FEDERALISM of both the cooperative and uncooperative variety is back in the news. As the 1 July start date for the federal government’s carbon pricing scheme looms, the Uppity Conservative State Premiers’ League is out in force, crying foul about the “tax” and fervently slashing “redundant” and “costly” state-based climate change schemes. Meanwhile, federal programs such as the Renewable Energy Target are under the microscope, with the Coalition and big business calling for an end to this kind of “green tape.”
Victoria’s Baillieu government recently accepted the recommendation of a review of the Victorian Climate Change Act 2010 to scrap the state’s 20 per cent emissions reduction target by 2020 – the latest in a long line of anti-environment, pro-fossil fuels policy developments during its first sixteen months in office. Queensland’s newly elected Newman government has opted for a more expeditious approach, axing just about every Queensland government program with a tinge of green – from the $430 million Queensland Climate Change Fund (which provides $30 million a year for climate change initiatives) to the $50 million Smart Energy Savings Program (which helps businesses improve energy efficiency).
Amid this carnage, it is worth considering just what is the appropriate role of complementary state and federal policies in tackling climate change in the context of the new carbon price.
For better or worse, economic theory features prominently in both the substance and the rhetoric of discussions on this issue. So it’s not a bad place to start. Here’s what some of our most respected climate econocrats have to say about the matter. (In each case I’ve emphasised the caveats using italics.)
First, the Productivity Commission. In its submission to the 2008 Garnaut Review, the PC asserts:
With an effective ETS [emissions trading scheme], much of the current patchwork of climate change policies will become redundant and there will only be a residual role for state, territory and local government initiatives… Once an ETS is in place, other abatement policies generally change the mix, not the quantity, of emissions reduction.
Not surprisingly, the PC’s view was echoed by Ross Garnaut in his 2008 report. “With the advent of a broad-based emissions trading scheme,” he wrote, “other emissions reduction policies become largely redundant.”
The logic behind both statements rests on the fact that there is an annual limit on emissions from sectors covered by the emissions trading scheme, which is given effect through the “cap” on the number of permits that are available each year. While the number of permits is capped, their price is determined by market forces, and this allows the market to find the “least cost” means of reducing emissions. “Other” abatement policies focused on specific sectors (renewable energy, for instance) or regions (state-based emission reduction targets, for instance) therefore “generally” do not create additional abatement because they free up other permits to be used in another sector or region. They might encourage or require emissions reductions, but not necessarily at the “lowest cost” under the national ETS. (Hence, they “distort” it.)
But the generalisations and equivocations in the PC and Garnaut statements hint at a more complex picture – one in which there remains a legitimate role for state climate policies. There are, indeed, three sets of circumstances in which state climate policies (or other federal policies) can be justified alongside a federal emissions cap.
The first is where the policy leads to genuinely additional abatement. The federal cap only covers a limited number of emissions-producing sectors – notably energy generation, industrial processes, landfill waste and fugitive emissions (for example, methane released from coalmines). Sectors not covered by the scheme include agriculture, forestry and (via changes to the fuel tax and rebate regimes) parts of transport.* Any state or federal government policies that reduce emissions in these sectors will result in abatement beyond that brought about by the federal cap. As the PC points out in its Garnaut Review submission, policies to target these sectors make sense to the extent that they would reduce the costs of achieving an overall national emissions reduction target.
Emissions embodied in the fossil fuels we export, which far exceed our domestic emissions, are not subject to the carbon price either. This gives states (which largely control mining policy) a critical role in influencing global greenhouse gas emissions. (Garnaut and the Commission have less to say about this sensitive issue!)
Another class of additional abatement involves emissions reductions within covered sectors that are classed by the federal government as “voluntary.” The government has said that it will consider purchases of accredited GreenPower generated after 1 January 2010 as additional to the national emissions target, and that purchases from 1 July 2012 will be taken into account when setting scheme caps.**
The second category of circumstances in which additional policies can be justified is where the policy addresses an additional market failure to that addressed by the ETS’s price signal. As Garnaut argues, other state and federal policies are justified where they “reduce the effect of market failures, so as to reduce the cost of adjustment to the low-emissions economy.” This rationale is reflected in the principles for complimentary climate policies adopted by Council of Australian Governments, or COAG.
Four main types of policies are considered (by the PC, Garnaut and/or COAG) to fall squarely within this category: energy efficiency policies that provide information that is not adequately provided by the market or deal with “split incentives” to reduce emissions (between a landlord who owns a property and the tenant who pays the bills for heating and cooling it, for example); the provision of public funds for research and development into clean technologies (which is underprovided in the market because of the unpriced “spillovers” of the benefits of such research); the provision of network infrastructure and other public goods that facilitate low-cost abatement options (for example, electricity transmission and distribution networks; electricity market regulation; public transport infrastructure; land-use planning); and policies to reduce existing fossil fuel subsidies (which, according to the PC, act as “barriers to deployment of low-emissions energy”).
THERE is a third category of circumstances in which an additional policy can be justified in the context of a federal scheme cap: where the policy is aimed not only at achieving immediate emissions reductions, but also at achieving some additional policy objective, known as a “co-benefit,” and providing that the policy is an effective and efficient means of achieving that objective. Though such policies tend to be sniffed at by the likes of Garnaut and the PC, they are worthy of deeper exploration.
