At the risk of stirring up the howls of protests and calls for another election (if you don’t accept the outcome of the last one) or an early election (if you do), I thought I’d put forward a case for why I think the PM has a mandate to introduce the package she announced on Sunday. Based on opinion polls, this is very much a minority view, and therefore one worth putting forward on MB, although I realise this ventures very much into politics rather than sticking with the economics.
It all hinges on the critical difference between a carbon tax and an emissions trading system (ETS). I recall the day Gillard said “there would be no carbon tax under the government I lead”, and I remember thinking at the time, “well, good, I would also much prefer an ETS over a tax”. A tax gives you price certainty but no certainty over the emissions outcome, whereas an ETS (also known as “cap-and-trade”) gives you emissions certainty (eg meeting a -5% target by 2020) but no price certainty. Perhaps the problem is that this difference may not have been fully appreciated in voterland, especially in the marginal seats.
The package announced on Sunday is not a tax. It is an ETS with an initial fixed price period with a firm transition to a floating price regime after three years. In this respect, it is almost exactly the same architecture as the Rudd/Turnbull CPRS, and that envisioned in the Shergold Report under John Howard, which had an initial fixed price, then floating. Ironically, if the CPRS had got up (either by double dissolution, or a one vote difference in the Coalition party room in late 2009) the floating price would have been in effect for a few weeks now. That being said, while the price is fixed, the economic effect is the same as a tax, even through the administrative regime is very much different for a tax than for a fixed price ETS moving into cap-and-trade.
If Gillard had said instead “there would be no carbon price under a government I lead”, where the price refers to either a tax or an ETS (or both), then I would be agreeing with the majority opinion and really questioning the mandate. That statement would have underdone the clear mandate and bipartisan policy position at the 2007 election for a price on carbon, which carried through to the CPRS.
One could also cheekily suggest that the PM is perhaps not really leading the government when it comes to climate change, and is therefore not breaching the pre-election commitment! Having now read and absorbed the package, it is clear that there is a heavy Greens fingerprint all through it. It is a surprisingly ambitious and comprehensive package, yet there are some aspects of it that I believe are economically inefficient and unnecessary (eg contracts for closure, price collars). That being said, there is no real 100% pure ETS design; each scheme whether it be EU, NZ, US (previously proposed) or Australia is very much a function of the political environment in which it is created.