Wednesday, August 04, 2010

Wednesday column: Earth to supporters of an ETS - we have a problem

Listen up

Julia Gillard is right. Althoucagh ridiculed, never put to Cabinet, apparently abandoned by the new-look Gillard herself and awarded first prize in The Chaser's Cash for Policy Clunkers contest, her promise of a 150-person citizens assembly to consider climate change has a compelling logic.

As she put it a fortnight back when she thought the idea was a winner: "You can’t create a circumstance where our economy transforms because you have put a cap on carbon pollution and then three years later we have a new government come in and sweep it all away and then three years later you have a new government come in and put a cap back on. We can’t do that. We need a deep and lasting consensus."

She put her finger on the deepest and least-spoken fear of all the experts and enthusiasts who promote an emissions trading schemes.

It's that, instead of spending money gearing up to cut emissions in the knowledge that the price of carbon will climb, polluters spend their money lobbying to bring down the scheme or to bring down the government that proposed it.

Why not? It's worked before. They could advertise. They could set up a website along the lines of "Keep Mining Strong." They could help push a prime minister under a metaphorical bus. It'd be value for money.

We now know there's no guarantee a government or an emissions trading scheme could withstand such an assault.

Reserve Bank board member and internationally recognised economic modeller Warwick McKibbin has been pointing to the weakness at the heart of such schemes for a decade.

As he presciently described the problem back in the days when John Howard was thinking of such a scheme, "in a democracy, a policy doesn’t become credible simply by being written into law. Every subsequent government will have the ability to repeal the law or to relax enforcement until it is irrelevant. Why would an energy company want to make a long-term investment knowing that? It’d easier to lobby to neuter the law.”

His solution? "Bluntly, you’ve got to create a powerful lobby group that will vigorously resist backsliding"...

Carbon emissions would be illegal without a permit. But the permits would be freely available - literally free, for 90 per cent of the present pollution. That would ensure an immediate 10 per cent cut. (Unless polluters paid over the odds for extra permits to be sold by a Central Bank of Carbon - more on that later.)

The genesis in the scheme is the design of the permits and the way they would be handed out. Each would last for 100 years and would allow a specific amount of pollution in each of those years. Think of coupons attached to certificates, one for each year. The coupon for the first year would allow 90 per cent of current pollution, the coupon for the next year somewhat less, the coupon for 2020 - 20 per cent less, the coupon for 2050 - 50 per cent less, the coupon for 2100 something close to zero.

Half the permits would go straight to polluters. But the other half - and this is the clever bit - would be given away to every Australian household. Businesses would try and buy them. Wise householders would hang on to them, selling just the coupons each year, or leasing their certificates for a decade or so knowing they had an asset that would appreciate in value.

Real environmentalists could burn them knowing they had permanently destroyed the ability to emit carbon for free. But the important point is that the householders and businesses who held on to the certificates would own something of value and would want that value to appreciate.

Just as Tesltra shareholders want the value of their shares to increase and are minded to punish any political party that tries to attack it, Australia would have a built-in electoral constituency for appreciating carbon certificate prices. Our retirement incomes and our children's inheritance would depend on it.

It ticks quite a few boxes. The Greens would like it because it would drive an immediate cut in pollution and create the certainty needed to plan to cut pollution in the future. The Coalition ought to like it because it revives John Howard's dream of a nation of mini-capitalists.

And Labor should like it because it would get business off its back - once and for all. Because businesses could make a lot of money by selling their free 100-year permits rather than polluting (essentially borrowing from the future) they would wind down pollution without complaining and without the threat of a Great Big New Tax.

The government's bottom line would scarcely be affected. It would neither take in nor pay out the billions essential to the scheme that ultimately cost Turnbull and Rudd their jobs.

To make things even simpler a separate Central Bank of Carbon would adjust the price for extra permits, probably once every five years in line with changing climate science. It's what our Reserve Bank does now for interest rates. It's regarded as above politics and it suits both sides to keep it that way. Financial markets could bet on what will happen to the price, just as they bet on what will happen to rates. It would allow businesses to better plan and to hedge against unwelcome developments.

When McKibbin first modeled the idea last decade the critics thought it too elegant. It wouldn't be needed because once an ETS had been legislated business and politicians would play by the rules. They mightn't think so now.

Published in today's Age and SMH.
Photo: Andrew Meares

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