Initial Analysis of the Gillard government’s ‘Clean Energy Future’ Proposal

Posted on July 11, 2011 by


BY BEN HABIB.

On Sunday 10th July, 2011, the Gillard government announced the details of its long-awaited carbon tax—the Clean Energy Future scheme.  The hype surrounding the announcement was justified; for a number of reasons, this was one of the most important public policy announcements since Federation.  I have a cautiously favourable view of the scheme, based on clear scientific evidence about the seriousness of the climate change threat and expert analysis indicating that a market-based carbon price is the cheapest and easiest way to achieve comprehensive nation-wide greenhouse gas emission reduction.

Why is a carbon price necessary?

As I’ve emphasised many times previously on this blog, we need to begin any discussion of climate change policy by recognising the inarguable fact that the Earth is a finite system which has a limited capacity to supply resources to and absorb wastes from human activity.  On the basis of compelling scientific evidence, it is increasingly clear that these limits have been reached, particularly with regard to human-induced greenhouse gas emissions and climate change.

This overwhelming scientific evidence demands timely, strong greenhouse gas mitigation measures because time is of the essence.  We cannot afford to waste further time debating the merits of different methods of carbon abatement without taking concrete action because of the increasing frequency and magnitude of climate-related impacts, which are tracking the upper end of IPCC prediction ranges, and because of the danger that human-induced emissions are on the cusp of pushing the Earth’s climate system toward tipping points, beyond which it will undergo abrupt, violent transformation.

Climate change is a global problem impacting all human societies, therefore every person on the planet has a responsibility to reduce their greenhouse gas emissions, both individually and in the collectives in which they are members (country; workplace; social organisations; family).  This responsibility is innate because we all have an equal stake in the outcome, regardless of what others are doing.

We do not have direct influence over government policy in China, the USA or India, but we do have control over what we can do.  It is often said that as a middle power, Australia often “punches above its weight” in the international arena.  By pulling our own weight, Australia can wield indirect influence over other countries by setting a good example and providing a template that policy-makers in other countries can aspire to.

What is the objective of pricing carbon?

Authoritative studies have demonstrated that the costs of carbon abatement and adaptation to climate-related damages will increase dramatically over time.  Therefore, strong policy action now is clearly the cheapest method of addressing the climate change threat.

Up until now, businesses have been free to pollute the atmosphere with greenhouse gases free of charge, while the cost of addressing the impacts of that pollution has been socialised—borne by governments and therefore ultimately by taxpayers.  It is not unreasonable to ask that those who make a mess be responsible for cleaning it up, which is exactly the objective of pricing carbon.

I understand that the up-front costs of greenhouse gas abatement are a turn-off for many people.  However, I can’t emphasise strongly enough how this up-front investment will pale in comparison to the future costs we will incur if we do nothing.  As Sir Nicholas Stern pointed out in his landmark report for the British Treasury and reiterated by Professor Ross Garnaut’s 2008 and 2011 reports for the Australian government, the bill we will rack up by inaction will include losses due to climate change impacts as well as a much higher price tag for the disruptive process of larger and more rapid emissions reductions.

It’s not matter of the false choice between a carbon tax and business as usual.  The real choice we face is between uncomfortable but relatively mild up-front costs now or the increasingly monumental costs of last-ditch mitigation and adaptation measures as we move into the future.  From a long-term strategic perspective, failure to recognise this equation represents both bad economic management plain stupidity, in light its clear economic logic.

With that in mind, the next question that comes to mind is the form that such strong emissions abatement might take.  A carbon price is desirable because as a market-based mechanism, it is more likely to drive economy-wide greenhouse gas emission reductions than a series of ad hoc government interventions.  Complimentary government policy interventions will be necessary to satisfy niche objectives that the market is not ideally suited.  However these need to be put in place in tandem with a market-based carbon price if we’re to reduce human-induced greenhouse gas emissions to the level mandated by the scientific evidence.

Ideally, a carbon price will force polluting industries and businesses to internalise the cost of greenhouse gas pollution in their cost of business calculations.  All businesses aim to minimise their overhead and production costs in order to offer their product to consumers at the cheapest possible price, in order to capture as large a market share as possible and maximise profit.

