From Professor Warwick McKibbin today:
The basic problem is that the debate on climate policy is a battle between extremes…Climate policy design is not about certainty and targets. Climate change policy is about managing risk given enormous uncertainty.
…How does this problem of extremes translate into policy? In Australia some people believed the former Labor government policy of introducing a carbon tax at a high level and then switching into a carbon trading system based on the European model was a good idea.
The problem is that the European scheme will likely have a low carbon price. This created a high carbon price in Australia that was expected to fall over time, which created high economic costs and very little investment in reducing emissions given cheap permits are likely to be available from Europe.
…The Coalition government’s Direct Action plan is based on a reverse auction where firms announce emission reduction plans and the government pays for these up to a given target of reductions…Given the targets and the expected trajectory between now and 2020, this is just as likely to reduce emissions as the alternative carbon tax or emissions trading schemes…the question is how adaptable is the policy to changing global circumstances…The costs of deeper cuts under a Direct Action style of policy will increase sharply because only a small share of emissions will be required to carry a rapidly rising burden…the fiscal deficit will be put under strain because funding will need to pour into the Emissions Reduction Fund.
That sums it up very nicely. A carbon price is scalable, Direct Action isn’t, for all intents and purposes. I have a couple of quibbles.
Representing the $28 carbon price as an “extreme” of the debate is false. For that to hold we’d need to have seen economic damage and we didn’t. That level of price was really only bringing Australia into line with other major nations on achieved abatement, even if it did lead them intellectually. The implicit comparison with the low European price is not an apples versus apples comparison because Europe has so many other abatement programs in place of carbon pricing that Australia does not. For instance Germany has reduced its emissions by 25% from 1990 levels. For Australia to replicate that the carbon price here would need to be a lot more “extreme” than $28.
Having said that, the structure of a falling price over time was bothersome, but it should have proven a medium term issue not long term.
That rhetorical point aside, Professor McKibbin neatly captures the challenge for the Liberal Party as the debate moves forward. It’s leader effectively punted on zero climate action by the world when he swore in blood to destroy carbon pricing and offered an unfunded Direct Action plan in its place. If the world does move forward with stronger abatement, Direct Action will now punch a massive hole the Budget – $30 billion in 2025 to match US abatement pledge according to Treasury modelling – the fixing of which was Abbott’s other key election pledge. Thus, the bill will go to tax-payers, whereas under a carbon price the polluter pays and price rises are offset for households via tax cuts.
So, if greater carbon action does arrive in Paris, the national choice will come down to paying an exorbitant price to retain Tony Abbott or an equally climate-cynical replacement, or to dump Abbott and move back towards carbon pricing with Malcolm Turnbull, or Labor.
It may seem an obvious outcome but let’s not forget that we paid scores of billions of dollars to elect Julia Gillard when she gutted the mining tax.
