CPRS vs carbon tax: Senate Inquiry

Recently, a Senate Economics Committee was established to investigate the current emissions trading legislation. Tim Kelly and I prepared a submission, which has now been posted on the senate website. It builds usefully on Tim’s earlier post: Carbon tax or cap-and-trade? The debate we never had, which prompted a lot of discussion in the BNC comments. So, as an update to this topic, I reproduce the new submission later in this post.

In addition, the Greens negotiated with the Coalition to establish a new Senate Select Committee on Climate Policy, with broad terms of reference (see below). It will report in May. Consider making your own submission to it.

This Committee has been established to inquire into and on:

a) The choice of emissions trading as the central policy to reduce Australia’s carbon pollution, taking into account the need to: i. reduce carbon pollution at the lowest economic cost; ii. put in place long-term incentives for investment in clean energy and low-emission technology; and iii. contribute to a global solution to climate change.

b) The relative contributions to overall emission reduction targets from complementary measures such as renewable energy feed-in laws, energy efficiency and the protection or development of terrestrial carbon stores such as native forests and soils;

c) Whether the government’s Carbon Pollution Reduction Scheme (CPRS) is environmentally effective, in particular with regard to the adequacy or otherwise of the Government’s 2020 and 2050 greenhouse gas emission reduction targets in avoiding dangerous climate change;

d) An appropriate mechanism for determining what a fair and equitable contribution to the global emission reduction effort would be;

e) Whether the design of the proposed scheme will send appropriate investment signals for green collar jobs, research and development, and the manufacturing and service industries, taking into account permit allocation, leakage, compensation mechanisms and additionality issues; and,

f) Any related matter.

Okay, on to the submission to the Senate Economics Committe, by Tim Kelly and Barry Brook:

Summary

1. A cap and trade mechanism is by its nature, an all consuming policy instrument that extinguishes the effectiveness of voluntary actions, harming rather than enhancing the evolution of a low carbon economy.

2. With a cap and trade approach, the target is everything as both the emissions cap and emissions floor are locked in. No one can do better than the cap, and so the cap must be a science based al consuming sustainable target pathway that won’t lock in failure. As we don’t yet have the widespread political and economic preparedness to commit to an all consuming sustainable target pathway (either nationally or internationally), the cap and trade mechanism is the wrong approach and we should instead focus on a carbon tax with complementary mechanisms that would transform the economy more effectively than the proposed Carbon Pollution Reduction Scheme (CPRS).

3. A cap and trade approach based largely on cushioning financial impact on business, is the wrong policy instrument to use during economically turbulent times where it is not possible to determine business as usual emissions. The cap and gateway will either be too aggressive and will cause a political backlash, or soft leading to coasting when we should be transforming the economy.

4. Voluntary actions including the cancellation of Australian Emissions Units (AEUs) are meaningless within the context of reducing National emissions under the CPRS. The Government has suggested contradictory logic in seeking to justify the role of voluntary actions under the Carbon Pollution Reduction Scheme. On the one hand Minister Wong has advised and the Discussion Paper on a proposed National Carbon Offsets Standard promotes that:

— The role of traditional voluntary action is to build capacity to reduce emissions, reducing scarcity and lowering permit prices so that the Government can lower the cap in future years

…yet this is completely contradicted by:

— The concept of voluntary surrender of AEUs (CPRS permits) presented as lowering the cap to educe emissions, but this will increase scarcity and increase permit prices whilst not improving Australia’s capacity to reduce emissions making the situation less feasible for the Government to lower the cap in future years. The CPRS Exposure draft supports neither concept to work effectively!

5. A carbon tax should be considered with an open mindset. The Australian Government has not had a full an open debate on which policy mechanism would be best suited to reducing Australia’ emissions and driving a transformation to a low emissions economy where voluntary efforts are enhanced. This submission and the attached discussion paper Greenhouse Tax Versus Greenhouse Cap and trade – The Debate We Never Had, explores these issues in detail.

Discussion

1. Cap and trade is an all consuming policy instrument

At the outset, the Senate Economics Committee should consider that an emissions  cap and trade mechanism is by its nature, all consuming and is not something that is compatible with complementary measures.  [The term ‘carbon’ is used in this submission as an abbreviation of the term greenhouse gas emissions which does includes carbon dioxide, methane, nitrous oxide and other gaseous emissions. It is acknowledged that elemental carbon is a solid material that does not contribute to enhanced anthropogenic climate change.] Other activities such as the Mandatory Renewable Energy Target and the home insulation rebate merely become picked winners within the National cap and don’t reduce Australia’s emissions any more than the cap has already determined.

Proposals to adjust the cap in future years to reflect voluntary actions are largely un-achievable as it is not possible to track individual choices. For example, it is not possible to track when individuals improve their household efficiency, or when they walk, ride a bicycle or use public transport rather than driving a car.

Whilst it might be technically possible to manually intervene to attach a retired Australian Emissions Unit to say voluntary purchased GreenPower, such an approach is external to the mechanism, would cover only a small fraction of the potential voluntary action of businesses and households and will largely be rendered as meaningless due to the nature of the process to determine National Scheme Cap and National Scheme Gateways.

2. Voluntary actions including the cancellation of Australian emissions units are meaningless within the context of reducing National emissions under the CPRS.

In understanding that a cap and trade approach is as an all consuming policy mechanism, the setting of a National Scheme Cap and 5 year gateways over-arch any particular action, initiative or complementary measure. 

The draft advises that the Minister in setting both the Scheme Cap and National Scheme Gateway “may have regard to:” “voluntary action which is expected to be taken t reduce Australia’s greenhouse gas emissions”. Such “regard” is however, not quantitative, there is no methodology in determining what constitutes “regard” and there is no assurance or mechanism identified in the draft Bill. It is far mor likely that the Government and Minister will set the caps based on lobbying and political assessment which will outweigh any level of voluntary action achieved or perceived.

