Photo: AAP Image/ Mark Graham
IT IS OFTEN SAID that there is nothing more powerful than an idea whose time has come. But it seems that in the case of Minister Wong’s version of emissions trading, the Carbon Pollution Reduction Scheme, or CPRS, there is nothing less powerful than an idea whose time never came.
The flaws in the CPRS are becoming obvious, not just to the public but to the government itself. As the start date for the scheme approaches, the public and the parliamentarians are starting to look a little more closely at Minister Wong’s scheme and, as we saw with the debacle around the House of Representatives inquiry, they clearly don’t like what they are seeing.
Minister Wong is now arguing that, under her scheme, individuals who lower their energy use will enable the government to reduce the number of permits the following year, effectively raising the cap and allowing individuals to “do their bit.” This is a great idea. But the problem for the minister is that nobody knows what she is talking about. The question for her is simple: On which page of the white paper is this spelled out?
If the federal government is to be taken seriously where the CPRS is concerned, it needs to make some significant changes both to the targets, which are pathetically small, and to the structure. The scheme needs to be modified so that when individuals, communities and any level of government make significant efforts to reduce emissions, the number of permits issued in subsequent years reduces accordingly. For example, when Kevin Rudd announced that $3.9 billion was to be spent on insulation in order to decrease emissions by four million tones per year, he should have simultaneously announced that the number of permits issued would fall by four million per year.
The ACT government has announced that it aims to cut emissions by 30 per cent by 2020. That is to be commended, but unless the CPRS is modified to take advantage of such a plan, the only winners will be polluters in other states benefiting from the availability of more (and cheaper) permits.
While some of the measurement difficulties will need to be considered carefully, modifying the CPRS in this way is hardly rocket science. In addition to providing an incentive for individuals to act, it would overcome the biggest problem inherent in emissions trading schemes, namely the inflexible targets. Under such an approach, emissions would genuinely be capped but there would be downward flexibility.
Assuming Minister Wong continues to ignore external advice, what should be done with the CPRS? Regrettably, it seems there can be little doubt that the current proposal is so flawed in its design and so lacking in ambition that if the government refuses to consider amending it then the Senate will need to vote it down.
While there are risks associated with such an approach, it is important to spell out the reasons why even a badly designed carbon tax is better than a badly designed emissions trading scheme.
First, a carbon tax is a much more flexible instrument than the CPRS. While the politics of setting the tax will be tough, a carbon tax does not require Australia to “set and forget” emissions between now and 2020. That is, if the scientific predictions get worse or the politics get better, it will be much easier to change the carbon tax than to change the CPRS targets.
Second, a carbon tax has the advantage of working much more effectively with complementary measures, including investment in energy efficiency, public transport and renewable energy. One of the major flaws with the CPRS, as discussed above, is that investment in such “Green New Deals” will not reduce Australia’s emissions, they will merely reduce the price of permits. Under a carbon tax, on the other hand, if the carbon price does not achieve sufficient reductions in emissions, any investment in other measures will add to the effect of the tax rather than substitute for them.
Third, a carbon tax provides price certainty. While this is of some benefit to polluters, enabling them to plan accordingly, the major benefit is to renewable energy providers, enabling them to make investment decisions with sound knowledge of the likely cost advantage they will have over their polluting competitors. Renewable energy assets require a large, up-front investment and they are built to last decades. Investors are understandably worried that if they build large-scale wind, solar or other renewable energy sources the carbon price may fall (perhaps due to a world recession) and their competitive advantage will be lost.
What then should be done with the revenue from a carbon tax, assuming of course that it isn’t all given back to the polluters as Minister Wong proposes to do in the case of the CPRS? While there will continue to be a need to compensate low-income earners, who will experience higher energy prices, a carbon tax will provide a large pool of revenue into the future.
Given that investment in energy efficiency, public transport and other green projects works well alongside a carbon tax, it would be desirable to invest a substantial portion of the revenue in these schemes. In order to spend that money wisely, a statutory body should be established with one simple priority: spend money in the areas that deliver the biggest reduction in emissions per dollar spent. Individuals and organisations could help to develop proposals for such schemes, with as much work going into evaluating the projects when they are completed as goes into selecting them in the first place. Mistakes would still be made, but if we learned from them the costs would be small.
A carbon tax is not perfect. It can’t guarantee, for example, that a particular level of emissions can be reached. But it should not be forgotten that the CPRS can’t do this either. The CPRS does nothing to restrict emissions from the agriculture sector (which accounts for around 16 per cent of Australia’s total emissions). Worse still is a poorly understood feature of the CPRS, which commits the government to print up as many extra permits as the polluters want in order to make sure the price never rises above $40 per tonne.
In a comparison between a carbon tax and a textbook emissions trading scheme, it is the latter which appears most advantageous in addressing the problems of carbon emissions. But the CPRS is a poor proxy for the textbook model. The targets are not based on science, 90 per cent of the permits needed by the biggest polluters are being given away and the price is capped rather than set by the market. These shortcomings, together with its destructive impact on the motivation for individual action and the way the targets lock Australia into failure, make it easy to argue for its rejection if the government does not make serious efforts to fix it.
