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Productivity Commission directed to ignore real emissions issues

By Geoff Carmody - posted Tuesday, 28 June 2011


The Productivity Commission's (PC's) research report Carbon Emission Policies in Key Economies has valuable, evidence-based, messages for politicians of all stripes, and some of their advisers.

There are more efficient and less efficient ways of abating emissions. Within the eight countries ultimately reviewed by the PC, both are evident. (Nine countries were covered in the PC's terms of reference, but India did not participate).

Australia can cut the cost of the emissions reduction currently being delivered – a lot. A broadly-based price on emissions (costing about $A9/tonne of emissions abatement) implies huge scope for Australia to swap better policy for the multiplicity of 'pissant' worse options in place (currently about 230 of them).

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As with tariff cuts, given the current abatement effort, unilateral action of this type is to our national benefit. This is the classic productivity enhancing finding we should expect from a PC doing its job.

However, under the Government's terms of reference and tight time constraints, the PC was unable to deal with two central questions. Securing a global climate policy deal hinges on answers to them.

First, what action is being taken to reduce emissions by Australia's trade competitors? (Australia's seven trading partners reviewed by the PC do not cover this group well). If the average answer for our trade competitors is 'zero' or 'not a lot', the PC results imply Australia is ahead of countries from which it has most to fear from 'carbon leakage' and related activity/job losses (and is ahead of the global average).

Garnaut concedes concern about loss of trade competitiveness is the most important single impediment to securing a global deal. In the light of the PC report, it would be useful for Garnaut and others to provide public, evidence-based, answers, rather than mere assertions, to questions like the following.

Do they agree with the PC's findings, and, if not, what evidence supports their disagreement?

Do they agree with the exclusion of the Chinese 'Large Substitute for Small' (LSS) energy generator modernization program from an assessment of what China is doing, and if not, why not? (The PC excluded the LSS program because the emissions abatement by-product of the LSS came at a negative cost. That is, the LSS is a 'no regrets' policy. There is a unilateral commercial benefit to China in implementing the LSS, with local pollution and greenhouse emissions benefits at no extra cost.)

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In praising the current Chinese effort on emissions abatement, does Garnaut exclude its LSS program?

Can they reconcile the PC's findings with assertions Australia is 'falling behind' on emissions abatement?

Second, accepting the PC's finding that broad, price-based policies (like an ETS) are more cost-effective than selective subsidies (such as 'direct action'), what's the most cost-effective broad price-based option?

Did its terms of reference allow the PC to answer this crucial question? To do so requires modelling of emissions pricing options under different assumptions about what our trade competitors are likely to do.

The PC is well aware of this issue. It is well placed to model different price-based approaches to emissions abatement.

These policy options could be modelled (under different assumptions about what our competitors are doing) as production or consumption-based taxes. Compared with the morass the PC had to deal with in preparing its research report, this modelling exercise would have been relatively easy. (I already have some preliminary results, but I'd rather the PC did the job.)

I'm prepared to bet that the Treasurer's recent claims that a carbon tax of about $A20/tonne will have a minor effect on Australian per capita incomes assumes our trade competitors also take action as part of a global deal. That's the assumption that underpinned the modelling for the CPRS a couple of years ago. Alternative assumptions weren't explored.

Suppose that, under Government instruction or otherwise, the Treasury modeling indeed makes this assumption. This would ignore the adverse activity, income and jobs implications of unilateral action by Australia to increase its existing average price on emissions.

Wouldn't this sort of risk management, if applied in a company, have the Board sacked?

The PC could not deal with this second question, but made the following observations related to it:

'…assessing the ultimate impact on producers' costs in Australia and abroad would also require that account be taken of any policies serving to counter the cost impacts of emissions reduction policies. It would also require comparisons with key competitor economies, which may include countries other than those the Commission was asked to look at in the present exercise.'

PC Research report, Carbon Emission Policies in Key Economies, Overview, page XL.

 

On policies that served to counter emissions abatement, the PC found that China was a notable offender in relation to biofuel policies.

More importantly, the PC's message concerning competitiveness effects of increased Australian emissions abatement is that more research is needed.

In Australia recently, much lip service has been paid to 'evidence-based policy' while honouring it in the breach. Absorbing the messages in the PC report, and following up where the PC indicated more work is needed, is an opportunity to put our money where our mantra is.

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An edited version of this article was first published by The Australian.



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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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