Climate policy: it’s the (emissions) price, stupid!

We know production-origin models won’t work when countries act at different times. But there’s an alternative path to the same result. This tracks the consumption-destination GST model.

There’s no “free lunch”. There’s a trade-off. Getting the trade-off right is essential.

Governments applying production-origin emission abatement models can more precisely target indigenous emissions - if their carbon accounting systems are up to scratch. But they undermine international competitiveness. So they won’t be applied properly, if at all.

Consumption-destination models are less precise, as explained below, but don’t undermine international competitiveness. They exclude exports and tax imports the same as locally produced substitutes.

The choice is between more precise models that won’t work globally, and less precise models that will.

With a failed production model, the global emissions reduction outcome is uncertain, at best. The local activity, investment and jobs outcome is clear and adverse.

If we adopt a consumption-based model, the global emissions reduction is small (our emissions are small in relative terms), and job losses are avoided. More importantly, the chances of others adopting this model are much better than the production-origin model, because in doing so they don’t lose international competitiveness, either. That improves chances of a global emissions reduction outcome.

The consumption-destination approach has two key practical advantages:

• It’s World Trade Organisation (WTO) compliant. As long as the carbon tax applied to imports is the same as that applied to locally produced substitutes, WTO rules are not breached. This is why Australia’s GST and some other taxes get a WTO “tick”.
• It’s data-efficient. A country applying this model does not need to know the emissions embedded in imports of product “X”. The carbon tax on imports is the same as the tax on locally produced products. It’s based on the average emissions embedded in production of the indigenous product.

Sure, this is “rough justice”. Imports produced using hydropower are penalised compared with local products using LNG or coal. Imports using brown coal get off lightly compared with local products using black coal or diesel. But that’s what the current WTO rules require.

Which is “rougher justice” from an emissions reduction perspective? Applying a production-origin model that we know doesn’t work, or a consumption-destination model that gradually spreads globally, putting in place a comprehensive emissions price driving production adjustments that reduce emissions?

One final observation is crucial.