Co-benefits arguments are most typically applied to policies to directly subsidise or otherwise encourage renewable energy in Australia, such as the federal government’s Renewable Energy Target Scheme (which promotes the production of renewable energy in order that 20 per cent of Australia’s electricity supply be sourced from renewables by 2020) and state-based feed-in tariff schemes that subsidise the purchase of household solar panels and the like. The most commonly cited co-benefit of such policies is that they help prepare Australia for the structural transition that will be essential to achieve the deeper, science-based emissions cuts that all countries will need to make over the longer-term. They do this by promoting early deployment rather than waiting until the invisible hand of the carbon market decides the price is high enough to warrant the necessary investment. They also help renewables achieve lower costs through economies of scale, and promote the growth of clean industries and “green jobs.” This argument rests on the assumption that the carbon pricing scheme will not of itself induce such longer-term, structural changes.
The PC argues that these justifications are “weak”:
Meeting the target proposed by the Australian government, or the more stringent ones discussed in Garnaut (2008b), would be an enormous task. There is, however, nothing inherent in the size of the task that requires other mitigation policies to be used in addition to an ETS. An ETS is an instrument that has the potential to achieve whatever targets are chosen, at least cost… [T]he choice of an ETS does not limit how ambitious the targets can be. Indeed, because the ETS is more cost-effective than most alternative instruments, more ambitious targets can be achieved for a given cost… An ETS could achieve rapid reductions in emissions if that is the policy objective and the targets are set accordingly.
The PC makes a similar point in response to the related argument that complementary renewable energy policies are needed because the ETS lacks the “credibility” needed to encourage companies to reduce emissions by way of investing in long-lived capital assets like renewable energy facilities (and will opt for shorter-term measures instead):
[Some] argue for a greater role for supplementary policies in the initial years of an ETS, while the credibility of emissions prices is being established. There are problems with doing this… A better approach would be to set emissions targets and design the ETS and related institutions in ways that promote credibility. Australia appears to be in a good position to establish a credible ETS having gained insights from the National Emissions Trading Taskforce, the Task Group on Emissions Trading and now the Garnaut Review. Lessons have been learned from others in establishing an ETS, in particular the European Union. In addition, Australia has a demonstrated record in establishing independent institutional arrangements.
Rationales like this demonstrate that the PC lives in a fantasy world in which optimal policy responses are calibrated precisely and implemented rationally in the public interest. Yes, it would be great if our leaders were capable of setting more ambitious emissions targets or designing policies and institutions that produce a long-term, steadily rising carbon price. But can anyone see that happening in the current political climate? The PC’s assertion that Australia is in a “good position to establish a credible ETS” beggars belief in the midst of Tony Abbott’s “toxic tax” campaign, Labor’s policy prevarication, mass voter disaffection with climate policy, staggeringly powerful polluting industries, widespread misinformation, the concerted climate scepticism of the Murdoch press, and the sheer reality that the Australian public is not currently willing to accept carbon prices sufficiently high to trigger investment in renewable energy.
In fact, this unseemly combination of factors has led to the creation of one of the most compromised pieces of policy in Australia’s history – a carbon pricing scheme with low targets, massive carve-outs and loopholes for polluting industries and consumers, and a number of poor design features (like the disappearance of the price floor in 2018 and the generous allowance of offsets) that will ensure carbon prices remain low while the future price path remains uncertain. This “credibility” deficit is amplified by Tony Abbott’s promise to repeal the scheme, if necessary by a double dissolution election. Sure, Australia has a bureaucracy that is capable of designing credible institutions, but the design of the carbon pricing scheme attests to the fact that, in this area at least, policy is influenced more by politicians responding to the rhythms of the electorate than by boffins applying the prescriptions of their economics textbooks.
Without serious policies to subsidise renewable energy, and without a carefully tailored range of other measures, Australia’s emissions will remain at their disgracefully high levels for decades to come and we will not be in a position to achieve the necessary rapid reductions in future.
Far from suggesting that state policy measures should be cut, this bleak reality draws attention to the absurdity of an ETS predicated on a weak target, into which the Australian scheme will automatically evolve after the transitional, fixed-price phase ends on 30 June 2015. Not only will the scheme fail to induce the necessary structural change on its own, but the presence of the “cap” will mean that the complementary policies needed to see us through the long haul will do very little of the emissions reduction “work” in the short-medium term.
The solution is not necessarily to scrap all of these measures at the state and federal level. Rather, it is to keep the schemes that effectively provide co-benefits and to design the federal carbon price so that it works in harmony with those other schemes, rather than having them undercut one another as they will tend to do under the federal cap. The simplest way to do this is to impose a long-term, steadily rising price floor in the federal scheme. This would vastly improve the scheme’s credibility and would ensure that complementary policies do much more work to reduce emissions.
Back in the newly expanded graveyard of state climate policies, many of the recent policy decisions betray an expediency not justified by the “state policies are redundant” caricature. As a result, we are racing towards the worst of both possible worlds: a weak federal scheme that limits the impact of important complementary measures; and a conservative underbelly of states that have not only scrapped their complementary policies but are imposing measures that work against the structural transformation of Australia’s economy.
You won’t find that policy mix in any economics textbook. •
Fergus Green is a climate change lawyer and policy analyst. He writes each month on climate policy for Inside Story.
* Some liquid fuels, not including fuels used in household and light commercial vehicles, are subject to changes in the fuel excise and fuel tax credit scheme that will apply an equivalent carbon price to those fuels, though there is no cap on emissions from the combustion of liquid fuels.
** The impression given by the government is that the emissions reductions resulting from voluntary purchases of GreenPower will result directly in a further tightening of future scheme caps by an equivalent amount of emissions. Such voluntary action is, however, merely one of thirteen matters that the minister “may have regard to” when setting scheme caps, so there is no guarantee that all voluntary reductions will translate into equivalently tighter scheme caps.