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Drop the ‘direct action’, by far the best option is a carbon levy

By Geoff Carmody - posted Tuesday, 27 July 2010


The political consequences of this are depressing. The economics are more so. All direct action measures put a price on carbon. They do so in an inefficient, ineffective and hidden way. Yet it seems mainstream politicians are prepared to pay a lot to purchase a hidden approach to putting a price on emissions.

As recent experiences attest, governments often aren't good at direct action. Look at home insulation, green loans and the green car debacles. The first two were rorted or abused. The third produced a market dud. It was old-style protectionism.

All three cost a bomb and failed to produce much - if anything - of their intended outcomes.

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Should we go back to the Rudd-Turnbull Carbon Pollution Reduction Scheme and put a price on emissions that way? Certainly not. It was a dog of a policy, with too many escape clauses. It was dishonest, inefficient and ineffective. Putting it on the back burner was a step towards good climate policy.

More generally, emissions trading schemes are scams in practice.

Trading in emissions permits - especially importing them - would have been a paper-shuffling exercise using funny bits of paper, right up there with “collateralised debt obligations” and “securitised assets”, and all the other oxymoronic-sounding instruments that lay at the heart of the global financial crisis. Indeed, during the GFC, in Europe, liquidity pressures crushed the price of EU emission permits so much that they became subprime assets.

Let's be clear. If we want to reduce man-made greenhouse emissions, we need a clear and broadly applied price on emissions as the signal to start reducing them. We need a price on carbon.

A carbon tax, based on our national consumption of emissions, is likely to be the most efficient and effective option. This would exclude our exports and tax imports. It won't adversely affect our international competitiveness, even if we act unilaterally. That feature makes it attractive to other countries, too. It would greatly improve chances of a global deal, which has been the target of the ineffective flailing around we've seen from Rio (1992) to Copenhagen (2009).

It's cheaper than direct action and delivers superior emission abatement results.

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The lever driving emissions reductions is price, however introduced. We should be upfront about getting a globally applied, predictably rising, price on emissions in place. That delivers greater investment certainly, drives changes in technology and, globally applied, cuts emissions.

This isn't a recipe for poverty.

We're trying to raise prices of emissions-heavy products compared with greener products.

We're not trying to cut real incomes. Using most revenue from a carbon price to cut other distorting taxes and increase welfare payments can achieve the first effect and avoid the second.

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First published in The Australian on July 14, 2010.



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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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