Carbon Pricing

I spoke in parliament on Australia's backsliding on climate action, while other countries almost universally do more to address the challenge.
Climate Change, 17 March 2014

I rise to speak tonight on the issue of climate change. As the House knows, the historic Australian climate change legislation, passed under the previous government, has seen significant improvements in our environment. Electricity sector emissions fell by 5.5 per cent over the year to September 2013; emissions from companies covered by the carbon pricing mechanism fell by seven per cent in 2012-13. Inflation was within the Reserve Bank's target band. Growth has continued. Productivity has modestly picked up. And we have not seen any Australian cities wiped off the map. The introduction of the Australian carbon pricing scheme was done in a manner which accords with textbook economics. While putting a price on the negative externality, that of carbon pollution contributing to climate change, we reduced income taxes for low- and middle-income earners to ensure that they became no worse off.

Labor went to the last election pledging to link our carbon price with international schemes. If we compare scrapping emissions pricing with moving to a floating price, the impact on inflation in 2014-15 is less than one-quarter of a percentage point. The government in Australia is running in very much a different direction from most countries around the globe.

A recent report by the global legislators organisation GLOBE, co-authored by the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, covered about nine-tenths of global emissions. That report catalogued almost 500 laws to tackle climate change—including: flagship legislation in developing countries including Bolivia, El Salvador and Mozambique; and key action in major economies such as China and Mexico. Indeed the report found that 64 out of the 66 countries had put in place or were establishing significant climate or energy legislation. Only two countries were backsliding: Japan and Australia. Japan is stepping away from some of its prior commitments as a result of the Fukushima nuclear disaster and scaling back its contribution to nuclear energy. Perhaps that is understandable given the circumstances of the Fukushima tragedy. Less understandable is Australia, which is walking away from carbon pricing for straight-out political reasons.

We had a consensus in this country for carbon pricing until one of the great tipping points in this debate: the victory by the Prime Minister Mr Abbott over the Communications Minister, Mr Turnbull, in the Liberal Party party room by one vote saw the bipartisan consensus for climate change collapse. Now the coalition are pushing for Direct Action, a scheme which Frank Jotzo and Paul Burke have noted is an attractive political phrase; the combination of two very positive-sounding words. But it is unfortunately fundamentally flawed. The reason for that is that, unlike carbon pricing, Direct Action does not allow us to pick the lowest-hanging fruit of emissions reduction opportunities. As the OECD has estimated, subsidy approaches involve an economic cost per unit of emissions reduction more than ten times higher than under carbon pricing. Because the baseline of what a firm would have emitted otherwise is impossible to verify, the result is that firms are probably delaying emissions reduction investment right now even as a result of the talk of Direct Action.

Direct action is a short-term policy with promised payments for five years worth of claimed energy reductions rather than the long-term solution of carbon pricing. While carbon pricing assists the government's bottom line, making a $3.6 billion contribution to cash receipts in the fiscal year 2012-13, direct action is funded by revenue from existing taxes. What we saw under Labor was a tax switch—and I emphasise the word 'switch' because when I spoke about this previously I was misquoted in a Liberal Party attack ad. A tax switch that sees lower taxes on work and higher taxes on pollution. The reverse system will involve higher taxes on work in order to subsidise polluters. As Professor Jotzo and Dr Burke note:

'Direct Action appears to be an ill-considered clunker, like the hastily chosen gift you bring to your aunty’s fourth wedding ...'

It is complex and bureaucratic as distinct from the simple, free-market solution of carbon pricing, which is, unsurprisingly, favoured by the World Bank, the OECD and the International Monetary Fund.

In a submission to the inquiry into the Direct Action Plan by the Senate Environment and Communications References Committee, Professor Ross Garnaut noted:

The Green Paper does not specify the objective of the Emissions Reduction Fund … The Green Paper makes no effort to meet the elementary requirements of good practice with new regulation:

As Professor Garnaut further noted:

'Rather than a Green Paper, what is before the Senate is a shooting of the breeze: the raising of a few of the questions that would need to be answered along the way to preparing a Green Paper.'

What we have at the moment is a proposal to get rid of a national cap. Without a national cap that we currently have under carbon pricing policies, the baselines and penalties need to set business facility by business facility. It is, as Professor Garnaut noted, 'a huge bureaucratic exercise'.

Professor Garnaut estimates that the lower bound for the budgetary deterioration as a result of shifting to direct action is $4 billion to $5 billion per annum and the upper bound extends several times above that. As a result of this, the emissions reduction targets, the five per cent bipartisan emissions reduction targets, are unlikely to be met, Professor Garnaut notes, unless the fund is as large a drain on budget expenditures as the sale of permits is now a contributor to public finances—that is even to get modest emissions reduction targets, but to meet the five per cent targets may well cost more than that.

The core of the problem is that the government is surrounded by climate change deniers. While the Prime Minister himself now says that he supports the science of climate change, having previously called it 'absolute crap', the renewable energy target is subject to review under a chair who is on the public record with statements that modern science is wrong in its knowledge that human activity is a major contributor to global warming. The scientific consensus around climate change is 95 per cent for anthropogenic climate change—about the level of certainty that scientists have that smoking causes cancer. The Prime Minister's No. 1 business adviser goes further still. In September of last year, Maurice Newman wrote in The Australian Financial Review claiming:

The CSIRO, for example, has 27 scientists dedicated to climate change. It and the weather bureau continue to propagate the myth of anthropological climate change and are likely to be background critics of the Coalition’s Direct Action policies.

These attacks on hardworking scientists are of a piece with the government's attacks on experts. This is a government that has never seen an expert that it did not want to attack. By contrast, under Labor we saw renewable energy grow. Under the renewable energy target, we saw more than a million households installing solar panels compared to only about 7,000 under the former Howard government, and we saw the creation of 8,000 to 16,000 jobs.

Former Treasury Secretary Ken Henry has described the Prime Minister's Direct Action scheme as 'bizarre' and when economists were polled on this at the Australian Conference of Economists a survey found that 86 per cent supported a carbon price or an emissions trading scheme with just six per cent supporting Direct Action. There is, as Matt Wade said at the time, 'near-unanimity among economists' for a market-based solution. That market-based solution is doing the job of reducing Australian emissions and Australia ought not be one of the only countries in the world that is backsliding on tackling climate change.

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