Because the cap and trade approach does such harm to voluntary processes it prevents the evolution of an effective market based economy. The Minister will be seeking to have “regard” to voluntary actions that are crippled by the scheme. In comparison, a carbon tax approach drives all greenhouse actions as voluntary, initially at a low carbon price, yet motivated with the knowledge that if collective emissions don’t reduce fast enough the tax will increase until they do.

With the target range already been locked by the Australian Government, voluntary actions are effectively excluded from influencing the cap as well as being ineffective under the CPRS cap and trad mechanism. Whilst households and businesses that buy electricity and other greenhouse intensive products and services will pay a higher carbon price, they cannot buy alternative emissions fre electricity, or other effective carbon neutral and offset products under the proposed CPRS Bill, under NGERS or under the proposal for a National Carbon Offset Standard. How then can back yard innovation hope to find a pathway towards developing a low emissions economy?

The use of overseas Kyoto units also covered in sections 14 and 15, cannot reduce emissions in Australia, do not create a green economy or green employment within Australia and should be limited to an option of last resort to be used where the policies within Australia have failed. It is also important to recognise that such units will become increasingly scarce as developing nations join a global fight to reduce emissions and take on reduction goals of their own.

3. Key issues for the Senate Economics Committee to consider

The two key issues that the Senate Economics Committee should consider in this matter are that:

1. Because the proposed ETS is all consuming, it requires a target that reflects the full extent of emissions cuts required by science, including Australia’s mandatory cuts and plausible voluntary actions Such a targets is much higher than the 5% proposed minimum and with potential voluntary actions including widespread household and business efficiency initiatives, a potential massive take-up o GreenPower if the scheme is reformed so customers receive reduced emissions and avoid CPRS costs, low emissions transport, and greener supply chains, then 25% to 40% should be the minimu starting range for the Australian Government to consider, and to present at talks in Copenhagen.

2. The nature of a cap and trade approach is that it cannot be ‘fixed’ to recognise vast potential voluntary actions that would arise with a genuine price on emissions. A cap and trade mechanism is no something that can be made t be ‘just one of many climate policy instruments’ as all other initiatives end up as being picked winners within the cap (not additional), or as guessed and fiddled adjustments to the cap.

4. Consider a carbon tax

Alternative to a cap and trade approach, a carbon tax, works by placing a price on carbon that then drives voluntary action in all sectors of the economy to avoid the tax, contributing to National emissions reduction even where contributions by individuals and thousands of small to medium businesses are not measured.

There is overall merit in a simple tax applied at roughly the same places where the CPRS costs would be applied close to the source of direct emissions and where bulk fuels are sold to diverse markets.

It is essential to note that the opportunity for voluntary action in an economy that has an effective price on carbon is not the same as voluntary action where no price on carbon exists. A carbon tax commencing at a very low rate can be most effective when used in conjunction with National reduction targets and gateways where businesses and communities understand that if emissions are not lowered fast enough, the tax will increase until they are. The difference is that every individual, household and business has a direct role in achieving the targets and in doing so will transform the whole economy, not just the 1000 or so businesses that currently pollute above the thresholds.

Revenue from a carbon tax should not just be handed back to polluters without significant conditions. Whether revenue from a carbon tax is paid to householders and individuals, or is used for direc government intervention to coordinate new low emissions infrastructure is important yet secondary to the comparison of a carbon tax versus a carbon cap and trade approach.

Neither a cap and trade approach nor a carbon tax are immune to being compromised when dealing with the realities of picking winners to protect jobs and existing businesses. It is however, all too easy to fall into the trap of thinking that because a cap and trade approach uses the word ‘cap’, that this would deliver a better emissions outcome.

It is therefore recommended that the Senate Economics Committee consider the comparative benefits of a carbon tax, including:

— A carbon tax can be more transparent as any variation in rates for a particular industry sector or business can be on a public register. (e.g. what concessional rate is applied and for how long).

— A carbon tax can legitimately commence at a low rate yet still be an effective policy mechanism where businesses and households understand that the tax would increase each year if National emissions were not reduced fast enough.

— A carbon tax acts more smoothly throughout economic cycles and avoids periods when too many permits are issued, whereas cap and trade approaches create periods of coasting that waste valuabl time in switching to a truly low emissions economy is needed.

— A carbon tax drives voluntary action everywhere in the economy, whereas under the proposed CPRS combined with the National Greenhouse and Energy Reporting System (NGERS), prices of energ will go up but consumers won’t have choices for meaningful voluntary products and services to avoid the carbon price.

— A carbon tax can be adjusted more easily than changing the emissions caps. For examples of the impossibility of creating a sustainable ‘cap’. Just consider the management record of Australia’s Murray Darling Basin, which is typical of many complex cap and trade situations.

— No rights to pollute (that lead to potential compensation and buy back costs) are locked in with a carbon tax and a huge range of complementary policies are compatible.

— Less data on future economy performance is needed for a carbon tax.

— A carbon tax will drive more green jobs in Australia and won’t be as dependent on greenhouse products from uncapped developing nations. 

A carbon tax must be set in the context of agreed goals such that businesses will have certainty that if collective emissions don’t reduce fast enough, the tax will be increased. This creates a huge imperative for businesses to reduce emissions and to be seen to b reducing emissions so they are not responsible for increasing costs to all others in the economy.

At some stage in the future, the pricing of embodied carbon emissions of exports and or imports will also need to be addressed in full.

We attach the paper “Greenhouse Tax Versus Greenhouse Cap and Trade – The Debate We Never Had”, as Appendix 1, which explores why we think that there has never been a fully informed debate on these policy options.

5. Specific shortcomings of the proposed CPRS legislation

I) The emissions trading mechanism will cause significant harm to voluntary mechanisms and will alienate individuals and businesses seeking to play their part in reducing emissions. Voluntary actions by individuals and entities will result in freeing up Australian Emissions Units for other business to pollute more, resulting in zero net greenhouse reductions. Most efficiency based voluntary actions ca never be measured by Government and cannot be adequately recognised.

II) Government messages on how voluntary efforts might be meaningful are contradictory to the voluntary mechanisms proposed in the draft legislation.

