The ‘environmental’ argument against emissions trading, also echoed in a recent statement by ‘ten Australian economists’, goes like this. An emissions trading scheme, like the government’s Carbon Pollution Reduction Scheme, needs an overall quantity target for emissions. That target defines the outcome. So if you decide to cycle to work rather than drive, or you installs some solar panels, it simply means that someone else, say an industrial polluter, can emit more, paying a lower permit price. This is misleading, and in my view unnecessarily feeds into rising public frustration about climate policy.
The argument ignores that there is a national emissions target, like the 5, 15 or 25 per cent reduction targets. That is what will really determine Australia’s contribution to the global effort to reduce emissions. So it is not a design fault of emissions trading or the government’s particular scheme that extra voluntary action does not directly translate into lower national emissions. It is a consequence of having a national target.
Different domestic policy instruments can be used to meet the national target: emissions trading or an emissions tax to do the bulk of the work, plus the renewable energy target, subsidies for new technologies and energy efficiency, regulations for industrial processes, and so forth. And if we still overshoot the national target (as may well happen) then Australia buys emissions offsets from developing countries.
Is ‘voluntary’ personal action to reduce energy use and emissions futile? Not at all. It is an integral part of achieving the overall outcome at least cost, and it will be encouraged by rising energy prices. The more we individually ditch our high-carbon habits, the easier it will be to collectively meet the national emissions target. That in turn will make it possible to go for more ambitious national targets down the track, as Penny Wong pointed out. That of course requires that targets are actually ratcheted down if we find that they are easier to meet than anticipated, which remains to be seen.
Now for the business case for the emissions tax: a tax provides more certainty for business, because the tax rate is known in advance – in contrast to the emissions trading price which will arise in the market. If reducing emissions turns out to be easy, then emissions will be lower; if it’s hard, higher. But this also ignores the national target. If the tax falls short of achieving the overall national emissions commitment, then more needs to be done through other policies, or more credits need to be bought from overseas, using taxpayers’ money. Shifting uncertainty away from industry means imposing more uncertainty on the rest of the economy.
But can’t we simply change our national emissions target in light of the emissions response to a carbon tax? No we cannot. The national target is and will be the core of Australia’s international commitment on climate change. Much of the Australian discussion ignores this, and implicitly assumes we can reshape our international commitments. Warwick McKibbin, in his case for a hybrid system, asks “why lock in a target no matter what it costs, especially while the rest of the world is uncommitted to a clear policy?” Because like it or not, the world has chosen to a ‘targets and timetables’ approach to climate change mitigation. Clear policy and target commitments already exist in Europe, and are underway in America as well as Japan, and other countries are likely to follow. Australia could not overthrow the system even if that was the aim, but what Australia can do is help make the system work.
The debate about Australia’s proper contribution to the global effort needs to focus squarely on the national emissions targets. What policy instrument to use is a complex discussion, with arguments both ways, but it is not what determines the overall outcome. In any event, the debate of emissions trading versus taxes as the preferred domestic policy instrument has been had, not just in Australia in the 1990s but in many other countries. The verdict almost everywhere has been that it is the trading proposals that get implemented, never mind theoretical arguments in favour of taxes.
The lobby groups are not interested in the finer points of economic and administrative argument over taxes versus trading, but in who gets the money and how much is done. Suppose emissions trading gets dumped in favour of a tax. High emitting industries meanwhile will lobby for tax thresholds or tax exemptions, and for low tax rates. Tax thresholds would give much the same effect as free permits under trading, while tax exemptions would additionally introduce economic inefficiencies. Those keen on a rapid shift to a low-carbon economy and a favourable deal for households, will argue that under a tax there would be no exemptions and thresholds, plenty of revenue to recycle into green technologies, and a tax rate high enough to drive change.
So it is all back to basics: who foots the bill, where does the money go, and how much change is induced. These are questions that must be addressed regardless of whether the policy instrument of choice is an emissions tax or trading scheme. And they must be addressed with the long-term public interest at heart, without fear of change and without favour to large emitters.
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Frank Jotzo is an environmental economist at the Australian National University. He worked as adviser to the Garnaut Climate Change Review.
The big problem with your argument is the setting of the target. If the target were consistent with the policy objective of stabilising climate then there would be no reason for additional voluntary action, or for separate measures by the government to subsidise emissions reductions.
But, as we all know, the target is a woefully inadequate political compromise. The costs of this compromise could be reduced if it was possible to pursue cuts beyond the target level through voluntary action, special government initiatives or some kind of hybrid scheme.
This could be achieved, for example, by
(i) allocating offset permits to people who undertook particular voluntary actions. Those who were motivated by environmental concerns could retire the permits, and effectively tighten the target
(ii) tightening the target when new government initiatives like the insulation subsidy are introduced
(iii) using the carbon tax to set a price floor (opposite of the McKibbin idea)
Thanks for the interesting post Frank – i agree with much of what you say but simply emphasise different ‘design features’.
