Sunday, July 21, 2013

What's the difference between a carbon tax and an emissions trading scheme?

It's a serious question

If you are anything like the radio producer who phoned me Monday morning, you won't have a clue what Kevin Rudd just did.

“What's the difference between a carbon tax and an emissions trading scheme?” he asked. “Our presenter needs to know.”

It occurred to me that if neither of them knew the difference I had been doing my job very badly, along with all the other economics writers and also the politicians who thought up the scheme in the first place.

We have been doing it so badly that after a decade of talk about the schemes Tony Abbott thought he could get away with describing them as “a so-called market in the non-delivery of an invisible substance to no one" – a line he had apparently pinched from the UK Telegraph newspaper, demonstrating that dumbed-down descriptions travel further than information.

My defence is that I began writing about the schemes years ago. I set down in print what I knew at the time and then settled down to reporting on changes to them rather than standing back every now and then and explaining what they were.

Readers who didn't understand what I have written were apparently too embarrassed to ring up and ask. They're never embarrassed to ring up when they do understand and they disagree.

So here's the explanation I should have been including all along.

If we wanted to completely stop emissions of carbon dioxide and associated greenhouse gasses it would be simple (although suicidal – plants need carbon dioxide in order to create oxygen). We could simply ban them.

But in trying to slow climate change we are attempting something more subtle. We want to wind back the emissions by a specified amount each year...

We could do it by passing a law saying each existing emitter will have to wind back its emissions by, say, 1 per cent per year. It would get the job done, but it would be enormously expensive for some firms (who have no easy way of cutting their emissions) and very cheap for others (who could easily cut their emissions further). Industry would end up suffering far more than is needed to achieve a fairly modest goal.

Australia pioneered a less painful solution to this type of problem in the early 1980s. Blue fin tuna was at risk of being wiped out. But there was no need to completely ban fishing, just to wind back the number of kilograms caught. So the government handed out a limited number of “individual transferable catch quotas”. If anyone wanted to catch more than their quota they could buy a spare from someone who was happy to catch less and sell it at a profit. There were few complaints and blue fin tuna survived.

A few years later in the United States President George Bush Senior picked up the idea, signing into law a new act to fight acid rain which was caused by emissions of sulphur dioxide. He issued a limited number of annual permits for sulphur dioxide emissions, but each year fewer than the year before. Then he encouraged the Chicago Board of Trade to set up an exchange on which the permits could be traded.

Over a decade the price of permits for sulphur emissions climbed from $100 to $800 a ton. The polluters who could easily cut back found themselves with something valuable. Those that couldn’t found business increasingly expensive, but not so expensive as to force them out straight away.

Over that decade sulphur emissions halved throughout the United States. In some parts of the country acid rain fell 25 per cent. The annual saving in healthcare costs was said to top $20 billion.

That's the sort of scheme that Kevin Rudd is going to bring in one year early in mid 2014, one with a history of working. Until now the government has sold permits to whoever needed them for a fixed price (which makes them a tax). From next July it will issue a limited number of permits each year, and fewer in each successive year than the year before. Some will be auctioned, some will be given away, but the important thing is that they will be tradeable. Firms that can easily cut their emissions can clean up by selling their unwanted permits to firms that find it harder.

It's a better way of getting there, except that Rudd will also allow Australian polluters to use permits from the European scheme which are dirt cheap because of problems in the design of that scheme and the European financial crisis.

Eventually he'll have to wind back access to the European permits or hope the price improves if he wants to meet the Australian target. He is moving in the right direction, taking a detour through Europe.

In The Canberra Times, and Sun Herald 

Related Reading

. Emissions trading: A mixed record, with plenty of failures

. Yes, Virginia, there can be a free market in carbon

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