From 1 July 2014, the Rudd Government promises to 'terminate' the carbon tax and move to an emissions trading scheme (ETS) linked to its European counterpart.
If this latest climate policy promise is actually implemented, carbon prices are not 'terminated'. They are determined by the ETS 'market'. Prices become more uncertain and volatile. Is this a better approach?
With a Federal Election imminent, on climate policy, we should review what we are doing – and why.
Ministers spruik an ETS as the most efficient, market-based, way to price and reduce emissions.
Really? What sort of 'markets' are the European and Australian ETS (both being 'cap and trade' schemes)?
Demand for emissions permits is determined by greenhouse gas emitters that must account, and obtain permits for, their emissions. Liable emitters are determined by governments. Governments allow many exceptions and selectively provide substantial numbers of permits free of charge or heavily discounted.
Governments also set the aggregate supply of permits within their jurisdictions, possibly on the advice of a government-established advisory body, like the Climate Change Authority in Australia. They also regulate energy supply sources (eg, renewable energy targets). The Productivity Commission has already found these extra layers of regulation to be very inefficient and costly. It recommended their termination.
Given total permit supply, permit holders can trade their permits, selling them at mutually agreed prices to buyers. This trading part of the ETS is supposed to ensure that 'the market' determines emissions reduction at the lowest cost. But this trading is circumscribed by yet more government controls.
Under 'linkage' with the European ETS, and for access to other (eg, developing country) permits, Australian emitters have limited capacity to purchase permits offshore. There are even more stringent limits on foreign purchases of Australian permits. So market arbitrage is compromised by more government regulation.
The ETS 'market' is defined and suffocated by extensive government regulation. Aggregate permit supply is government-determined. It's subject to their policy whims. Property rights are uncertain and evanescent. The ETS is a political football where, as now, considerations other than reducing emissions often take precedence. For example, a $6 carbon price is politically more attractive than $25 for hip-pocket reasons.
To describe these ETS models as 'free' – or, worse, efficient – 'markets' is a triumph of rhetoric over reality.
Why are we indulging in this regulatory orgy? Supposedly, we want to reduce anthropogenic greenhouse gas emissions to limit global warming. Putting aside the debate about the science – which, while healthy, hardly suggests all agree the matter is settled – are we going about it the right way?
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