Tuesday, September 02, 2014

The carbon tax isn't dead, just resting. Abbott's RET review points the way

Like John Howard before him Tony Abbott has set in train a series of events that will lead to a price on carbon.

Howard set up his 2006 prime ministerial emissions trading taskforce in order to kill the idea. Fairfax reported at the time it was stacked with miners, bankers and power industry representatives. Its terms of reference required it to advise on the nature and design of a workable global emissions trading system in which Australia would be able to participate.

Note the use of the word "global". Howard said the one thing it couldn't do was recommend a standalone Australia-only emissions trading scheme. Its "sole remit" was to say what shape a global scheme might take.

But once established, the taskforce was beyond his control. Its get-out clause said it could consider "additional steps that might be taken in Australia consistent with the goal of establishing such a system".

It found that it would "be difficult to reach international consensus in the near future". In the meantime, Australia should cap its emissions and should do so "at least cost".  A market-based trading system that put a price on carbon would do it at the least cost.

Howard was about to face an election. He announced the emissions trading system.

Fast forward to another prime minister keen to kill an idea. Abbott appointed a panel to examine the Renewable Energy Target that was predominantly hostile to it. But like Howard's taskforce years earlier it was staffed by public service economists charged with examining the evidence...

Last week the panel found against the RET, but in a way that has again built up the case for an emissions trading scheme. The panel found the RET had two failings. One was that it ensured new solar and wind generators grabbed business from existing (predominantly coal-fired) generators. This wasn't so much a failing as a design feature. The other was that it was an expensive way to cut emissions.

Cost matters, the panel said.

"The cost of abatement is an estimate of the cost of a policy measure in reducing carbon dioxide equivalent emissions, expressed in dollars per tonne of abatement. It is a tool that enables an assessment of the relative cost-effectiveness of different emissions reduction policies."

That tool showed the cost of using the RET to reduce emissions was $35 to $68 per tonne of carbon dioxide or equivalent.

It is, as the panel says, on the high side. But compared to what?

Compared to the carbon tax. Labor's carbon tax cost $24.15 per tonne. Half way through next year the tax was due to transition to a true emissions trading scheme which allowed polluters to buy and sell emission permits and trade them overseas pushing the cost down to around $10 per tonne.

If cost per tonne is the best tool to assess the worth of an emissions reduction scheme, Australia's planned trading system is about the best there is, certainly much better than the Coalition's yet-to-be-detailed "direct action" policy.

Direct Action establishes a fund that will award grants to companies that come up with promising emission reduction schemes.

Using the RET review's favoured measure it looks appalling. In 2010 the Audit Office calculated the cost of earlier grant-based emission reduction schemes. The average was $140 per tonne. One cost as much as $447 per tonne. And their administration was a mess.

Firms were reluctant to devote the time needed to comply with the red tape and the bureaucrats were unable to process applications quickly. The Audit Office found it commonly took two years before approved programs could start. None of the grant-based schemes managed to spend more than 40 per cent of its budget.

In an early recognition of this (and perhaps to save money) this year's budget slashed the four-year total that the Coalition was to have allocated to Direct Action from $2.55 billion to $1.15 billion. Environment minister Greg Hunt says the $2.55 billion will still be there if it is needed, but it may not be if the scheme is riddled with the delays the Audit Office found were typical of such schemes.

An emissions trading system wins hands down on the RET review panel's prefered measure.

As the taskforce that reported to John Howard late last decade discovered, such a system is by design the cheapest possible means of reducing emissions.

It charges big polluters as much for the right to pollute as is needed to achieve the reduction target, no more. Businesses that buy permits they no longer need because they have cut more emissions than expected can cash in by selling their excess permits to another business that needs them more. Businesses that find it expensive to cut their emissions will buy permits rather than pay the cost. Businesses that find it cheap will sell permits and cut emissions. It'll ensure emissions are cut by the cheapest possible means first. That's why the panel of business figures, energy companies and bankers appointed by John Howard fell in love with it.

Cheap is good. Abbott's panel is pointing us back towards cheap.

In The Age and Sydney Morning Herald target="_blank"


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