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.