewable energy feed-in tariffs and energy efficiency targets which green groups and the Greens are promoting alongside a carbon price. As the Australia Institute’s Richard Denniss articulated during the CPRS debate, complementary measures introduced in parallel to a cap-and-trade scheme can in no way increase the emissions reductions delivered – all they can do is reduce the carbon price by making it easier to meet the target that has been locked in. On the other hand, complementary measures introduced alongside a carbon tax can dramatically increase abatement, as they bolster the price signal instead of depressing it.
To take the numbers used above, a cap-and-trade scheme with a 5% target will deliver 5% cuts regardless of any complementary measures. A tax set at the $20/tonne implied by a 5% target can deliver far more than 5% cuts if supported by a range of complementary measures.
The final point is one of politics, not policy: the targets discussion is locked in a political dead zone. The ALP has effectively locked itself into a 5% target and has made it clear that it will not move to any level the Greens are in a position to accept. Moving to an interim tax frees both sides of baggage and allows discussion to start on a clean slate.
That realpolitik acknowledgement, frankly, is what led to the Greens’ decision to propose the interim tax option at the beginning of the year. It allows both sides to agree on less controversial aspects, get a price in the market, prove to the community and business that the sky will not fall in, and only then tackle the fraught issue of targets.
So, where does this leave us, other than frustrated?
In my opinion, what we need to see over the coming months is a campaign for ambition in our climate goal, not any particular mechanism per se. We should be talking about levels of ambition that can and will transform our economy, whether delivered through a strong carbon price or a high target. We should be making it clear that weak action, action which makes it more difficult to prevent climate crisis, is not an option.
The Greens are not in power, despite what Tony Abbott says. We can only push the government as far as they are willing to move. A campaign from environment groups which promotes a preemptive compromise will only lead to a final deal which is weaker still – or no deal at all. The only way to get an ambitious outcome is if people are out campaigning in a way that creates the space for the government to move towards us.
16 Comments
This seems like a rhetorical, ‘its my way or the highway’.
No, blue_green, it is nothing of the sort. It is explicitly saying there is a negotiation going on and the environment movement has to choose between campaigning on the Greens to make us move towards the ALP or campaigning on the ALP to make them move towards the Greens.
I’ve always considered a rising tax to be a more effective, cheaper-to-implement and more transparent solution.
I also believe the Hansen-backed fee-and-dividend style tax is worth investigation – but perhaps not at the full 100% compensation returned to households/small business.
It is a mistake for the environment movement to *campaign* for either a carbon tax or for an ETS.
There is no evidence that any of the realistically achievable market mechanisms (tax or ETS) will result in anything like the sort of emission reductions that we need. I understand that Labor has so far rejected even $20/tonne carbon tax proposed by Greens but that a carbon tax in excess of $90/tonne would be required simply to push a market change from coal to polluting (planet-destroying) gas.
We all pay a huge price for the popular misconception promoted by Labor and others (even the Greens) that market mechanisms (tax or ETS) equals “climate action”.
The environment movement should be *campaigning* for direct investment in renewable energy and other measures that acually reduce emissions.
Alex, I agree that there is no evidence that a market mechanism ON ITS OWN can achieve the kind of cits we need in the timeframe we need, but there is plenty of evidence that a carbon price alongside a range of other measures will deliver it effectively and efficiently.
The problem with campaigning for direct investment on the scale required is simple: it’s not going to happen. Look at the massive bunfight over the NBN and then multiply that by an order of magnitude and add in climate scepticism into the bargain and you get the beginnings of an idea of the political bunfight that would cause.
I will briefly make a few general points and then describe what I think would be a way forward. Firstly, much of the debate about carbon pricing instruments is framed in terms of “carbon tax” vs “cap-and-trade”, when the reality is that these are two end points of a whole spectrum of carbon pricing approaches, and the best approaches come somewhere in-between. Secondly, during the debate around the CPRS and before, people spent much more time arguing about the relative merits of different carbon pricing instruments, and many of us should have spent more time articulating why we need a carbon price in the first place. Any form of carbon price is far better than being in a situation where there is no carbon price.
