From Rio to Copenhagen the model was wrong

The UN's Copenhagen climate conference was substantive failure and procedural debacle. Other assessments are dishonest or delusional. We must learn the lessons of history and adapt climate policy to reflect them.

Big-picture lessons have been evident for nearly two decades.

First, a big-bang synchronised response by all nations to global climate threats is a pipe dream. This was acknowledged in the UN Framework Convention on Climate Change in Rio in 1992 and in the 1997 Kyoto Protocol. Late last year, Copenhagen amplified this lesson.

Second, nations won't compromise economic growth by losing industry competitiveness in the name of mitigating climate change. This applies especially in the case of developing economies.

Third, a policy focused on where national emissions are produced, rather than where they are consumed, only made some sense under a big-bang synchronised global response. But it's been retained since 1992 despite failure to secure such a response.

Under a non-synchronised approach, this emissions production model generates national concerns about loss of competitiveness, job losses and carbon leakage. Nations won't play or will only play dirty, via extensive policy exemptions, using this model.

Fourth, a focus on emissions reduction targets and their distribution funnelled negotiations into sterile, zero sum debates about who will commit to what emissions reduction outcomes when. There has been insufficient emphasis on putting a price on emissions, comprehensively applied and growing predictably through time.

This caused many problems, including failure to start pricing emissions globally. No emissions price, no emissions reduction. No surprises there.

Fifth, we have failed to learn the preceding four lessons of history.

There are other lessons. Emissions trading schemes don't work well in a non-synchronised policy context. There is too much scope to avoid the policy by exploiting exemptions. They have had little effect on emissions where applied (carbon leakage aside).

They have produced highly volatile carbon prices (around a low average), and they're subject to all sorts of carve-outs, undermining their effectiveness. They have been "permit churn machines".

Carbon offset schemes such as the UN Clean Development Mechanism and the Reducing Emissions from Deforestation and Degradation scheme are susceptible to corruption and fraud, as has been seen recently in Papua New Guinea.

From Rio to Copenhagen, the lesson has been loud and clear: it's the wrong model, start again.

We need a different approach. To start with, assume the present state of climate science at least suggests nations should take out insurance against human-induced global warming.

Next, we need a foundation on which to build the policy architecture: that is, a set of principles with which an effective climate policy should comply, applicable to all nations.

Principles for climate policy design, based on lessons from Copenhagen, Kyoto and Rio, are presented in the box. Sovereign government action based on these principles is more likely because impediments to such action - such as concerns about carbon leakage and related job losses - are removed.

Naturally, I think my consumption-based carbon tax model, which excludes exports and includes imports in a World Trade Organisation-compliant way, meets all nine principles. That said, on principle six, I think the prudent thing would be to get an independent body such as the Productivity Commission to model all options and come up with a finding.

For what it's worth, on the basis of preliminary modelling the consumption-based approach is up to 77 per cent more cost-effective than the Carbon Pollution Reduction Scheme in terms of gross domestic product costs.

Who knows? There may be even more effective options available out there. But the priority should be to get broad agreement on the design principles first, to ensure subsequent negotiations aren't built on sand.

Alternatively, we could ignore the climate policy lessons of history, again. We could persist (wrongly) with the mantra that the CPRS is the only, or least-cost, option. If we do, despite the UN's Danish debacle, a fast-growing proportion of Australians will conclude a more cost-effective option for Australia is to do nothing, and rightly so. Australia's climate policy is ours to choose. We can choose an effective policy, or one that doesn't reduce emissions but does reduce jobs.

If we choose badly, others won't follow. If Australia really wants to lead by example, its climate policy must have two key features.

First, it must help reduce global emissions, not just shift them away from Australia. Second, it must not give Australia's trading partners a competitive free kick. If it does, they'll have a powerful incentive to milk the trade advantages and job transfers we'll be offering them. They'll have no incentive at all to follow our climate policy example.

History tells us where that option leads.

Principles for effective climate policy design

1. Effective responses to human-induced global warming come from sovereign government action restricting emissions, not aspirational, target-focused multilateral communiqués.
    
2. National emissions policies should apply as consistently and comprehensively as possible. They should neither provide special treatment for interest groups nor encourage them to seek it.
    
3. No country should be exposed to carbon leakage and job losses from its own climate policy action, and no country should be able to offload its emissions reduction effort on to other countries.
    
4. As a corollary of 3, international trading in emissions permits (if emissions trading scheme policies are adopted) should be proscribed or, at most, confined to trading between countries with similar emissions prices.
    
5. Countries can penalise emissions or reward emissions reductions, recognising that either course, in effect, puts a price on emissions. (Policies that do not price emissions equal business as usual.)
    
6. Countries should choose the most cost-effective policy option(s) to reduce emissions. Choice should be determined by independent, evidence-based, economy wide analyses of all feasible options, using accepted modelling methodologies.
    
7. National climate policies should be compliant with World Trade Organisation rules to avoid concerns about (more) protectionism.
    
8. Policies should be more about raising relative prices and costs against emissions production, and lowering them in favour of emissions reduction, than about lowering real living standards per se.
    
9. Policies should minimise regular government decisions on climate policy parameters. Decisions should be confined to, (i) the national price of emissions through time, or (ii) the national quantum of emissions through time, but not both. Emissions production or emissions abatement quantification should be determined by independent, appropriately qualified bodies.