— On one hand the Government has suggested that traditional voluntary action such as improving efficiency and installing insulation (GreenPower also fits into this category) will build Australia’ capacity to reduce emissions, free up emissions permits which will lower permit prices and make it more feasible for the Government to reduce the cap in future years.

On the other hand the draft legislation proposes an entirely contradictory mechanism for voluntary action.

— Part 14—describes the voluntary cancellation of Australian Emissions Units (AEUs). The voluntary surrender of AEUs (CPRS permits) will increase scarcity and permit prices whilst not improvin Australia’s capacity to reduce emissions and makes it less feasible for the Government to reduce the cap in future years.

III) It makes no sense to suggest that voluntary actions to build capacity for a green economy will reduce emissions by creating a surplus of AEUs, when at the same time suggesting that throwing AEUs in the bin, creating scarcity in the market with no addition to a green economy will also reduce emissions. The abstract concept of throwing permits in the bin is meaningless when the emissions cap is base on Government reading of a political landscape and what business can afford.

IV) The CPRS cannot be just one of a range of greenhouse mitigation instruments because it is all consuming. Initiatives such as the expanded RET or a National household insulation program all fit within the CPRS as picked winners but do nothing additional to the cap to reduce emissions.

V) The draft legislation has created such compromises of the cap and trade approach that the CPRS cannot deliver reduced emissions at lowest economic cost.

VI) The draft legislation, combined with some serious shortcomings in the National Greenhouse and Energy Reporting System, limits market choices and will not support a green economy, or encourag innovation.

VII) The cap and trade approach cannot be effective during the current economic turmoil, and may well result in minimum transition to lower emissions during a period of low emissions caused by global recession.

VIII) Related climate policy areas are no where near completion, such as:

— The discussion paper on a proposed National Carbon Offset Standard contain ideas such as the No Action Carbon Neutral Logic that is not consistent with NGER law and would bring ridicule Australia’s international reputation. [The Government suggested amongst other ideas that “. If all an entity’s emissions were covered by the Scheme it could be considered ‘carbon neutral’ in the sense that individual emissions have had no net impact on aggregate emissions”.]

— Mechanisms for offsets have not been finalised.

— GreenPower (as a mechanism to purchase emissions free electricity) is not supported by the draft legislation, is not supported by NGERS and is not supported by the Mandatory Renewable Energy Target Legislation. GreenPower as currently presented and used is false and misleading as it does not legally count as use for customers nor does it legally reduce customer emissions as these benefits are assigned to all grid customers in proportion of their use. GreenPower is nothing more than a donation of renewable energy to all other customers. [For details on double counting, see Submission on Expanded Renewable Energy Target]

The accounting of renewable energy is appalling and riddled with double counting. Under NGERS, no business or household can access anything other than standard grid electricity. Where any part of Australia’s grid is used, even where users build and own a renewable energy asset to support a particular facility, they must still report standard grid emissions under NGERS.

6. Ineffective Targets

A change from our current collision course with dangerous if not disastrous climate change will require developed countries such as Australia to take a lead role in reducing emissions in order to build support in developing and emissions intensive nations to also reduce their emissions in a huge way.

Targets of 5% to 15% by 2020 are not consistent with the change that is required, or the speed at which change is required. It is ironic that 5% reductions may be achieved by economic downturn leading to a free ride with no transition to lower emissions technology for many years. It is also likely that the science and growing climate change impacts will reveal that Australia’s targets are woefully inadequate, and that the cap may need to be lowered and permits recovered at cost to the taxpayer.

With a cap and trade approach, the target is everything as both the emissions cap and emissions floor are locked in. No one can do better than the cap, and so there must be open ended target caps that can be adjusted at any time without the need for compensation. For example, if the rest of the world strives for 24% to 40% reduction targets by 2020, Australia should lift its efforts to achieve this goal.

The Senate Economics Committee should consider all options, including the abandonment of the cap and trade approach because issues of critical importance around voluntary empowerment have not been dealt with adequately, and cannot be effective during changing and erratic economic conditions. The Government will never be forgiven for picking the wrong mechanism where identified risks were ignored.

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26 Comments

  1. I have to disagree on several counts. I believe a cap-and-trade scheme administered in a fairly ruthless way is the best approach. Free permits should be replaced with highly visible cash subsidies and offsets good and bad limited to say 10% of the cap.

    In my opinion the voluntary actions argument is a furphy. Voluntary action that lowers demand for gas and coal fired electricity will reduce the CO2 spot price. It doesn’t matter whether that price is high or low so long as an appropriate cap is not exceeded. It’s the tonnes not the dollars. If the cap is bettered the CO2 price will be quite low but not zero; see non-binding quota in the economic literature.

    In contrast to a variable spot price a fixed tax per tonne of CO2 will either overshoot or undershoot the target and require subsequent fine tuning. That fixed penalty will seem harsh in tough times. A CO2 price that rises or falls according to recovery or recession will be perceived as fairer. Tradeable permits let the players juggle costs and may assist efforts at getting an international scheme.

    Other issues are equivocal as to the carbon penalty mechanism. What I see as a glaring anomaly is that black coal exports (running at 4X domestic use in 2007) are completely overlooked as a major Australian contribution to global emissions.

    Given that the ETS is in the draft stage I think talking about a radical restructure is muddying the waters. The draft legislation may contain some enormous blunders somewhere in the 400 or so pages but they should be nutted out. I also agree with complementary measures like MRET despite some inconsistencies.

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  2. Wasn’t an equal per-person repayment of all of the C tax discussed, so that the C tax revenues would slightly impoverish high consumers and slightly enrich low ones, rather than concentrating huge carbon fortunes in a few bureaucrats’ hands? I hope that’s still in there.

    I seem to recall the concept of doing this cash payment initially with existing C tax revenues, such as those from petrol taxation, was mooted.

    This would establish a precedent: when government takes fossil fuel revenues, it doesn’t keep them.