The problem we face at the moment is that until there is some sort of carbon price, the government is unlikely to choose a 2020 target that is stronger than 5 percent. An issue with the CPRS is that it would have risked locking in a weak target range for too long – maybe 5-10 years but possibly longer. But there was some sort of administrative review mechanism in around 2013 or 2014, and including some sort of review mechanism is a useful part of any solution. But the main way to get a carbon price to work effectively is through having it send a strong long term price signal to investors in long-lived assets such as buildings and power plants. This is why there is resistance to setting targets for a shorter period of time.
As Tim rightly points out, they way around this problem is to have an interim carbon tax (or “fixed price ETS”), so if and when targets are set, there is more political space to set stronger targets – because people will realise that a carbon price didn’t cause the sky to fall in. But there is again some resistance to this approach, because if there is a transition from a carbon tax to a standard ETS, during the carbon tax phase investors will have little or no information about what will happen to the carbon price once an ETS is introduced.
Getting around this is straightforward, but does require that we move beyond the “tax vs ETS debate” and start thinking about hybrid approaches. To send a strong long-term price signal, all we need to do is let the carbon tax price become an emissions trading floor price. The carbon tax/floor price should steadily increase at a fixed percentage above inflation each year. With that sort of signal, investors will be sure not to build a coal-fired power station, and take the risk out of investing in energy efficient buildings. A floor price would also provide a price incentive for emissions to go below the level set by the government, maintaining all of the environmental advantages of a carbon tax.
But the issue of targets is the most difficult one. Introducing a fixed price beforehand will help, but there is no doubt that the issue of targets will be difficult even if a interim fixed price is introduced. One approach that could make this less difficult is to use an allowance reserve. An allowance reserve is a fixed amount of ‘extra permits’ that you auction at a higher reserve price (e.g. $40 per tonne). If the carbon price is low, none of these permits are auctioned; if it reaches $40, some are auctioned, and the amount of permits in the system goes up; if all permits are auctioned, the carbon price goes above $40.
So what does this have to do with targets? Consider the following approach: the amount of ‘normal’ permits (which are auctioned with a reserve price that is the same as the floor price, e.g. $20) adds up to enough emissions for a 25 percent reduction by 2020. But there is an allowance reserve auctioned at a reserve price of $40, and if all of them are auctioned that adds up to a 5 percent reduction by 2020. Greens are more happy, because if the carbon price is $40 or less, emissions will be less that the weak 5 percent target; and if the carbon price is less than $20, emissions will be less than 25 percent below 2020. Government is happy, because they get to keep their 5 percent target. Investors are happy, because they have long-term information about the carbon price.
If you wanted, you could have more than one allowance reserve. For example, you could have normal permits that go to a 40 percent reduction; Allowance Reserve 1, that is priced higher than the normal permits and goes up to a 25 percent reduction; and Allowance Reserve 2, that takes you up to a 5 percent reduction.
I wish “Michael” would read some of this excellent material and improve his knowledge.
I thought Garnaut said it well in his speech in the most recent Rooted post here:
“This focus means that I will not be talking about alternative approaches to carbon pricing. That is for the future. But at this gathering of the Academy, it is salutary to recall a statement of the Secretary of the Department of Climate Change and Energy Efficiency. In his June 2010 Sir Leslie Melville Lecture, Dr Martin Parkinson argued that economists have been unhelpful to the public policy-making process on the Emissions Trading Scheme (ETS) proposed in 2008 and 2009. Their squabbles over smaller points had obscured the extent of common ground on a more fundamental issue: the superiority of an economywide price signal over regulatory approaches to mitigation. Parkinson was right on that point.”
This debate is urgent, as a grouping of large NGOs enters the public arena to advocate for politically-based climate targets. It’s disturbing to see that the Climate Institute and the Southern Cross Climate Coalition (SCCC) are it again, pitching for climate policy targets that fall well short of what the climate science requires.
