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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The Coalition's cheat sheet. What to say about carbon tax

Leonore Taylor has the background.

34 pages. Here's what they have to say:

Coalition Carbon Tax Talking Points


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The world is in good hands, Chinese hands - Michael Spence

Ask the Nobel Prize winning economist who has advised China on its latest five-year plan the question on every Australian economists’ lips and he doesn’t flinch.

“How long have we got? How much longer can China’s extraordinary explosion of economic growth continue,” I ask Michael Spence down a phone line to Italy where he lives six months of the year.

“I think the answer is something like two decades, in the later part of that they will start to slow down,” he says ahead of his book tour of Australia to promote The Next Convergence - the Future of Economic Growth in a Multispeed world.

He is a good person to ask. As well as actually advising China on its growth strategy, for the past four years he has chaired the World Bank sponsored Commission on Growth and Development set up to distill all that is known about how to drive economic growth and cut poverty.

His key insight about China is striking - that the sudden burst of growth that has revolutionised global economics and politics was the result of a conscious decision made by just a handful of people.

Deng Xiaoping and a few comrades could have decided to throw the switch to growth later - perhaps even in 20 years time; they could have decided to do it earlier, although not before Mao died and the Gang of Four were arrested in the late 1970s.

Deng and cronies decided first to allow the limited use of market prices for farmers selling production over and above what was required, saw the results were impressive and then semi-secretly invited experts including the then president of the World Bank Robert McNamara to give them advice on what steps to take next. Some of the meetings took place on boats on the Yasngtze River.

“What Deng asked for was not primarily financial capital, even though he was talking to the World Bank,” Spence writes. “Rather, it was knowledge. He realised intuitively the missing piece was know-how.”

Spence himself is now providing that know-how. When he sent over his thoughts for latest the five-year plan that began this year he felt his ideas being sucked out of him.

“They ingested. They didn’t just kind of get a couple of people read it, they sent to everyone involved in the five-year plan. It doesn’t mean they believe it. This is an economy that ingests ideas,” he tells the Herald...

It is the ability to take what works from the West that has seen China’s industrial revolution spark growth rates far faster than those during the first and second centuries of the West’s revolution. Starting very late has allowed it to use ideas, processes and machines that have already been tested to supercharge what used to happen more sedately.

When will it stop? Greenhouse gases might put a stop to it. More on that later. But otherwise it is hard to see a roadblock.

“This is a country with a per capita income of $5000. That’s a huge improvement over $300 but it is a long way from $25,000,” he says.

“What happens when you get to $20,000 - whether you turn out to be Italy or the United States or Germany - depends on a whole new set of factors. But the immediate challenge over the next two decades is to get over the middle income transition, to get to $10,000.”

“There are risks, the thing could blow up politically. It’s not a done deal. But if income is $5000 now, in 15 years it could easily double twice, even if things slow down a bit in the later stages. By then China will be a middle income country. In terms of sheer economic size all China has to do is double once more, then it will be comparable in economic size to the US or to Europe, depending what happens to Europe.”

But doesn’t China’s sustained growth depend on the rest of the US and Europe saying out recession.

Not any more says Michael Spence.

“Right now the emerging economies that are trading with each other are self-sustaining. They can grow even if the major industrial powers just plug along.

“If you go back ten years that wouldn’t have been possible. Weak growth in Europe or the United States of 1 or 2 per cent would have dented growth in China and associated emerging nations. But not now. China will become increasingly decoupled as time moves on. Its own emerging middle class will drive its own growth.”

But surely its billions of citizens will never get to the stage where they pump into the air pollutants at the rate of around 20 tonnes per person per year as do Australians and Canadians and residents of the United States.

No, they never will, says Michael Spence.

They will use much more energy per person. At the moment it is less than 5 tonnes. “But the realise they will have to deviate from our growth pattern before they get to 10 tonnes per person, where the Europeans are now. They will never get to Canadian or Australian emissions.”

“This is a new realisation, maybe just two years old. They are set to become so big economically, to have such a big stake in the planet, that they realise they will have to save the planet.”

“In the US people find China’s growth confronting. I know Australians don’t. It looks as it could work out well.”

Michael Spence will speak at the Grattan Institute in Melbourne on August 15 and at the National Press Club in Canberra on August 17.

Published in today's SMH and Age


China is preparing to take the lead from developed nations in saving the planet from climate catastrophe according to an advisor to the nation who worked on its most recent five year plan.

Nobel Prize winner Michael Spence who is about to visit Australia has told The Herald there has been a sharp change of attitude in the world’s fastest-growing big economy.

