Tuesday, July 01, 2008

Tuesday column: You want to include petrol in an emissions trading scheme...

...but you don't want to push up its price.

Welcome to the strange world of emissions trading.

We will know more when Professor Garnaut releases his 600-page draft report
here on Friday. The ABC will televise the event live from 12.30pm. Here's my column:

What if they brought in a scheme designed to raise prices that didn't raise them?

Would it be a scheme designed to raise prices at all?

That's the conundrum at the heart of the gymnastics both sides of politics are engaging in over Australia's planned emissions trading scheme.

They both support such a scheme. They both went to the last election saying so. They just don't want it to push up the price of petrol.

''Bowser parity'' is the phrase. The idea is that it's okay to include petrol in the emissions trading scheme due to start in 2010, just so long as other taxes on petrol are cut, so that the price of petrol remains unchanged.

The Opposition is actively promoting the notion. The Government's climate change cabinet subcommittee reportedly endorsed it last week.

For an indication of just how serious the Government is about it, look no further than its treatment of the Garnaut report...

It commissioned Professor Ross Garnaut to report on climate change last year while it was in opposition. At the time, Kevin Rudd praised the ANU economist's ''wealth of experience'' and said that if Labor took office it would ''help shoulder the burden of ensuring that this important piece of work is taken to completion''.

Garnaut will come down in favour of charging every Australian polluter for emission permits and denying all but a few of them compensation. He will also insist that petrol retailers deserve no special treatment.

And so rather than waiting for the ''important piece of work'', carefully considering it and then responding, the Government has fast-tracked the process while relegating it to the status of an ''input''.

Garnaut has booked the National Press Club for Friday to launch his draft report. Climate Change Minister Senator Penny Wong has booked the Press Club for July 16 just 12 days later to launch a green paper responding to the draft Garnaut report, and just about every other ''input'' to the debate.

She notes that the professor is ''an esteemed economist and his contribution will be well considered by Government''. But she says her green paper will outline her ''thinking on these issues, informed by a range of matters, including Professor Garnaut's report, including advice from within the Government and, of course, including the consultations with business, with industry that Government has been undertaking''.

In other words, it will kill the debate. Why pay too much attention to what the professor is recommending when just 12 days later the Government will outline what it actually plans to do?

Would the ''bowser parity'' that the Government is likely to promise in its green paper nullify much of the effect of its emissions trading scheme?

To answer that, it is necessary to examine first what an emissions trading scheme is. Many of us don't know understandably, given the unusual nature of the idea. But we will need to know or none of what we are in store for over the next two weeks will make much sense.

Usually when the authorities don't like something they ban it. But carbon emissions are different. If we banned them altogether we wouldn't be able to breathe out. Air travel would be difficult as well.

When we want to limit something but not ban it entirely, we either tax it or license it. It is possible to think of an emissions trading scheme as a carbon tax, and that is often how it is described. But it is more like a licence.

In order to limit the number of southern blue fin tuna that are caught each year, the Government first decides on a limit in that case 5265 tonnes and then grants licences only for the capture of that much fish. If it wants fewer fish caught in future years, it cuts the number of licences.

That's how an emissions trading scheme of the kind to be recommended by Garnaut would work. Every few years the number of greenhouse gas emission permits would be cut, until by 2050 Australia would be emitting 60 per cent less, or perhaps 90 per cent less gas, than it does today depending on the target adopted.

Garnaut wants the permits auctioned. Economic modelling conducted by the CSIRO suggests the auctions would raise a lot of money more than 1 per cent of Australia's GDP; about one-third of the total tax take of Australia's state governments.

The emissions trading report presented to John Howard wanted the big polluters (or the firms likely to suffer a ''disproportionate loss of value'') to be given their permits for free.

However issued, the permits could then be traded, which is why the scheme is called an ''emissions trading scheme''.

If one finds that it can cut its pollution and no longer needs as many permits as it had bought (or been given) it can sell them and pocket the revenue.

If another firm finds it difficult to cut pollution it will be able buy the permits it needs at an increasing cost.

The ''trading'' will reward those firms that can easily cut pollution, while allowing firms that can't to (more expensively) remain in business.

It will push up the price of power produced by Australia's existing coal-fired power stations while increasing the reward for generators who switch to solar or wind.

If it is applied to petrol, it will push up the price of driving the cars we have while increasing the rewards for switching to smaller ones.

So would cushioning the effect of the scheme on petrol prices stop it achieving its effect?

Perhaps not. The CSIRO's Dr Steve Hatfield-Dodds, who has
modelled the effects of the schemes, says it mightn't be a bad use of some of the money raised so long as all that was cushioned was the initial effect on the petrol price.

''The main way that we respond to higher petrol prices is by changing the type of cars we drive, and we can't do that immediately in any event. So long as people believe that because of the scheme the price of petrol will rise over time, you'll get most of the effect you want,'' he says. ''You can afford to shield people to start with, so long as you make it clear it's a one-off.''

Hatfield-Dodds says it would be better to protect people in another form perhaps by cutting car registration fees or handing out a tax cut, anything that shields people from the pain they are about to face but keeps the effect of that pain in place.