Of course it is well known that an ETS delivers certainty about quantity but there has been very little discussion, in the academic or public debates, about the consequences of an ETS with a suboptimal target. Under such circumstances the supposed strength of an ETS (quantitative certainty) becomes a weakness.
If governments want to build political spport for such schemes then they need to come clean with their popualtions about the limitations of an ETS when the target is lower than that demanded by the community. In Australia the Climate Change Minister has gone out of her way to confuse and decieve the public into thinking that if they put soalr panels on their roofs they will be reducing Australia’s emissions. In fact, all they are actually doing is helping to meet the fixed target with the catch being that the more money they spend on soalr panels the less money big polluters have to spend on permits.
Any economist who cant see that this is a political problem that must be resolved through honest discussion with the population is mad.
I can’t for the life of me figure out why it took the Germans so so long to figure out that every time they build a wind turbine the Poles could increase their pollution (see recent piece in Der Spiegel). The problem for the government is that the cat is out of the bag. So what to do?
There is no reason that an ETS cannot be modified in order to reduce the annual target in line with any measured voluntary emission reductions. And when i say voluntary i dont just mean individual…the federal governemnt recently announced a plan to install insualtion in 2million houses but they made no mention of reducing the emissions cap accordingly. That is, they attempted to describe their investment as a win for the environment but all it meant was cheaper permits…its the deception that causes the problems.
You are of course correct that a carbon tax can’t guarantee any specific level of emissions in any one year, and that this is in conflict with the idea behind our international agreements.
However, I think the goal of climate change policy should be to introduce the policy that best achieves our goals for the lowest cost, and not to meet agreements for the sake of meeting agreements.
If we meet agreements and don’t switch to alternative energy technology then we will have achieved nothing. If we don’t meet our agreements but switch to alternative energy technology (and help others to also switch) then we will have actually helped to move the world towards a low-emission economy.
As a separate point, an ETS also doesn’t guarantee that we will hit any particular target as it doesn’t cover all emissions.
But I really do think there is a problem in the framing of this discussion and the short-term emission targets are a distraction from the only real path to a low-emission economy — changing incentives towards investing in alternative energy technology.
Thank you John, Richard and John. Good points.
The issue of a fixed target possibly resulting in too little an effort surely is an important one. Especially because the economic downturn will do a fair bit to reduce emissions in the short term but without any changes in technology that could keep the growth trajectory down in the longer term.
Once more about the assertion that solar panels on roofs etc do not reduce emissions. Please let’s realise and acknowledge that what’s planned is NOT a closed national system, but one that is open to international trade in permits. On most of the modelling, Australia would buy offset credits from other countries to meet the 2020 target. So the Australian price will be determined by international prices. ‘Voluntary’ solar panels on Australian roofs have almost no effect in changing the permit price, and so will not change Australian industries’ actions.
More private solar panels mean less international credits purchased. So voluntary efforts leave global emissions unchanged in the short run (plus minus uncertainty around accounting for credits) but DO reduce Australia’s emissions. So it is NOT a zero sum game for Australian emissions, not even in the short term, if that is what people care about.
Emissions Trading is projected on economic growth and increasing demand. Ergo any reduction in carbon emissions that results from reducing demand either from an economic downturn or voluntary efforts by individuals will essentially contribute to the set targets.
What is required here is essentially an earlier transition to active reductions in emissions per tonne of coal burnt as an integral part of the calculation – fundamentally a technical monitoring and measurement issue for the industry, engineers and government regulators. This will enable regulators to separate the artificial lowering of emissions from the voluntary efforts of citizenry or for that matter, the more likely lowering of emissions output from declining energy demand associated with the global economic downturn. This is the pressure that the industry needs to drive the dollars, innovation and creativity into real reductions.
Technological innovations are more likely to bring India and China into the mix in the long haul as industry will have a vested interest in keeping transformation or conversion costs as low as possible in order to compete internationally.
One reason for a gradual tightening and a declining cap model was to allow industry the time required to adjust technologically to the new market criteria. One could however argue that the global recession has provided industry that relief for the next couple of years at the very least under the present model. However, any advantage gained would be lost if no clear expectations are projected in the interim in terms of stricter monitoring and compliance measures two years hence.
Ross Gittins in today’s Herald:
“And then there are all those useless economists, endlessly arguing the toss between pollution taxes and emissions trading schemes – whichever way you jump they’ll hanker after the other way – while the opportunity to act slips away. Thanks a bunch, guys.”
🙂
from ‘Emission impossible: unholy alliance set to sink carbon reduction plan’, Sydney Morning Herald, 2 March 2009.