climate policy
2 Feb 2010
Have The Libs Lost Faith In The Market?
At the heart of the Coalition's long awaited climate change policy is a belief that polluting the atmosphere should be free of charge, writes Ben Eltham
The Coalition’s climate policy, which was announced this afternoon by Tony Abbott, has abandoned all faith in the market as a mechanism to restrain carbon emissions. Under a Coalition Government there would be no proper price signal for pollution only direct payments to polluters out of what would be known as the Emission Reductions Fund.
The party of free enterprise has proposed a policy of free pollution.
For economists, prices are among the most important things in the entire economy, in fact they are often held up to be the holy grail of free markets themselves. This is because of the crucial role prices play in signalling the supply and demand in a given market. Indeed, the theory of marginal utility underlies much of contemporary economics.
This is what makes the Coalition’s climate change policy so strange. The Coalition believes in market signals in education, in healthcare and in real estate but when it comes to polluting the atmosphere, the Coalition has somehow convinced itself that carbon emissions should come free of charge.
The key line comes on page 14 of the policy, where Tony Abbott and Greg Hunt attempt to explain how their $3.2 billion policy will work. The policy states that "unlike Labor’s emissions trading scheme, businesses will not be penalised for continuing to operate at ‘business as usual’ levels," and that the fund "will not be imposing liabilities but instead providing incentives". While there will be some kind of "penalty" for businesses emitting more than their "business as usual" levels, the cost of this penalty is not explained. All we are told is that "the value of the penalties will be set in consultation with industry".
So there you have it. The Coalition proposal is essentially to argue that polluting the atmosphere should involve no extra cost. Even worse (for the environment, that is), companies that can prove they are reducing their greenhouse emissions — or even growing them more slowly than "business as usual" — will be paid a subsidy by the government. In other words, the more you pollute now, the better your chance of raking in millions of dollars of taxpayer money for greenhouse abatement. The money will come straight from the budget — that is, from taxpayers like you and me.
There’s a big problem here, obviously. Global warming, as Nicholas Stern famously pointed out in his Stern Review, is a problem of market failure. Because producers and consumers don’t pay for the damage their pollution does to the planet, there is little incentive for any of us to modify our carbon-intensive lifestyles. Most people can intuitively understand this idea — it’s why we pay large taxes on harmful products such as cigarettes and alcohol. With this policy, however, the Coalition is effectively saying it won’t charge any of us for our carbon addiction. Instead, it will use taxpayers’ money to pay the worst offenders to cut back.
The result will be the creation of a low and ineffective "shadow price" for carbon which corresponds to what taxpayers will pay polluters in order to reduce their emissions. The policy does put some numbers on this — in a range between $8 and $40 per tonne. If you add up the reductions the Coalition claims it will achieve (140 million tonnes), and divide them by the middle of the carbon price ranges it gives, you get an aggregate carbon price across the scheme of about $12.50 a tonne.
None of the economists who have looked at the climate change problem believe that a carbon price that low will drive wholesale decarbonisation of the economy. Even Ross Garnaut believed $20 a tonne was the very minimum and should be a low baseline from which carbon prices should start to rise. The modelling done by the federal Treasury, which is the most comprehensive undertaken in Australia, states that a 5 per cent reduction will require a carbon price of $23 a tonne.
The emissions reduction figures also look dodgy. The Coalition argues that it can achieve carbon emissions reductions of 140 million tonnes of CO2, but 85 million tonnes of that are from soil carbon capture technologies that remain highly speculative and unproven on the scale the Coalition is proposing.
And what about the Emissions Reduction Fund, the centrepiece of the Coalition’s policy? The total cost of the scheme is projected to be $2.55 billion until 2015. There’s also an additional $400 million in nebulous initiatives for "one million solar roofs" and a grab-bag of additional policies such as $50 million for small-scale geothermal and tidal energy projects in regional towns. Anyone who thinks this is a robust and comprehensive response to the single biggest environmental challenge faced by our nation is kidding themselves.