Competent corporate leaders and business owners will recognise that they can reduce their cost of business by becoming more efficient and reducing the carbon emissions inherent to their operations.  This is the market signal that will drive innovation in technologies and process efficiencies, which under a carbon price will allow businesses to pay less.  The net result, of course, will be reduction in the net carbon emissions of businesses that become more efficient.  Extrapolate that across the whole economy and you get significant, widespread emissions reductions at a national level.

There are two broad options for pricing carbon in a market economy: a carbon tax and an emissions trading scheme.  A carbon tax is a blanket cost per tonne of CO2 paid by polluters for every tonne of CO2 that they produce.  Carbon tax schemes, such as the one that has functioned successfully in the Canadian state of British Columbia since 2008, often feature mechanisms for distribution of revenue raised among individual households, in order to absorb the impact of any price rises rippling down supply chains from the higher production costs of polluting businesses.

An emissions trading scheme is more elaborate.  A cap on the total amount of carbon emissions is set to limit emissions growth.  Portions of the total emissions cap are shared between polluting businesses, ideally auctioned off at the market price in order to impose the price signal described above.  Polluting industries can buy and sell their permits within this framework; heavily polluting enterprises can buy permits from more efficient businesses, thereby creating an incentive for business to increase efficiency because of the profit to be made in selling permits.  The emissions cap is gradually reduced over time, thereby reducing the total carbon emissions of the national economy.

Is this carbon price the right one?

The government’s Clean Energy Future proposal is a hybrid scheme, beginning as a carbon tax with a set carbon price of $23/tonne for the first three years before transitioning to an emissions trading scheme (with a $15/tonne price floor for the carbon price when the ETS begins in 2015).  This hybrid scheme is designed for a soft landing by limiting potential price volatility at the outset of its implementation.

It also includes an independent Climate Change Authority to monitor Australia’s carbon pollution levels and make authoritative, science-based recommendations on the level of exposed industry compensation and the total emissions cap.

In addition, Clean Energy Future includes a number of targeted government interventions (including the Clean Energy Finance Corporation and Carbon Farming Initiative) to provide strategic investments in promising carbon mitigation sectors and, more cynically, to buy off the support of certain industries (see the Jobs and Competitiveness Program) and voter cohorts that are likely to be hostile to the scheme.

On balance, the government’s Clean Energy Future proposal is worthy of support, on the basis that it provides the foundation for increasingly strong emissions reduction measures to the level mandated by the scientific evidence.

The Positives…

There are many positive aspects of the Clean Energy Future proposal.  Most encouraging was the 80% emissions reduction target by 2050, in line with the recommendations of key scientific bodies.  This is vitally important because the scheme will be pointless if it does fulfil Australia’s role in helping the planet avoid catastrophic climate change.

Also welcome is the $10 billion Clean Energy Finance Corporation, which will drive investment in the renewable energy sector and help to facilitate Australia’s transition away from fossil fuel-based energy.  As Tony Windsor has said repeatedly over the past year, expansion of the renewable energy sector is likely to have huge benefits for rural Australia because of the simple fact that most renewable energy projects will be decentralised and established in regional Australia.

Dramatically raising the carbon efficiency of the energy sector is crucial to Australia’s emissions abatement effort, so it was pleasing to see the pledge that no new coal-fired power stations will be built, along with the proposed buy-out of 2,000 MW of coal-fired power generation from the present grid.  From a social justice perspective, it is hoped that the government provides workers from any retired power plants are given the opportunity for re-skilling and alternative employment to minimise the impact of affected communities.

While on the theme of social justice, the household compensation package seems fair, given that low income households are most exposed to the costs of both greenhouse gas mitigation and climate change adaptation.  A note of caution: if Australia is to achieve an 80% emissions cut by 2050, action by five hundred companies alone will not be enough.  At some stage, all of us are going to have to re-examine our consumption patterns and lifestyle choices to make them more carbon friendly.  Over and above government policy, this will require each and every one of us to radically change our perception of our relationship with the Earth.

The Carbon Farming Initiative is a positive, providing capacity for carbon sequestration (locking up carbon in trees and vegetation), an alternative income stream for farmers and employment opportunities for people in the country.  My enthusiasm for this component comes with the caveat that thorough carbon accounting practices are used to calculate carbon credits generated by land sequestration, and that it not become a rort polluting industries to purchase on-paper emissions cuts without actually improving the efficiency of their operations.