I thought getting beaten to a pulp in the 2008-2009 CPRS debate would have taught these groups something. Back then, they tied the success of Labor’s climate policy to a process that was obviously failing long before it died at the December 2009 Copenhagen climate conference, in what Sweden’s Environment Minister, Andreas Carlgren, called a ”great failure”.
While much of the world recognised that commitments under Kyoto were a disaster, in Australia Kyoto was used in 2006 and 2007 as a stick with which to beat the Howard government. That suited Labor and the big environment NGOs, but this strategy reinforced a public view that the international process on which Kyoto was built could save us. Before the doors had closed on Copenhagen, this strategy was in tatters, and Rudd’s credibility. From there it was a short skip to the climate backflip and his loss of the PM’s job. And a 5% by 2020 target which both major parties took to the election.
How can we start this discussion anew, other than by arguing for what the science demands? The strategy for acceptable increments assumes we have got decades to slowly build on a series of increments – we don’t.
It’s not hard to demonstrate that even for a 2-degree target and an equitable reduction in emissions, Australian’s carbon budget runs out in under a decade! Surely this must be the starting point?
Most in the community climate action sector are extremely wary of the conversation being pushed back into an ETS with poor outcomes, in a tragic repeat of history. A test for Labor will be its willingness to bury the CPRS remains.
The CPRS was a policy race-to-the-bottom, locking in a brown economy by failing to cut emissions below the baseline till 2035, in the vain hope that clean coal would then kick in, and relying on importing permits as a substitute for emissions reduction. Rudd ignored Garnaut’s warnings and caved into the big polluters with obscene levels of compensation. The Labor-oriented think tank, the Grattan Institute, found industry assistance “a $20 billion waste of taxpayers’ money… many of the proposed free permits would delay structural reform that will ultimately improve Australian living standards. Where businesses are unsustainable, government support should be directed to assisting individuals and communities to adjust, not propping up profits. In the few industries where some assistance is justified – particularly steel and cement – assistance could be delivered better, at lower cost to taxpayers, through border tax adjustments”.
If a new carbon pricing mechanism is re-built from the CPRS, its hard to see in not falling victim to the same special interests and gang of rent-seekers, and the lure of offshore permits. The very structure of emissions trading builds a market in carbon pollution permits that can become detached from the goal of emissions reduction. Cap or trap?, a recent study of the European Union’s emissions-trading scheme for 2008-2012, found it will reduce emissions by only 32 million tonnes despite covering annual emissions of 1.9 billion tonnes.
This is not to say that the mechanism debate is more important the the outcomes we aspire to, but once bitten…
Full comment at:
http://climatecodered.blogspot.com/2010/11/putting-politcs-before-science-is-dumb.html
As you know Tim, I agree with Kuke above that Hansen’s scheme is the most transparent, the fairest and least cost scheme.
Of course the finance industry wants an ETS to use it to make $quillions. But I’d rather those funds go to reduce emissions instead.
I know you think Hansen is niaive to suggest his scheme, but I don’t agree. What govt doesn’t like is that they lose some of the ability to dispense the proceeds politically to benefit those they wish to represent.
However I am curious to know what you have been told that makes you believe that the vested interests must be paid such large amounts, presumably in compensation? And why the targets must consequently be less than the science requires to avoid a nasty future?
By now the power industry must have built what appears to be a very strong case, backed up by the implicit threat that there will be catastrophic power shortages for the economy if they don’t get what they want.
My response to that is to tell them that unless they become more reasonable in terms of undertanding that their bottom line is actually not as critical as our future, Australia will ‘declare war’ on climate change. This will create the situation where industries deemed critical by the govt may have to be nationalized.
I seem to remember that approach focussed the minds of similar industries in the UK at the start of the last war quite remarkably .
The bottom line is that unless we do it ourselves now and do it slowly and with justice for those workers affected and carefully manage the transition to renewable energy, there will come a time within the next decade when the rest of the world will simply apply sanctions – just as Nicholas Kern has predicted. We will then have to do it very quickly and much more painfully and really disrupt the economy.
