It’s interesting how within an hour or so of the release of the Productivity Commission Report yesterday that commentators were lining up on both sides of the debate to use it to justify their positions. I thought it would be useful to point out what the report doesn’t say and therefore the conclusions that can’t be drawn from it.
The first thing is that due to either or both of its terms of reference and the timeframe available, the number of countries that it analysed were a small subset of the countries that Australia competes with. It analysed those countries that have been most active in abatement policies (UK, Germany, NZ, Japan, South Korea, China and so on) but left out trading competitors like South Africa, Indonesia, Brazil etc. You can conclude simultaneously, therefore, that we are not “leading the world” on abatement efforts but that many of our competitors aren’t either, and are possibly further behind.
Another issue is that the carbon price equivalents calculated doesn’t say anything about distributive impacts on the economy, and especially on trade exposed emission intensive trade exposed (EITE) sector. This was also a problem with last year’s Price Tag on Carbon report by Vivid Economics. You can have, say, a $10/t implicit price on carbon while also having no impact on competitiveness. A good example of this are feed-in tariff that only apply to residential customers, or a mandated renewable energy target that exempts EITEs, or a taxpayer funded support mechanism to drive abatement while shielding large industry. Yes these infer a cost, but they don’t apply the cost to EITEs; the cost is spread to other sectors of the economy. A $10/t explicit carbon price, on the other hand, does have an impact on competitiveness but spares the taxpayer from the budget expense of the implicit policy measure.
Thus it was an inadequate survey to form an opinion on the relative harm or lack of harm from implementing a carbon price on emission intensive trade exposed industries. Whether or not this will then answer the questions that the members of the MPCCC may have remains to be seen.
It was never the stated purpose of the PC Report to demonstrate the effectiveness of economy wide carbon pricing, but that is one conclusion that can be drawn from it with greater confidence. By surveying a raft of alternative abatement policies, it shows that for the same (implicit or explicit) price of carbon, you get far more abatement for carbon pricing mechanisms relative to other mechanisms, or that you could get the same abatement for a much lower cost.
Lots of other countries are “leading the world” with abatement policies, some of them economically efficient and most of them not. So putting a price on carbon would not be leading the world in terms of the amount or vigour of policy measures, but it would be close to the head of the pack of efficient abatement policy if implemented as a broad-based carbon price. To the extent this has an impact on the competitiveness of some trade exposed industries, there is a strong, valid case for assistance, as Garnaut and others have put forward.
By efficient abatement policy, I mean policy that has a least cost impact on the economy as a whole. This will mean that jobs are lost in some sectors as they grow in other sectors. It will mean that electricity prices go up to signal the higher cost of clean energy to those using it. But it is more efficient in terms of cost incurred for abatement achieved for the economy overall. Other policies may be easier to implement politically, because they have a lower impact on electricity prices, but that doesn’t make them more efficient.
The abatement effort would become more efficient still, on this measure, if it dismantled the inefficient policies as the carbon price came in. After all, these other policies were implemented in the wake of successive failures over the last decade to implement carbon pricing but while there was still community pressure to “do something” about reducing emissions. So if the choice is made to reduce emissions in this country, any economic self-harm comes from implementing inefficient policy, rather than implementing policy per se.