    This encourages members of the public who might otherwise fear that government will seek to keep taking those revenues forever*, by protecting the fossil fuel industries and hobbling their non-token competitors, not to fear that, and therefore not to oppose the tax.

    Political feasibility. Maybe not essential, but a nice thing to have, don’t you think?

    (How fire can be domesticated)

    * They will, after all, need those revenues to build dikes around important government buildings, now won’t they. Have some consideration.

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  3. I believe a cap-and-trade scheme administered in a fairly ruthless way is the best approach.

    Bear in mind that we are mostly talking about the Carbon Pollution Reduction Scheme (CPRS), as presented in the legislation and white paper. Not a generic cap-and-trade. A ruthless cap-and-trade could work well, in theory.

    John, could you expand a little on why you think MRET deserves support under a CPRS model?

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  4. Essentially a a carbon cap with a separate renewables target is a one-two punch. There is little wriggle room via bogus offsets and free permits. It also denies natural gas the role of heir apparent to coal; lower carbon indeed but not renewable and we need to conserve a lot of gas for other uses. In the case where an MRET (say 20% of gwh’s) implies stiffer carbon cuts than a weak cap (eg 5% less CO2) the tougher requirement should prevail.

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  5. One of the main arguments in favour of cap-and-trade is that international negotiations are based on a “target-and-timetables” approach. Emissions trading (on a national scale) has the advantage that there is much more certainty that a given target will be reached. This increases the credibility of targets under international negotiations, more so than a carbon tax. There are some advantages that a carbon tax has over an emissions trading scheme. Especially if the ETS has poor targets. Most of these advantages also exist under an ETS under an ETS with a price floor. I have never seen any arguments as to why a carbon tax is better than an ETS with a price floor.

    An important issue with a carbon tax or price floor is that it needs to be indexed from the start. An appropriate rate might be 4% per year (as suggested in the Garnaut review).

    Many of the specific issues raised above in the blog post depend on implementation. Whether a carbon tax can be adjusted more easily than a cap depends on the implementation. Under the CPRS the scheme cap is locked in for five years, and “gateway” ranges with upper and lower bounds for the cap can be set for an indefinite period into the future. If the scheme caps and gateways legislation was amended (Sections 14 and 15 of the exposure draft legislation), the CPRS caps could be adjusted downwards much more easily. The scheme caps and gateways approach risks Murray Darling Basin like overallocation problems.

    Emissions permits do not have to guarantee a right to pollute. They don’t even have to be a property right. They are a property right under the CPRS, but only because of Section 94 of the Exposure Draft legislation.

    I don’t see why less data on future economy performance is needed for a carbon tax. Suppose you wanted to stabilise emissions at a certain level, it would be much easier to set a cap that guarantees that than set a tax level. To set the cap you only need to know the science, while to estimate what price is required to achieve a given amount of emissions reductions requires some sort of economic modeling.

    Whether a carbon tax will drive more green jobs than an ETS depends on the tax level and the ETS cap. IMO it is likely that a low tax level (such as $20/tonne + 4% per year) will drive more green jobs and emissions reductions than the CPRS with a 5% target because the carbon price under the CPRS is likely to be less than $20/tonne + 4% per year (as modeled by treasury). Whether a carbon tax or ETS will be dependent on greenhouse products from uncapped developing nations is an issue about whether offsets such as CDM credits can be used to reduce the amount of compliance required. I don’t see why it has anything to do with ETS vs. tax.

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  6. The idea of what to do with revenue is covered in Section 3 of the “Debate We Never Had” which appears as an appendix to the submission. In Section 3, James Hansen’s Idea to return the revenue to individuals is discussed. I added that “the tax gives the push away from polluting technologies and there is some legitimate debate to occur on the best way to use the revenue to pull through the lower emissions technologies”. I also discuss an additional concept to pull through low emissions technologies in Section 4.3.

    My view is that determining the most cost effective way to use the revenue to pull through better technologies is secondary if selecting a carbon tax as the central policy issue. If using a Cap and Trade approach however, using the revenue in a way that picks winners beneath the cap is contrary to the concept of the mechanism (whether this is for coal CCS, renewables or smelting).

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  7. Thanks Peter, good discussion

    Kyoto targets were negotiated without regard to the mechanism that would be used within countries to reduce their emissions, and credibility will come from legitimate action.

    I would argue that a target negotiated for a cap and trade approach will 1) never the right target and 2) will be less than a learning by doing approach that can be motivated by a tax mechanism which fully involves the whole economy. Critical difference is that the total economy change will facilitate a tightening of targets faster than limiting the game to the biggest players.

    I guess that my central argument as to why carbon tax is better than an ETS with a price floor is that voluntary actions are not constrained, they become central to driving innovation to avoid the need to pay the tax.

    I am dismayed by the fact that under the CPRS, customers will pay more but have little choice. Under the CPRS, a customer cannot buy renewable or lower emissions electricity from the grid to avoid their scope 2 emissions and be assured that they avoid or reduce the CPRS pass through costs. NGERS, the CPRS Exposure Draft Legislation and the NRET Exposure Draft Legislation don’t cover renewable energy to be bought by customers and so the GreenPower concept is nothing more than a donation to all other grid users.

    I think that the most important thing for the tax to work is Government commitment to increasing the tax if National emissions are not reducing fast enough and this can be adjusted on a yearly basis.

    I agree on implementation issues yet my view is that it would be best to have targets that are determined independently of the mechanism. I regard adjusting the caps to reflect voluntary action as guessing and fiddling.

    A carbon tax acts on a tonne of CO2-e emissions more consistently than a permit price that can plummet because of economic cycles and over-allocation.

    If we were to be setting caps at a sustainable level
    determined by science, I would be quite happy with a cap and trade approach but unfortunately this is not the case.

    A Cap and trade approach with a price floor becomes hybrid that incorporates a tax at the lower end, and our CPRS also has a tax of $40/tonne at the upper end.

