Australia must relinquish the dream of targets, timetables, caps and trades until China, India and the US are on board. A nationally-based carbon coupon system is a promising alternative.
Forget 2010; Australia needs to admit that the giant developing economies are not getting any closer to embracing a target for greenhouse gas emissions. With the world’s financial markets at tipping point and Australia’s economy still heavily reliant on coal, a premature “cap and trade” system would be foolhardy.
A far more sensible route is to move now to a national carbon coupon (or hybrid) system without the auctions, caps and international trading. As we have seen with water, enormous savings are possible with the right incentives for business and households.
Released last week by Reserve Bank of Australia board member and ANU Professor, Warwick McKibbin, “Building on Kyoto: Towards a Realistic Global Climate Agreement” outlines just such a domestic scheme. A national plan retains sovereign control and delivers what business seeks; the economy-wide capacity to manage risk to promote deeper investment in carbon mitigation.
Setting targets for the year 2050 may be politically seductive, but India and China can’t even predict their own growth ten years out and they’re certainly not about to curtail it. We know from negotiating free-trade agreements that “mutual action” is more likely to succeed than complex global “cap and trade” arrangements, where actions of recalcitrant states simply shifts the burden to others.
McKibbin proposes national carbon emission coupons; essentially emission permits of varying durations which obviate the need for an auction or direct taxes. Coupons can’t be traded internationally but additional annual coupons are available from the government at an international price. Coupons are divided equally; half to our energy intensive producers (according to their 2001-5 average); the other half distributed per capita to all Australians. Expiring permits create a downward sloping carbon curve over many decades. Just as shares pay dividends, Australian citizens can rent their coupons back to industry as compensation for increased costs of living associated with higher energy prices. The higher the costs, the more the coupons are worth.
A known carbon curve means more certainty for energy providers and users, allowing them to make long-term technology investments where a fluctuating carbon price would not. Each nation avoids hitting its diminishing carbon curve, when its industries become more efficient or acquire coupons from less efficient rivals.
Hedging against carbon risks makes sense to a liberalised finance sector. Growth industries can hedge by acquiring coupons or gamble that technical improvements induced by carbon constraints will keep them affordable into the future. The arrangement is preferable to collecting carbon taxes up-front then attempting to compensate the vulnerable through imperfect redistribution.
McKibbin’s proposal retains decision-making within sovereign states, with the safety valve option of industry purchasing short-term permits from the government at an international price. So there is an international component, but one state’s irresponsibility doesn’t flow through to others.
Distributing coupons to the population means we each have a stake in the integrity of our national system, rather than a centralised “cap and trade” arrangement where every participant from individual to nation has an incentive to dishonestly understate their consumption. A coupon-holding population has good reason to self-regulate and prevent abuse.
Australia was a black sheep of the international community on Kyoto, taking the principled but unpopular position that it was impossible to set realistic targets. Nations made little attempt to meet their Kyoto targets, no one took the penalties seriously and too many nations were grandstand spectators. Australia’s celebrated ratification came after the agreement was already in disarray.
Rushing into an emissions trading scheme by 2010 has serious implications for Australia. No other country has such a tiny global footprint (1.5 per cent of global greenhouse emissions) yet as much at stake economically from a flawed “cap and trade” system.
Unfortunately for Australia, our reliance on hand-picked but non expert economists is leading us down a very different post-Kyoto path. As if making up for lost time, we are racing to design a technically perfect carbon tax which faces evisceration by exemptions demanded by politicians. That could do more harm than good.
Many nations will struggle to sign up to a carbon tax for which the costs are large and uncertain. The impact on machinery and vehicle sectors, chemicals, metals, paper, plastics, agriculture and food will vary for each signatory. International carbon trading means external shocks are transmitted to other nations in a “zero-sum game”. Lastly, signatory nations have to churn carbon tax revenue back to compensate vulnerable citizens. This is a very impure science at the best of times.
Climate change’s rate-limiting steps are the giant developing economies. This week, China supported the election of Robert Mugabe at the UN. When one also considers China’s actions in Darfur, it is clear that self-interest still trumps altruism. For the other half of the world with incomes below $10 per day, there will be little appetite for adding a 20 cent carbon tax to fuel which is already subsidised.
Last century, 44 nations tried to fix the price of money to a gold standard at Bretton-Woods. They failed. Enforcing a global price for carbon will be even tougher. Elements of McKibbin’s proposal avoid the pitfalls of a global “cap and trade” and deserve urgent consideration. Unlike the gold standard, this time we don’t have the luxury of decades to urge imperfect administrations to adopt a perfect carbon tax.