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State of the Planet

Feb 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 emiss

Anna Rose

Anna Rose is Co-Director of the Australian Youth Climate Coalition. The coalition unites a diversity of youth organisations to build a generation wide movement to solve climate change. Anna was National Environment Officer for the Australian National Union of Students in 2005 and is past National Convenor of the Australian Student Environment Network. She is also contributing editor to the blog

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.

This is their statement:

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

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4 thoughts on “Economists speak out against flawed Carbon Trading Scheme

  1. EnergyPedant

    Calling it a cap is misleading. It should be called a target, that includes the bi-directional nature.

    Note that they don’t object to a permit trading scheme in principle, just the government’s tainted version.

    “I would prefer the Govt to have a target on % of power produced by renewables in a certain time frame and like Obama set aside some decent dosh for it to make it cost competitive as it gets established.”

    Thomas there is legislation coming increasing the renewable target to 20% by 2020, its called MRET. For every MW of electricity sold an increasing number of Renewable energy certificates must be surrendered or a penalty is paid (this penalty actually being higher than the certificate price).

    The elephant in the back of the room so far unnoticed is that between the green and white papers the limit on permit importation was removed. In the forecasts, by 2020 domestic emissions won’t reduce at all, instead offsets will be bought from China/India/Indonesia/etc…. If those reductions overseas are real then it is an efficient way to achieve global abatement, maybe. But one consequence is the balance of trade impact from buying billions worth of permits to support our lifestyle.

  2. Criticisms of the CPRS and calls for a carbon tax « Blogocrats

    […] group of 10 economists including Joshua Gans spoke out yesterday criticising the CPRS. The Statement called for three main improvements to the CPRS and, unless these improvements are […]

  3. Thomas Paine

    Same old same old. There is an ideal way and there is a way that will get through the Senate, maybe. Get it in first and then change it. Put the entry level too high and it probably get blocked in the Senate. The all or nothing approach is naive.

    I would prefer the Govt to have a target on % of power produced by renewables in a certain time frame and like Obama set aside some decent dosh for it to make it cost competitive as it gets established.

  4. Oz

    The Australian today had two opinion pieces both calling for a Carbon Tax as opposed to an ETS.

    The main crux of both was point number five from the above statement.