    To some extent I could accept that the future of CDM based credits that are currently available from developing nations may not cease should all countries adopt targets, but there would need to be a major overhaul of the mechanism. As it stands, Australian companies will be able to buy CDM credits based on renewable energy projects from overseas, but won’t be able to buy locally produced renewable energy as an energy product to avoid CPRS costs and to avoid scope 2 emissions.

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  8. Thanks for the comments Tim. On the subject of whether an ETS with a price floor is better or worse than a tax, consider the following example. Suppose you had a tax at some rate, e.g. $20 per tonne + 4% per year. Any voluntary additional action would reduce emissions. Suppose now that you had a price floor that was at the same tax level as before, but also had a target, e.g. a 10% reduction by 2020. If the target would have been met by the carbon price being at the level of the price floor anyway, then the carbon price would remain at $20 per tonne; the amount of emissions will be less than the cap; and voluntary measures would still count. If the target would not have been met by the carbon price being at $20 per tonne, then it will go higher; voluntary measures will not directly reduce emissions (but will reduce the carbon price, increasing the likelihood of the floor coming into effect); also you would have a guaranteed maximum amount of emissions by 2020.

    So under an ETS with a price floor, voluntary measures will count more than under the CPRS. I agree with you that the CPRS is also a hybrid scheme, because of the transitional price cap. It is true that under an ETS with a price floor voluntary measures don’t count all of the time like they do when there is a carbon tax (or when there is no carbon price). But when they don’t count as much (when the emissions cap is determining the price), you get the added advantage that a specific cap is being met. This has direct environmental benefits, and benefits in terms of facilitating international cooperation. I believe this is more important than whether voluntary efforts count.

    One way that a price floor could be introduced is by having a reserve price when permits are auctioned. Another way that a price floor could be implemented would be to have firms pay an extra fee (e.g. $20 per tonne) when they surrender their permits. In that case the carbon price becomes equal to the sum of the permit price and the surrender price.

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  9. It is indeed difficult to compare the proposed scheme by the government with a carbon tax, as the carbon tax gets to be presented in an unadulterated state. If the govt were to be convinced to change to a carbon tax I’ve become cynical enough to imagine Kev standing next to Barry and hailing his input in steering the govt to the new wonder that is the carbon tax… only to then in 3 months produce a new white paper that makes a dogs brekkie out of a carbon tax and leaves Barry feeling very much like Mr Garnaut, and scratching his head wondering how the purity of the tax was sullied at the hands of Kev’s mates in the fossil fuel industry:) I’m quite sure it is easy to design a carbon tax that gives massive handouts to the existing polluters, and results in emission reduction that is woefully inadequate in terms of addressing the actual problem!

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  10. Barry & Tim,

    Thanks for your contributions. I have addressed some of your main points below. I couldn’t agree more with your main complaint that the targets are inadequate, but I think that moving to a carbon tax won’t solve this problem, and we are better off aiming at improving the CPRS.

    A carbon tax and cap-and-trade scheme are actually very similar. Both are market-based schemes (as opposed to regulation or information-based policy instruments) that achieve their desired effect by putting a price on carbon emissions. Both schemes aim to achieve a transition to a low carbon economy at the lowest possible long-term cost.

    To achieve this two-sided goal, we need to make changes across the whole spectrum from individuals to our biggest companies, but we should make the least expensive cuts first. How do we do that? Simply by putting a price on carbon emissions and leaving it up to the rational economic self-interest of individuals and companies to decide where those cuts should be made.

    At least, that’s what the economic theory tells us. In reality, many people and companies are driven by moral (or marketing) reasons to do more than rational economic self-interest would dictate. This is the basis of green consumerism, low-impact lifestyles, and lots of other “voluntary” initiatives. Which brings me to your point that:

    —-

    Voluntary actions including the cancellation of Australian Emissions Units (AEUs) are meaningless within the context of reducing National emissions under the CPRS.

    Voluntary actions, under both a tax and a cap-and-trade system, will help to achieve the overall aim of transitioning to a low carbon economy at the lowest possible cost; the difference is that whereas under a tax this action contributes to the “low carbon” part of the goal, under a cap-and-trade scheme it contributes to the “low cost” part of the equation, by reducing the burden on industry – and therefore the whole economy. Either way, voluntary actions help.

    If you have a problem with your actions helping the economy rather than the environment (and clearly many people do, based on the reaction to the legislation), you can also purchase and retire some carbon credits – and now you’re back to the “low carbon” side of the coin. The two voluntary measures – reducing personal emissions, and surrendering AEUs, are quite complementary, rather than contradictory, as you suggest. (Having said that, I still believe that rational economic self-interest will remain as the primary driver of change. For most people, the reason they will install insulation, reduce their driving or buy products with low embedded carbon will be because it is cheaper, once the proper carbon price has been introduced).

    I would make a similar argument regarding other measures such as the MRET – it complements the cap-and-trade strategy because it helps to force along the process of innovation, thereby reducing the overall cost of the low-carbon transition. It is well established that market instruments alone are not enough – see Chapter 16 of the Stern climate change review for an excellent summary.

    —-

    It is however, all too easy to fall into the trap of thinking that because a cap and trade approach uses the word ‘cap’, that this would deliver a better emissions outcome

    But equally, there is no guarantee that a tax will deliver a better emissions outcome. Consider these two scenarios:

    1. We set the tax too high (that is, higher than is necessary to reach our national target, whatever it may be). Environmentalists are thrilled. Businesses leaders, on the other hand, are furious, pointing to unnecessary economic pain and job losses. No government wants to be branded as economically irresponsible, so they are forced to reduce the tax to an insignificant level or repealed it.

    2. Due to political pressure, we end up setting the tax too low. There is insufficient incentive to lower our emissions, and it slowly becomes clear that we are missing our targets. Even so, raising the tax is a huge political struggle. The profitability of our big emitters is already reduced, and they are prepared to fight any tax increases tooth and nail, by stoking the old fears about job losses and demanding compensation. Meanwhile it’s 2015 already, and our emissions have been steadily increasing.

    Both of these scenarios are bad, but based on current experience the second one is more likely.