Penny Wong really has only two choices: start modifying her scheme or start designing a brand new one. •
Richard Denniss is Executive Director of The Australia Institute and author of Fixing the Floor in the ETS
4 Comments
Richard,
Whilst I am heartened by your efforts to highlight faults in the as-proposed CPRS, I am disappointed by your misrepresentations. Given your knowledge of the CPRS, I can only assume the following points have been deliberately left out of your analysis.
First, I have seen a number of quotes from you asserting that under the current scheme, in the event of voluntary carbon abatement, “the only winners will be polluters in other states benefiting from the availability of more (and cheaper) permits.”
Assuming here that you refer to polluting industry purchasing permits, I find it hard to believe that you don’t understand that the cost of carbon permits is not absorbed purely from company profits. Wherever possible, and industry is working hard on this, the carbon price will be passed onto consumers. This is the intent of the CPRS, to create that price signal for consumers. It naturally follows that, whilst acknowledging that not all costs can be passed on, consumers (especially low-income consumers with little discretionary income), will benefit from voluntary action or additional government action.
Secondly, in this article refer to the government’s price cap mechanism. “Worse still is a poorly understood feature of the CPRS, which commits the government to print up as many extra permits as the polluters want in order to make sure the price never rises above $40 per tonne.” Either you yourself poorly understand this feature or you attempt to mislead. You have chosen not to mention that the government will buy permits on the international market to offset the allocation of these additional permits, meaning that this feature will not lead to an increase in global emissions. An unfortunate omission on your behalf.
Finally, you state that: “The CPRS does nothing to restrict emissions from the agriculture sector (which accounts for around 16 per cent of Australia’s total emissions).” The reason that the CPRS will not do so is the same reason that a carbon tax will not be able to do so. There is no reliable way of measuring agricultural emissions.
Richard, there are many faults in the current CPRS that will stop it from achieving the emission cuts that we require to mitigate the effects of climate change. To expose these faults is an important task. It is however it is important that we keep the debate honest and maintain the integrity of our arguments.
This is what a lot of people have been waiting for. I would like to see it now reprinted in the Australian Financial Review so that the Australian corporate sector might be exposed to these clear and cogent arguments. Over the past week, I have had the sense that nobody - Government leaders, Opposition lesders, corporate lobby leaders, even media - has had much of a clue what is going on with the curent ETS debate. A case of the blind leading the blind. A lead article in AFR yesterday and editorial in AFR today 25 February just muddied the waters further.
Thank you, Richard Denniss, for this insightful and important analysis.
Just as I’ve decided to become a CPRS advocate, Richard Denniss of the Australia Institute has another go at taking it down.
nb: I think his arguments are sound and clear but he risks being seen to play the man or, in this case, the woman.
In my simplistic view… The matter is urgent. The national government needs to take action as soon as possible. the process to get us here [the white paper, currently in transit to draft legislation] has been pretty much exhaustive [and exhausting]. I am unconvinced by arguments about a tax being more effective. although i’m not thrilled by advocating another market mechanism for a world of failed market mechanisms. the case mounted by business against action will get stronger [and/or more strongly put]. We need to demonstrate leadership at copenhagen and otherwise. We need a response with ready international linkages. We need to say to business: “This is the decision… resistance is futile.” Yes, there are design flaws [not all of which, I suspect, are yet apparent] and there possibly will be perverse outcomes. We can make fixes. Yes, the targets are too low. Maybe we can regard 05/15 as a sort of trojan horse, then turn our attention to Copenhagen and work to ensure those decisions push us to 15 [which is still in the order of a 40% reduction off projected business as usual]. I think once we start we’ll get a grip, and hopefully, accelerate. i keep asking what it will take before sceptics go “okay.” Maybe an ice-free arctic? It’s coming at you.
Thanks to all who have commented.
Joel P provides some specific criticisms so I shall respond to them in detail.
First, he says that I ignore the potential permit price reductions that flow from voluntary action and he is right, I ignore them because to say they are trivial for an individual would be an overstatement. If an individual spends $15,000 on a PV solar system to try and reduce emissions they will fail completely. While it is true that the national permit price will fall insignificantly as a result of their reduced demand for coal fired electricity there is absolutely no way that they will recoup the cost of their purchase through such an effect.
Second, while I have several problems with the $40 price cap the main one is that while the whole basis of the CPRS is that we should rely on market forces to set prices the existence of the price cap prevents the market doing what it is allegedly best at. The fact that the taxpayer will pick up the tab for any necessary increase in permit imports just rubs salt into the wound from my point of view
Third, while it is true that measuring agricultural emissions is hard under an ETS or a carbon tax it is much easier to impose a price signal on meat directly than it is to try and account for the methane at each farm
You suggest that I am trying to mislead people but the fact is we have a Minister for Climate Change who has spent the last three months misleading people about the key point that I’m trying to make. That is, she continues to deny that for every tonne of emissions saved by households there will be a spare permit for polluters to increase their emissions.
Just last week she stated again “This proposition that some people seem to be peddling that there will be all this free carbon for industry to use as a result of individuals’ actions simply is not correct.” Yes, minister, it is.
I apologise if in one 800 word piece i did not go into minute detail about every feature of the scheme that I mentioned but if anyone is doing some misleading I think it is pretty clear that it is the Minister, not me.