The Concerns…

I would like to preface my qualified endorsement of Clean Energy Future with a number of concerns.  First, I am anxious that the generous compensation offered to polluting businesses and industry sectors may distort the intended market signal of the carbon price and thus reduce its effectiveness as a mechanism for emissions abatement.

It is disappointing that the scheme will forgo an important revenue source in the sale of emissions permits by giving away 94.5% of them to polluting industries, rather than having these companies buy them at the market rate.  Also, I fear that the government will repeat the mistake made by the European Union’s emissions trading scheme by setting a weak emissions cap and giving away too many emissions permits.  One hopes that the Climate Change Authority will provide the necessary protection against this eventuality.

It is troubling that the reduction in the number of companies to be included under the carbon tax may reduce the incentive for economy-wide, rather than limited sectoral efficiency gains and emissions reductions.  I fully endorse, however, Robert Oakeshott’s argument against including companies engaged in long-haul transport to regional areas, until such stage as freight and personal transport infrastructure is improved to make the sector more efficient (for example, better rail corridors).

It is also concerning that the Clean Energy Future proposal relies too heavily on the purchase of carbon offsets from overseas, rather than concentrating achieving the heavy lifting of emissions reductions at their source here in Australia.  Even if stringent carbon accounting practices are applied, overseas carbon offsets exist in a finite market and there is a limit to the number of emissions offsets that can be purchased, especially when businesses in other countries are competing for the same number of limited credits.  That concern would apply in a perfect world; in reality, there are several valid criticisms of the accounting methods used to calculate carbon offsets and until these criticisms are addressed, this seems to be a very shaky basis on which to promise two-thirds of Australia’s emissions cuts.

To summarise my concerns in nutshell: As a political scientist I recognise the necessity for compromise and negotiation, especially in the current political climate.  However, I strongly warn against excessive trade-offs in order to make the scheme popular.  Again, if the scheme does not reduce Australia’s greenhouse gas emissions by the level mandated by the scientific evidence, it is not doing its job.

The verdict: A promising first step

Overall, I hope that Clean Energy Future will get Australia’s emissions reduction ball rolling and lay the foundation for increasingly strong abatement measures over time.  The overwhelming scientific consensus on the severity and timeline of the global warming threat is very clear on what we as a species have to do to avoid catastrophic climate change impacts.

Our economy is important, it is the engine and the measure of our prosperity.  However, at all times, we need to remember the undisputable physical reality that our economy and our society are wholly-owned subsidiaries of the natural world.  The more we damage the natural world, the more we damage our economy and ultimately ourselves.  Through pricing carbon, we have an opportunity to integrate this understanding into our economic system and make it properly sustainable, in a way it has never been in the past.

I also hope that today’s policy announcement will lift the tone of the public debate on climate change policy and move Australia away from the redundant debate about the reality of climate change to focus on how we, as individuals, families, communities and as a nation are going to respond to it.  The public debate on this topic to date has been heavy on misinformation and outright falsification, heavy on narrow self-interest, and heavy on misplaced fear, at the expense of a proper analysis of the urgency of the climate threat.

Enough is enough, it is time to get on with action.

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Additional Resources:

Australian Government: Clean Energy Future website.

ABC New – Climate Change special coverage: Pricing Carbon website.

University of Melbourne: Public Lecture – John Gummer, Lord Deben on ‘Climate Change Action and Conservative Politics.

Wodonga and Albury Toward Climate Health: Key climate change documents (chronological list of key scientific, governmental and inter-governmental reports, and international legal documents, dating from 1972 to the present).

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Dr. Benjamin Habib is a Lecturer in Politics and International Relations at La Trobe University, Albury-Wodonga. Ben’s research project projects include North Korea’s motivations for nuclear proliferation, East Asian security, international politics of climate change, and undergraduate teaching pedagogy. He also teaches in Australian politics and the international relations of the Middle East.  Ben undertook his PhD candidature at Flinders University in Adelaide, Australia, and has worked previously for the Department of Immigration and Citizenship.  He has spent time teaching English in Dandong, China, and has also studied at Keimyung University in Daegu, South Korea.  Ben is involved with local community groups Wodonga and Albury Toward Climate Health (WATCH) and Transition Albury-Wodonga.

Ben welcomes constructive feedback.  Please comment below, or contact Ben at b.habib@latrobe.edu.au.

 

The views in this story are those of the author and not necessarily those of Our Voice: Politics Albury-Wodonga.

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