    —-

    A carbon tax must be set in the context of agreed goals such that businesses will have certainty that if collective emissions don’t reduce fast enough, the tax will be increased. This creates a huge imperative for businesses to reduce emissions and to be seen to b reducing emissions so they are not responsible for increasing costs to all others in the economy.

    On the contrary, this situation encourages free-riding on the efforts of others. I doubt the “naming and shaming” approach, if that’s what you are suggesting, will be effective at all. Each business will continue to maximise their own profits, hoping others will do the hard work on emissions reduction.

    In any case, why would our emissions targets under this scenario be any different to the current inadequate levels? The targets would be a product of the same political process, so we would presumably still be aiming for 5/15% by 2020. We would be no better off.

    —-

    Neither a cap and trade approach nor a carbon tax are immune to being compromised when dealing with the realities of picking winners to protect jobs and existing businesses.

    I think you hit the nail on the head there. You can’t compare a pure and perfect carbon tax system with a compromised CPRS – the carbon tax legislation would have to go through the same process as the current legislation, probably with the same result or worse, as MattB points out above.

    —-

    The more I think about it, the more Peter Wood’s suggestion of a cap-and-trade system with a price floor makes sense – it seems be a “best of both worlds” scenario, addressing the problems of both cap-and-trade and a carbon tax.

    Overall, I agree strongly with John Newlands that we should be spending our effort trying to reform the currently proposed legislation rather than arguing for something entirely different. The emission reduction targets are the most obvious area to be attacking, and that’s where we should be focusing our attention.

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  11. I agree with John Newlands – the argument about voluntary reductions is a furphy.

    The claim that the CPRS will “(extinguish) the effectiveness of voluntary actions” is just another way of saying some people would have cut their emissions anyway. So what?

    Anyway, I see no sign that voluntary reductions for non-economic reasons are having any significant effect right now – why should we expect them to be significant in the future?

    I’d also disagree with Tim’s point summarised as “Critical difference is that the total economy change will facilitate a tightening of targets faster than limiting the game to the biggest players.”

    An ETS will raise the price of carbon emissions for everyone, so everyone will have the chance to respond to the higher price. The game will not be limited to the biggest players.

    Also: “I think that the most important thing for the tax to work is Government commitment to increasing the tax if National emissions are not reducing fast enough and this can be adjusted on a yearly basis.”

    Problem is you can’t do it on a yearly basis. The time scale involved in developing alternative energy sources and building the physical capital is so much longer than this – by the time you realise you’ve blown it by setting the tax too low you’ve lost a decade or two. Then you have to push it up higher than you would have in the first place.

    MattB’s comments about comparing the CPRS with a hypothetical carbon tax is spot on – anyone who thinks there won’t be special dispensations for entrenched interests under either system is dreaming.

    But we should be wary of claims that favouring existing interests will make emissions reduction less rapid under an ETS (or a carbon tax where the average price of energy doesn’t change because of the favours).

    What it will do is make the process less efficient in the economic sense, which is a different matter. For example, it might mean reductions in emissions are skewed more toward less energy use overall and less toward a greater proportion of energy through renewables, that sort of thing.

    In other words, there is some irony in industries claiming they need special favours to avert the adverse economic consequences of a tax or an ETS, when in fact the special favours will actually cause the adverse economic consequences.

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  12. In relation to “Suppose now that you had a price floor that was at the same tax level as before, but also had a target, e.g. a 10% reduction by 2020. If the target would have been met by the carbon price being at the level of the price floor anyway, then the carbon price would remain at $20 per tonne; the amount of emissions will be less than the cap; and voluntary measures would still count.”

    I don’t believe that this is the same, because voluntary action under a carbon tax approach is not the same as voluntary action under a cap and trade system. Voluntary mechanisms are in my view crippled under a cap and trade approach where there is the knowledge that emissions reductions allow permits to be freed up for use elsewhere. The voluntary situation is made worse where the Federal Government makes suggestions that organisations are carbon neutral by taking no action under its CPRS, and where voluntary mechanisms such as GreenPower are left out of the CPRS and NGERS legislation and left riddled with double counting.

    I also don’t accept that it is accurate to compare the apparent market price of a carbon tax with a carbon tax rate, particularly under this CPRS draft which includes high proportion of free permit allocation and significant assistance to EITEIs that influence the price. Whilst this can also be true where concessional tax rates are used as transition assistance, my key point is that the tax approach does facilitate a greater response through the whole economy and may therefore deliver an outcome at a lower rate as the cost is spread across the economy more effectively. The average rate across the economy that takes into account free permits or lower tax rates to some, is probably a more important number.

    Beyond the direct hypothetical ‘what if’ situations, I think that it is important to think about the complexity of how such targets are negotiated and the impacts on what is agreed. As with the Murray Darling Basin Situation, when complex multiple interests are involved with cap and trade, the targets are low and the compromises become so great that the mechanism fails to deliver in a least cost manner.

    I have never presented the carbon tax as being in an unadulterated state suggested by Matt B and have acknowledged that there are likely to be tax concessions and transitional assistance with both approaches. I do however assert that with the carbon tax approach, that it works as a foundation policy upon which complementary mechanisms can be built, rather than being an all-consuming policy that engulfs complementary measures and cripples voluntary action and mechanisms.

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  13. Brett,
    You make a statement that “The two voluntary measures – reducing personal emissions, and surrendering AEUs, are quite complementary, rather than contradictory, as you suggest”.

    Could you please explain why these mechanisms are not contradictory?

    I can accept that reducing my emissions or buying GreenPower does improve Australia’s potential capacity to reduce emissions, will free up permits, lower the AEU price and make the situation more feasible for the Government to reduce the cap in 5 years time (crippled but not killed)

    I cannot then accept that throwing AEUs in the bin, doing nothing to improve Australia’s potential capacity to reduce emissions, causing AEU scarcity and making the situation less feasible for the Government to reduce the cap in 5 years time, would actually carry through lower emissions.