Australian’s want real action on Climate Change or they wouldn’t have elected more Greens. They are sick and tired of the fossil fuel industry controlling the policies of this fascist political duopoly we pretend is democracy. They want the Greens, as our last chance, to stand up to Labor’s (and the COALition’s) bluff, demand that the basis for compensation is put in front of the Australian people to test their verdict. And then act. Let them know you would rather force an election on this issue if you must, because my take is that you will win it……./Chris
I have now adapted my comment above into a blog post.
@Tim Hollo
“The problem with campaigning for direct investment on the scale required is simple: it’s not going to happen. Look at the massive bunfight over the NBN and then multiply that by an order of magnitude and add in climate scepticism into the bargain and you get the beginnings of an idea of the political bunfight that would cause.”
There is no way to avoid the mother of all political bunfights on this issue, and pretending that you can is just utopian. All you will get is a mechanism that either (a) is ineffective or (b) shifts the entire cost of any transition onto the working class and the poor, because the precondition to avoiding a bunfight is placating a tiny, narrow minority of corporate interests whose sunk investments and economic futures would be impinged on. Let’s not forget that we are talking oil companies, vehicle manufacturers, miners, etc, etc. Not minor players but at the centre of the global economy.
That’s why climate change is not an issue of science. It’s an issue of what sort of politics can break the stranglehold those powerful interests exert either directly or through their pliant supporters in the major parties. I’d say that something along the lines of the UK One Million Climate Jobs Now!, now backed by the TUC, suggests not only a simpler and more concrete plan but also seeks to mobilise an agency outside the elite games that have been played by the polluters and mainstream parties. (see: http://www.climate-change-jobs.org/ )
The Greens have been unable to break from this paradigm because they accept neoliberal ideology about the efficiency and adaptability of markets (as Tim’s statements above demonstrate). They also lack a strategy that could successfully challenge the corporate power that stands in the way of a just transition. The longer they continue to do this, the longer any grassroots climate movement will be paralysed by the defeatist logic.
And, to be honest, the economic fervour around carbon markets pushed here worries me that if the Gillard government pursues the unpleasant market reforms it is flagging the Greens will not have a clear alternative except to act as responsible junior partners.
“[Economists'] squabbles over smaller points had obscured the extent of common ground on a more fundamental issue: the superiority of an economywide price signal over regulatory approaches to mitigation. Parkinson was right on that point.”
Actually he was wrong. Decades of experience in a number of countries and areas of environmental concern have demonstrated that regulation is a far superiour approach *for achieving environmental goals* than market mechanisms.
Typically, those that spruik loudest about the “benefits” of market mechanisms are those that want to delay or avoid achieving environmental goals (just like the right wing economists who first came up with the idea).
With the official approval of the Wandoan thermal coal mine today – “Australia’s largest coal mine” – I wish I didn’t care so much.
I need a drink.
There is an interesting article in yesterday’s Carbon+Environment daily that says “The Greens continue to prefer imposing a carbon tax, then moving to emissions trading once a global agreement is locked in, according to the party’s Deputy Leader Christine Milne.”
What if consider hybrid approaches such as price floors and allowance reserves as well as simply a carbon tax or an ETS? An ETS with a price floor of $20 is automatically at least as ambitious an a carbon tax; and is automatically at least as ambitious as an ETS with the same target.
It is likely to be a while before we get to an equitable legally binding global agreement with targets that add up to a good probability of staying below 2 degrees of warming. But there is no reason why we shouldn’t move from a carbon tax or a ‘fixed-price ETS’ to an ETS with a price floor (and possibly also an allowance reserve) much sooner.
For more info on Price Floors and Allowance Reserves, see Wood, P.J., Jotzo, F., ‘Price Floors for Emissions Trading’, EERH Research Report No.36, (2009) – http://www.crawford.anu.edu.au/research_units/eerh/pdf/EERH_RR36.pdf
That idea, Peter, is a great one for a follow-up to the interim tax – keep the tax as the price floor. It won’t happen as the first step, though. The govt won’t go there.