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Helensburgh coal mine. Credit: Damian Baker.

By Simon Hukin:

I admit, I’m a lefty. Even within the ALP I’m a lefty. I should be all for solidarity; standing firmly behind the party line. But sometimes, as the old hymn goes, one must dare to be a Daniel. The Rudd Government’s Carbon Pollution Reduction Scheme (CPRS) is doomed to failure, even if the Coalition (which is looking increasingly like a Punch and Judy show) doesn’t kill it first.

The debate this country has never had is not between global warming advocates and sceptics, as the Nationals would have us believe. Rather it is a debate centred around how to address anthropogenic greenhouse gas emissions. Most of the proposed solutions do little more than tinker around the lip of the catastrophe curve, dealing with mandating energy efficient globes, regulating energy star ratings, etc, etc. The big issue we now face is how to address the major causes of pollution – cars and agriculture, fossil fuel burning power stations.

The three most touted means of tackling our emissions problem are ‘command and control’, cap-and-trade, and carbon taxation.

Command and control boils down to the government simply ordering the polluters to clean up. Cap-and-trade (as favoured by the Rudd Government) is the creation of an artificial market for carbon; the Government sets a cap on the amount of carbon allowed to be emitted in any given time period and either auctions or gives away permits to those who can demonstrate a need. Once emissions have been reduced then permits may be sold to those who need them, and the level of the cap is gradually brought down to zero. Carbon taxation is imposing a tax on emitters relative to the quantity of greenhouse gas they emit and its concentration, in order to incentivise the reduction of emissions.

Command and control will be extremely damaging to some polluters, such as utilities that rely heavily on dirty, old coal-fired power stations. A great many will find it impossible to meet the state mandated goal, exposing them to severe punitive measures — the costs of which they’ll pass on to their customers. Of all possible approaches, it would have the worst effect on the economy. However, it would work. Emissions would be reduced, and people would be discouraged from purchasing high-carbon goods and services.

Cap-and-trade has theoretical merit – it’s potentially less expensive, generates profit and allows for reductions in emissions. However, it also creates opportunities for cheating, leads to unpredictable fluctuations in energy prices and does nothing to offset high power costs for consumers. This is, of course, not to mention the myriad problems which come with not auctioning permits – as the Rudd Government proposes. Carbon taxes, however, can avoid these problems almost by default, while providing a more reliable market incentive to produce clean, renewable energy technologies and reduce emissions in the process.

The Business of Emissions Trading

It’s not enough saying a cap-and-trade system will work in theory. Sure, the underlying economics behind a perfect cap-and-trade system are sound, but it is very unlikely any ETS ever developed will be perfect. Ours definitely won’t be. In order to fully understand the drawbacks of non-ideal carbon trading schemes one must examine the only one presently in existence, the European Union Greenhouse Gas Emission Trading System (EU ETS).

Under this scheme individual member states each developed emissions reduction targets, then handed out credits to polluters. However, thanks largely to the work of powerful big business lobbyists, the cap was initially set far above the level strictly necessary and the vast majority of polluters fell beneath it without needing to take any action whatsoever.

The power of lobbyists is a pressing problem. In Australia as in Europe special interests, particularly big polluters (who tend to be big business), infect the political system so totally and effectively that any decision which may harm their interests is immediately vetoed. Politicians are forced to tip-toe around the coal lobby, the energy lobby and especially the menacing figure of Heather Ridout from the Australian Industry Group. Industry wins, as we’ve seen during the process of exempting or compensating ‘trade exposed industries’, no matter the environmental impact.

Of course, Europe also highlights the problem of monitoring. Cheating the system is ludicrously simple – the environmental agencies of the member states are, in most cases, simply not strong enough to effectively police the quantity and concentration of emissions by individual corporations at individual sites. Polluters can fudge the figures without fear of reprisals. This may be avoided in Australia by providing for a strong regulatory authority, but this is, again, unlikely.

There is excellent reason to believe the polluters who are lobbying for the CPRS (particularly those represented by the Australian Industry Group and the National Farmer’s Federation) have a seat at the table when permits are being handed around. There’s no doubt they’ll attempt to either actually maximise their emissions or fudge their figures so it looks like they emit more than they do, in the hope of securing more permits. Why? There is a lot of money to be made in permit trading. Companies want to get their hands on as many permits as they can.

It is also likely the CPRS will have a deleterious effect on our power bills. Consider the recent spell of hot weather in South Australia and the eastern seaboard. Power companies have had to burn more coal to produce more power, causing their emissions to rise sharply. Under the proposed ETS they would have to purchase more permits in order to offset their emissions. This  heavy demand would see permit prices leap sharply, and the power companies would pass the associated costs on to consumers.

This inherent price volatility, which has been endemic to the EU ETS, doesn’t hurt end-users alone. It also provides a disincentive for innovation, as there is a high congruence between cost and demand, meaning there is no reason to invest in research into cleaner technologies. Investors (especially venture capitalists) prefer stable prices in order to accurately calculate potential returns. After all, they need to know if they’re going to make enough money from their newfangled solar-powered iPod to pay for its production.

Why I love tax, and you should too

Carbon taxes have none of these problems. The carbon tax is an incentive for polluters to clean up their act and to encourage venture capitalists to invest in innovative clean, renewable technologies, by making them more competitive. It is predictable and constant. It doesn’t have all the issues of creating an entirely new market, and it slots nicely into our existing bureaucracy. It’s also much more difficult for big business to distort the process – the tax is based solely on the amount emitted, after all, so there’s no chance for the corporate world to snaffle extra concessions.

It would also be far less detrimental to the interests of consumers. As Harvard Professor of Economics N. Gregory Mankiw suggests, a tax could be structured in such a way as to return much of the accrued revenue to consumers while still providing a disincentive to purchase emissions intensive goods and services or use more power. Rather than adding to the profits of large corporations, as an emissions trading market entails, the revenue from a carbon tax could (at least until carbon pollution has been eliminated) be used to cut other taxes such as income tax. This is both economically desirable – as a tax of this nature creates far less market distortion than an income tax – and good for the consumer. It only hurts the polluters.

Climate change is an international problem, and requires an international solution. One of the major problems the world faces in terms of reaching an international agreement is the historical reluctance of the US and China to accept any deal which treats them as less than equals. China will not accept fewer carbon permits per person than the United States, nor will it accept the use of a historical baseline. Such a baseline would reward the US for historically being the primary contributor to the problem.

However, if carbon permits were allocated based on population alone the United States would end up buying permits from China. Given the prevailing sentiment of the US electorate it is highly unlikely the Congress would embrace a system which created higher energy prices and transferred a great deal of its national income to the Chinese. It would be seen in the same light as foreign aid, and the controversy which surrounds US foreign aid programs is extensive.

Carbon taxation, on the other hand, is relatively simple to negotiate. All governments require revenue and a carbon tax is an effective means of raising some of that revenue. Money needn’t cross national borders. Each government could keep the revenue from its tax and use it to finance spending or whatever form of tax relief it considered best. Convincing China of the virtues of a carbon tax, however, may prove to be the easy part. The first and more difficult step is to convince Australian voters, and therefore politicians, that “tax” is not a dirty word.

Simon Hukin is a student at the Australian National University, General Secretary of the Western Australian Secondary Students’ Association, peripatetic music teacher and general curmudgeon. He is heavily involved in politics and the union movement.