Friday, June 17, 2011

But Ross, who has an economy-wide carbon tax?

Yesterday saw two very important contributions to the carbon tax debate being published.

First Greg Sheridan published a takedown of Ross Garnaut in The Australian.

The Age published an edited speech by Ross Garnaut reconciling his recent report with the Productivity Commission (PC) report on Carbon Emission Policies in Key Economies.

Sheridan has identified a fundamental problem with these two reports;  they cannot both be correct, one is wrong.  Garnaut has argued that Australia needs to act of climate change policy or will be left behind.

The PC report finds no such thing.  Within a government-selected group of countries Australia fares well.  The PC was able to identify 1,096 climate change policies across nine countries and Australia accounts for 237.  In bang-for-buck terms the PC found Australia did well.

So the argument that Australia is doing nothing is simply wrong.  The argument that Australian needs to adopt an economy wide carbon tax to avoid falling behind is also simply wrong.

The PC provides a simple answer to the question, ''How many countries have economy-wide carbon taxes?'' Answer:  no-one does.

In fact the PC was unable to execute their brief to provide an estimate of the effective carbon price per tonne of CO2-e faced by the electricity generation sectors.  This is because all the countries the Government chose for analysis eschew ''broadly-based explicit pricing for a myriad of less transparent, more narrowly-focused interventions designed to assist the production and consumption of selected, less emissions-intensive technologies, or penalise particular emissions-intensive products and processes''.

No other country actually does what Garnaut proposes.  This, you would think, poses something of a problem.  Garnaut, however, plans to brazen out any inconsistencies between his and the PC reports.  Garnaut wrote in The Age, ''The excellent Productivity Commission report has settled the question of whether other countries are taking action to reduce the risks of dangerous climate change.  It has also played a significant role in what is now a decisive victory for carbon pricing over regulatory intervention in the battle of ideas.''  But the ''excellent'' PC report finds no such thing.

True, other countries are taking action -- as is Australia.  In fact, at the last budget some of the Australian policies were actually wound back.  But the notion of decisive victory is not a victory for Garnaut.

Quite the opposite -- regulatory intervention is the world standard;  carbon pricing is a small policy and the PC tells us, ''Carbon taxes have generally not been used to date in the countries studied'' furthermore ''no country currently imposes an economy-wide tax on greenhouse gas emissions or has in place an economy-wide ETS''.

That leaves Garnaut in a difficult position.  He is proposing policy by assertion.  He tells us that adopting a carbon pricing policy and supporting innovation will allow ''Australia to catch up without putting prosperity at risk''.

But how would he know?

This policy has never before been attempted and Australia is not falling behind -- as the PC show.

In a 2010 report to the Department of Resources, Energy and Tourism the US-based Electric Power Research Institute concluded that low emissions were high-cost and there were significant technical uncertainties associated with their development.  That probably explains why most countries have not adopted them on any large scale.

Much is being made of the fact that China proposes to shut down a large number of smaller inefficient power plants and replace them with larger more efficient power plants.  This is an economic decision that has the consequence of reducing emissions.  Garnaut points to this outcome suggesting that the PC should have included this policy in its report.

The PC was attempting to measure abatement policy -- not business model improvement.  The Chinese are replacing expensive ''dirty'' energy with cheaper slightly less ''dirty'' energy;  Australian policy is aimed at trying to replace cheap ''dirty'' energy with very expensive less ''dirty'' energy.  The former is a business decision;  the latter is a policy decision.

The problem the Gillard Government now faces is that two important contributors to its carbon tax policy have provided very different information.  Clearly the PC report is a far more credible document than Garnaut's report.

This PC report is the first solid, serious and sensible report that we've seen on carbon tax policy after three years of debate.  The actual findings are not as conclusive as the Government would have us believe.  Given the difficulties that the PC faced in preparing the report it quite clear that the Government's proposed policy isn't quite the no-brainer they'd have us believe.

Good policy formation would rely more on the PC than on Garnaut -- yet it remains to be seen whether the Government will be more cautious and nuanced following the PC report.


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