Exempting farmers from the CPRS: can we go the whole hog?

The Government proposes to exempt farmers from its Carbon Pollution Reduction Scheme (CPRS). This indefinite exemption covers direct cost increases otherwise arising if farmers had to purchase CPRS emissions permits.

Indirect cost increases affecting “upstream” and “downstream” supply chain inputs (for example, farmers’ purchases of electricity) will still increase farm prices, as measured from farm gate to final purchaser.

In GST jargon, farmers will be “input taxed” under the CPRS. This will increase export- and import-competing product prices. Eliminating these input cost effects on farm products would require exemption of the entire farm input supply chain. In practice, this covers most of the economy.

Farmers might be encouraged to reduce emissions by earning “carbon credits” for activities reducing greenhouse gas emissions (details aren’t available yet). If this shift from a “stick” to a “carrot” approach has merit, why stop at farmers?

Why not go the whole hog? Ditch the entire CPRS emissions permit regime, and adopt “carbon credits” incentives for the whole economy. After all, emissions reductions can be promoted two ways.

Taxes can be imposed on “bad” activities - emitting greenhouse gases. Alternatively, subsidies can be offered for reducing “bad” activities - reducing greenhouse gases.

In practice, bits of both approaches are envisaged under current policy in a number of countries.

Crucially, non-harmonised national action on climate policy is enshrined in agreements like the Kyoto Protocol, and national emissions production is the policy target for each country. In this context, rewarding reduced emissions, rather than punishing their production, has advantages.

Exports and import-competing products would no longer suffer losses of competitiveness if countries acting first were to subsidise emissions-reducing technologies for their own production, rather than taxing their emissions.

The “carbon leakage” problem for “first mover” countries would be eliminated. This would help remove impediments to developed countries acting ahead of developing countries, for example. “First movers” could act early, confident that late (or no) action by others would not adversely affect their international competitiveness.

If subsidies are less painful than taxes in producing the desired emissions reduction outcome, what are we waiting for? The CPRS taxation approach has failed since 1997 (the Kyoto Protocol) and earlier.

Sadly, there’s no “free lunch”. There are at least three practical problems with this approach.