Garnaut Review favours carbon price over direct action

Those fighting tooth and nail against the carbon tax found justification on Page 17 of Ross Garnaut’s 2011 Climate Change Review released today. “Australian households will ultimately bear the full cost of a carbon price,” said Garnaut. The country’s biggest selling newspaper, the Herald-Sun’s report on the review chose this sentence as their first direct quote from the review. Opposition leader Tony Abbott also used it as his headline quote from the 40-page summary update to the review. The reason why is obvious: it is the line causing maximum political damage to Prime Minister Julia Gillard as it runs against her promise householders would be shielded from the tax.

That this quote is taken out of context is no surprise in the light of similar shenanigans. As British former Tory MP Iain Dale found out when he went to parliament today, Australia does a poor line in genuine debate and the response is as Professor Garnaut must have feared. When the political expediency above everything and the media game about conflict, a reasoned document such as this will get short shrift. The future seems far away when there is so much shit-stirring to do in the present.The future is very much on Garnaut’s mind. He brings the science up to date from his last review in 2008. There is a statistically significant warming trend and it did not end in 1998 or any other year. Science says matters have worsened since 2008 and its prognosis of drastic global warming is now established beyond reasonable doubt. Australia’s emissions trajectory has grown to 24 per cent above 2000 levels (a 4 per cent above the levels expected in 2007). As Garnaut says “this will not be easily understood by other countries and is likely to bring Australian mitigation policy under close scrutiny.”

All countries will closely examine each other’s efforts to confirm each is contributing its fair share. China is on a fastpath towards climate action and has also achieved success in implementation targets with widescale regulatory changes in energy and innovation. The Cancun Agreement has pledged Australia to 2020 targets of –5% to –25% of 2000 emissions with a review in 2014. Garnaut said it was in the national interest for effective mitigation to make the emerging arrangements work.

He looked at the two models to reduce carbon emissions: a market-based approach, built on a price on emissions; and a regulatory approach, or direct action. In the market-based approach, carbon can be priced either by fixed-price schemes (carbon taxes) where the market decides how much it will reduce the quantity of emissions or by floating price schemes (ETS) which permits to emit are issued to a set limit. The permits are tradeable so the market sets the price. In the alternative route, regulation or direct action, there are many ways that government can intervene to direct firms and households to go about their business and their lives.

Garnaut prefers the carbon price option. For one, it raises considerable revenues that can buffer the transition. Much of this revenue could be used to reduce personal income tax rates on households at the lower end of the income distribution and would encourage labour force participation. Some revenue should also be used to purchase carbon credits from the land sector and also to support the business sector to innovate emissions-reducing technologies. It has less short-term negative effects on productivity growth and incomes than “direct action”. The other problem is direct action relies on the ideas of a small number of politicians and their advisers and confidants, subject to lobby pressure. “While some of these ideas might be brilliant,” Garnaut said, “they would not be as creative or productive as millions of Australian minds responding to the incentives provided by carbon pricing and a competitive marketplace.”

Electricity prices will go up in that marketplace, but not as much as they went up after 2006 due to distortions in price regulation of distribution networks. There would also be compensation, which did not occur in 2006. Garnaut suggests a starting price of carbon in mid-2012 as $20-$30 rising at 4 percent a year. An ETS will need to be administered by an independent authority such as a Carbon Bank. By 2015 agriculture will need to be brought into the fold, perhaps in line with New Zealand’s plans to do exactly that.

Garnaut says householders will bear the full cost of a carbon price as international markets will determine returns to capital. But this is why “it makes sense from equity and efficiency perspectives for households to ultimately receive the vast majority of the carbon pricing revenue.” Tax cuts will assist household spend money on goods and services that embody low emissions and the carbon price will set off a supply side adjustment to enable low cost emissions reductions.

Its not in the review papers but Garnaut has this to say about Australia being a small contributor to the world’s emissions and therefore should not take the lead. “We matter even on climate change, even though our emissions are only 1.5 per cent of the world’s, just like the UK matters with its 1.7 per cent.” The Tory-led British Government has pledged to cut carbon emissions in half by 2025. That is “direct action” Tony Abbott and the anti-carbon tax cheer squad would have nightmares over.


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