While it was set to continue to grow very strongly for two decades, underpinning Australia’s prosperity it would aim to approach developed nation standards of living without developed nation emissions per household.

“China and is starting to internalise these things,” he said.

“They are coming to realise that they will soon be big enough economically to put pressure on the entire globe’s environment. In a sense they will become much of the globe.”

“They are moving away from the free-rider problem you have in smaller places such as Australia where you say - why should we do anything, the US is not doing anything we are just shooting ourselves in the foot.”

“This is a real change. It is very recent. It forms part of their new five-year plan. It would date back a couple of years at most.”

Asked whether a small nation with big per capita emissions such as Australia should bother cutting those emissions Professor Spence said it was more important to take part in global discussions.”

“Australia can be influential, but it is not smart to get too far ahead. The Europeans are pertty aggressive, but they are suffering push back from their business community, and that will get worse with Europe’s growth problems.”

China’s new approach was part of a journey rather than a fixed outcome and it might still decide not to assist the rest of the planet and go for western-style emissions.

“At some time in the future China may face a choice between draconian measures to restrain emissions for the good of the planet and further growth. It may chose to go for growth regardless. If it does that I don’t know how my grandchildren are going to do.”

China’s emissions per capita remain a fraction of the West’s at less than 5 tonnes per person per year compared to 10 tonnes in Europe and near 20 in Australia, the United States and Canada.

China was reaching the stage where its growth would be self-sustaining. It would no longer depend on consumers in any other nation, relying solely on demand from its own middle class.

Published in today's SMH


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Joshua Gans on Henry and the academics

Gans is at present in the US and following the debate back home:

You know, you have to believe that Ken Henry really doesn’t understand academics at all when he publicly says stuff like this:

“Whenever an idea is ventured publicly by a person, whether that person is a policy advisor or whether it’s a government minister, there’s at least a handful of academics who will contest it,” he said. “I’ve seen it on both sides of politics – this is not a partisan comment at all – but for governments, government ministers who are seeking to get ideas legislated – it is unbelievably frustrating, incredibly frustrating.”

“It is a great strength of economics as a discipline. It is one of the things that as a young person I found very attractive about the study of economics, this contest of ideas. But I think there are occasions on which economists might, at least for a period, put down their weapons and join a consensus”…

Warwick McKibbon, appropriately sums up the position of we academics:

“I have enormous respect for Ken Henry, but he can’t believe that you should have consensus because it is better to have bad policy that everyone agrees with than eventually get god policy that will work.”

He goes on:

"If the government won’t engage you behind closed doors then an academic has no other choice than to express their opinion in the public interest in public for the public to assess."

Warwick, like many, have opposed the Government strongly on many policies. And in so doing, he has added to the debate and in some cases there is arguably success in getting sense put in place. It is tough thing to do and it frustrates me to see it so derided.

But I want to add a few things here. First, let me tell you, praising the Government is as thankless a task as critiquing it... I was someone who fell behind the Government and wanted to get the ETS done and said so publicly in the face of criticism myself. I was someone who fell behind the Government and argued that we should pay attention to the evidence on FuelWatch and give it a go. And I was someone who, after years of critiquing their broadband policy, praised them when they moved in the right direction. And was I ever able to be brought in to help improve these policies (something they could clearly use)? No. Whenever I tried I was given the clear message that there are insiders and there are outsiders.

Warwick is actually one of the insiders. I write blogs and occasionally newspaper pieces only to find the Government abandoning those policies that I supported for political and expedient reasons rather than on the basis of evidence. I find myself often wondering these days if it is really worth the effort to write long submissions to Parliamentary inquiries, conduct research in policy-relevant areas and stick my neck out at all only to wake up and find that we are all really just an annoyance anyway.

Second, this is isn’t a problem with just this Government. They are all like this. The Howard Government in the face of the clearest evidence that it was poor policy went ahead with the introduction and then increments to the baby bonus despite the strain that put on maternity hospitals. Where was Treasury then? How could it be that the mistake was made and then repeated two times with ample time and options to get around it? And I will continue to harp on me and fortunately I get to write textbooks so that our students can see what a broken evidence-based policy system looks like.

In the US, I can see that things are very different. The Government consults regularly with outsiders and genuinely solicits advice. I have seen it happen, not just here at Harvard but all over the place. In Australia, the aura is one of distance. Now I am not saying that Ken Henry or anyone else has to engage with me personally. Just being a professor commands no such right. But I would like to see him and the Government actually engage with some outsiders regularly rather than project the image of distance. But regardless, there is surely no right to consensus until the Government has earned it. They have far to go. If asked, I’ll gladly help. Otherwise, I speak my mind from the sidelines."


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