    If we accept that it is the “feasibility” aspect that determines whether the cap is reduced the AEUs bin option cannot work.

    As for your other points thanks. I think that we all have a range of valid points.

    With the devil is in the detail of any system it is easy to compromise any approach. I agree with Ross Garnaut that the Global Financial Crisis has provided an opportunity to get a system established when emissions will be lower. I also think that this may have provide a little more time to get the mechanism right and sort out complementary measures, voluntary mechanisms (including GreenPower)and the National Carbon Offset Standard before the legislation is rushed into Parliament. On these last three matters we are not even close. The DCC Website has not had the link to the Discussion Paper on the National Offsets Standard working for around three or four weeks and none of the offset submissions have been posted so it is difficult to know what is going on in this area.

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  14. I want to explore the “AEUs bin option” because I honestly don’t follow your logic.

    Let’s say for the sake of argument that in the year 2015, an extremely wealthy benefactor decides to purchase 10% of our AEUs (very roughly 60 Mt CO2e) at a cost of somewhere over $1 billion. What effect would this have?

    As you point out, emissions credits would become more scarce. With this sudden shock to the system, the price of credits might double or triple. Like any change in the carbon price, this would have a whole-of-economy effect. The incentive to reduce carbon emissions, for big business and individuals alike, is increased, resulting in a sudden transformation across the whole economy and a net 10% reduction in emissions (in reality, the economy would not be able to respond so quickly, but this is just an exaggerated, fictional example).

    Will this increase the feasibility of deeper cuts in the future? Yes, because we have shifted forward in time some of the transformation, albeit at a high short-term cost. Maintaining the same level of emissions (which is really a 10% cut on 2014 emissions) in 2016 should be achievable at no cost at all, thereby making deeper cuts more feasible.

    For the record, I think that there will be very little retirement of credits in practice. I would be happily surprised if it was more than a few thousand tonnes a year. But if it is more, then it will have a positive effect on to speed of our transition to a low carbon economy.

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  15. The correct answer to the question of cap-and-trade vs carbon tax is “neither”. As Richard Lindzen and others have pointed out time and again: there is strong evidence from outgoing long-wave radiation measurements that climate sensitivity is no more than one degree.

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  16. OK,
    Taking this suggested economic model, the first thing to recognise that models require the necessary inputs which include the inputs that I claim to be contradictory.

    We need to add conventional tangible voluntary actions such as buying GreenPower, improving efficiency, so we will include these at the same scale (60MT) as the wealthy benefactor throwing Australian made AEUs in the bin.

    In any equation, where the units are the same (AEUs) it is not possible to make actions of opposite signs to contribute to a single directional change without cancelling each other out.

    1) WITHIN THE 5 YEAR TARGET AND GATEWAY PERIOD
    The wealthy benefactor buys 60MT of AEUs and throws them in the bin, which take care of the 60MT of tangible voluntary achievements that were meant to lower scarcity in the market and cancels the change to the market price of AEUs.
    The end result is that available permits are 60MT less, emissions are 60MT less but we have lost 60MT of the 120MT of voluntary action paid for within the 5 year period because the scarcity was cancelled out. In terms of any change to market scarcity there is zero change.

    2) CARRYING THROUGH TO THE FOLLOWING 5 YEAR TARGET AND GATEWAY PERIOD
    The zero change of market scarcity carries through to the following period as the Government makes its changes to the cap based on the “feasibility” to lower the cap and there has been no improvement to this “feasibility” from voluntary action. So now we lose the second 60MT of additional voluntary action.

    END RESULT
    The two voluntary actions have cancelled each other out to the total value of 120MT across two target periods.

    WHAT IF CONVENTIONAL VOLUNTARY ACTIONS WERE NIL?
    If we consider again the model scenario that deals only with throwing Australian made AEUs in the bin, there are yet more things that need to be factored in.
    Firstly, we don’t have a true cap so the sudden market shock may largely be taken up by the Government issuing beyond cap $40 permits.
    More of the shock may be taken up by some businesses reducing production because the price of permits is unnecessarily high. The big players will take more of the cheap permits out of the market leaving the small players with a higher cost burden and some may unnecessarily go out of business. (It is also worth noting that electricity generators would see this scenario as causing unnecessary competition for AEUs that would unnecessarily force up electricity costs and prices).
    Whilst there may be a driver for low emissions technology (in the absence of conventional voluntary cancellation) it is it is not as simple as plugging in an emissions reduction box. Low emissions performance costs in both setup and to operate. The AEUs in the bin option takes up opportunities making it harder for further reductions to be achieved.
    So whilst the market may technically comply, it is not the case that businesses won’t be screaming louder for the cap to stay higher, making it less “feasible” for the Government to lower the cap.

    At least we agree that there will be very little retirement of credits in practice. Many customers will distrust the option, some like me will regard it as flawed logic to use where a cap is set based on “feasibility” and the option is doomed as a voluntary concept where the price AEUs will increase through time (which they must), making further voluntary action less affordable. In a proper market framework, tangible voluntary actions (drawn from a pool of opportunity beyond that which applies to CPRS covered businesses) should reduce in cost as low emissions solutions become mainstream.

    CONCLUSION
    Because the AEUs in the bin option causes voluntary cancellations, perverse outcomes and is likely to be rejected by markets, The DCC should abandon this concept.

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  17. Tim Kelly, as far as I can see you keep parotting the one point you have demonstrating preference for a carbon tax over the CPRS which is the issue over voluntary abatement.

    In the senate committee enquiry current voluntary abatement accounts for only 1.3 million tonnes when we need to reduce emissions by 135 million tonnes, I think your huge issue over voluntary abatement is really making a mountain out of a molehill.

    Having a carbon tax is not all that different to an ETS with the added detraction that it is very difficult to quantify what percentage of tax to set to achieve the required reduction. The other main issue is that tax rates are not at all flexible, particularly in the upwards motion. I believe that it will be particularly difficult for the government to keep ratcheting up the tax rate without causing a great deal of consternation from most sectors of the economy, and also having the tax rate set by a government who is more interested in ensuring voter satisfaction than the environment will make it next to impossible.
    Ideally the cap for the CPRS should be set by an independent climate board to achieve the required reductions, however then we have the possibility of sending a supply side shock through the economy, and we all know the effect that can have (see the 1970’s recession due to oil price hikes by OPEC).

    So in short there needs to be a balance, and I believe the benefit of being able to quantify the amount of emissions reductions that will be achieved is far more important than the insiginificant issue of whether voluntary abatement is compensated.

    I think you will find that people who genuinely care about the impact they are having on the environment will not be concerned about being compensated for contributing to the health of the planet, and as others have specified voluntary abatement will reduce the shock to the economy which can only benefit those who cannot afford to make the contributions that others can but have to bear the cost of greenhouse gas emissions.

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  18. Pingback: Climate change items in the 2009 Federal Budget « BraveNewClimate.com

  19. Jenna
    I think that it may be fairer to use the term rabbitting on rather than parotting on. When I released my post Are voluntary actions meaningful where an emissions cap is introduced? (https://bravenewclimate.com/2008/09/15/are-voluntary-actions-meaningful-where-an-emissions-cap-is-introduced/) in September 15 last year, there was very little public discussion on this matter that I was aware of and my thoughts reflected a genuine effort to assess the issues in the context of practical experience in undertaking voluntary actions.

    I do concede that in addition to the need to place a meaningful cost on greenhouse gas emissions I follow the theme of enhancing voluntary mechanisms so that they work for households and businesses to choose between a greenhouse costs or low emission alternatives that avoid the carbon cost. I guess that I have confidence that the free market will work if and when when a meaningful carbon price and escalating carbon risk is brought into the economy.

    As for making a mountain out of a molehill, I have addressed this point in my discussion paper contained in our submission(http://www.aph.gov.au/senate/committee/economics_ctte/cprs_09/submissions/sub33) to the Senate Economics Committee (section 4.2. Can voluntary action make the difference?). In short, my view on this is that it is not appropriate to compare a voluntary response in the absence of a carbon cost, with a market that would apply a meaningful carbon cost.

    In addition, I actually do make more than one point in this paper, such as:
    * A cap and trade approach is the wrong policy instrument to use during economically turbulent times.
    * The Australian Government has not had a full an open debate on which policy mechanism would be best suited to reducing Australia’s emissions.
    * Those developing emissions trading would seek to create scarce emission permits whilst at the same time capping the costs which defies economic logic. With the CPRS we see unlimited permits at $10 per tonne (or down as low as 50 cents per tonne for those that receive 95% free permits) in the first year followed by unlimited permits at $40 per tonne. This is more like a carbon tax approach anyway.
    * A carbon tax would be simpler than an emissions cap and trade system (reducing red tape).
    * That a carbon tax is better at driving innovation because encourages a greater market to find low emissions options for customers to choose from.
    * Greater price certainty.
    * Less need for full information.

    I agree that having a carbon tax is not all that different to particularly the Government’s proposed ETS except that the ETS trashes the effectiveness of voluntary action as something that contributes to achieving National greenhouse reductions and it introduces perverse responses.

    I think it is naive to believe that because the word ‘cap’ is used in the Government’s proposed CPRS that it will actually deliver a fixed maximum quantity of emissions, or indeed that the proposed CPRS is designed to work from the cap. I would urge a closer look at the legislation and compromises that are proposed which reveal that this scheme just like a tax, is based on the Government hoping to manage the carbon price below its so called safety valve of $40 per tonne (following the $10 start in year 1), and this is largely dependent on bringing in overseas carbon credits.

    I fully agree with you that the targets should be set by science and if they were then the need for voluntary actions would not be as critical. I also acknowledge that managing economy shocks is a critical issue.

    To me, choosing the right mechanism is about effectiveness in the midst of compromised options. It is the effectiveness and sending the right price signals to a responding retail market as well as the wholesale market, rather than compensation which is important.

    Thanks for your comments. I will be rabbitting on about the latest changes to the CPRS proposal as well.

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  20. Pingback: The Clean Energy in Australia « LitFuse

  21. All stick no carrot…..

    Everything I have read so far on both CPRS and a carbon tax concentrate on the effect of an increase in price driving a move from high to low CO2 emission energy sources. There is a lot of talk about the effect on voluntary actions and the difficulty in attracting investment to new renewable energy sources. The only incentives discussed is the compensation to companies in the form of free permits, subsidies to selected renewable technology and compensation to consumers in the form of increased targeted taxbreaks/welfare.
    What is needed is a massive and relatively sudden re-engineering of our society, this will not work from the top down, the power for this change will come from the individual. It is not simply a matter of individuals reducing their dependence on fossil fuels but rather choosing to purchase low CO2 emission technology and adopt more sustainable practices. The problem is that right now and for at least the next 10 years there is not enough sustainable technology to go around, consequently too much pain and very little gain.
    If we are going to ask each individual to bear the cost then they should have some control over the benefit.
    Therefore I would suggest a counter intuitive approach a – Carbon Credit Scheme.
    it would operate the same as a carbon tax imposed at source lets say initially at 5%, this carbon credit is then passed through the money chain until it is redeemed on renewable/sustainable products. It would operate in a similar way to the many reward schemes currently available. In the early years there would be only a small effect on CO2 emissions but it would rapidly escalate, fossil fuels eventually funding their own replacement.
    Obviously there will be a lot of debate over the process for identifying those products that can be purchased through carbon credits. What ever the agreed process once a product makes it on the list it would become a very attractive business investment, it would ensure the massive private investment in low CO2 emission technology that is required.
    The biggest issue is deciding what products would be redeemable, for example public transport could be included.
    I’m no environmentalist or economist so I have probably unwittingly made some heretical statements, however I find the logic of a Carbon Credit very appealing.

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  22. Pingback: Green Blog » Blog Archive » Top experts: Carbon Tax needed NOT Cap-and-Trade Emission Trading Scheme (ETS)

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