Nor does the policy explain which and what sort of projects will qualify for the Emissions Reduction Fund beyond saying they will have to "deliver additional practical environmental benefits, not result in price increases to consumers, protect Australian jobs; and not otherwise proceed without Fund assistance". There’s a lot of ambiguity and wiggle-room there.
It’s also difficult to see how this Emissions Reduction Fund will work in practice — or indeed if it can work at all. The majority of Australia’s energy generators already use the cheapest, dirtiest technology: coal. Despite this, electricity prices are already rising steeply, simply to cover the additional investment required to keep existing coal plants going and to meet the Rudd Government’s 2020 renewable energy target (which the Coalition supports). It is stretching the bounds of credibility to believe that coal-fired electricity generators can deliver greenhouse abatement without raising prices for consumers — but this is what the Coalition will require of them.
In fact, does anyone seriously believe that energy prices won’t go up? Rising prices for fossil fuel energy sources like oil and gas alone will account for significant energy price increases across the economy in coming decades.
Let’s be perfectly clear what this policy won’t do. It won’t avert large-scale, damaging and possibly catastrophic climate change. It won’t save the Murray-Darling Basin or the Great Barrier Reef. It seems unlikely that it will even achieve the 5 per cent cut in emissions Tony Abbott claims it will. It’s an even less effective policy than Labor’s Carbon Pollution Reduction Scheme.
$3.2 billion? It’s about the cost of one Air-Warfare Destroyer. It’s less than the Government spends annually on subsidising private health insurance. That’s not "direct action". That’s business as usual by another name.
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Ben I think you are wrong. The scheme does have a marginal price. You pay if you go over your baseline or you get a subsidy if you go under. So the marginal price is the same either way.
There are 2 ways to correct an externality. You can charge a polluter for the cost or you can subsidise him not to pollute. From the efficiency point of view the outcomes are the same. You’re letting your ethical views of pollution contaminate your economics.
And, remember, the CPRS gives polluters plenty of free permits. Again they still face a marginal price because there is an opportunity cost of polluting instead of selling the permits.
As I think Manuel Castells pointed out ages ago, the right’s never really liked the free market, despite all the rhetoric. That would mean giving away control and not knowing where the money’s going. It’s the labor parties and social democrats around the world who’ve been much stronger believers in the market (and indeed implementers, like Keating and Blair, not that I “believe in a free market myself). The right, however, especially the Liberals in Australia *are* very good at adding taxes and giving the money to large corporations in the name of the free market. It’s not of course a solution to anything (like health insurance for example). At the end of the day, it’s more just what they do.
I would imagine that the group of Industrialists, Miners and Coal Burners that wrote all the ‘pollution reduction’ legislation for Howard, and later for Krudd, have also had a lot to say in this Abbott fiasco.
While they are allowed, even encouraged, to write legislation for Australia which has anything to do with Carbon Reduction and Global Warming and relevant Industry policy, we can be sure that it will be totally ineffective in curbing the pollution, and the polluters.
But they are the ones who pay the piper, and they call the tune.
Us voters and citizens just have to sit back and enjoy being raped and pillaged! Certainly, no Government or Opposition is listening to us…on anything!
Krudd/Gillard/Ferguson/Garrett/Crean/Conroy/Abbott/Hunt and their insane, useless and unworkable schemes, (but expensive), are proof of that.
Also, the mad race to mine and sell every ounce of COAL that can be found in Australia, particularly in NSW and Queensland is proof positive that what we, the punters, desire, need, is immaterial to these people. Money, money, money!
Seems to me the same as those Drug Pushers/Dealers that the ‘Leaders’ scream and moan so much about.
Sell it and make a profit, never mind that it is also killing millions/billions of humans and other living things.
Can you tell me the difference, other than in scale?
spot on
Ben - Thank you.
The policy is inconsistent, and at times contradictory.
A carbon price must be the centre-piece of any carbon reduction strategy. Investment in technology will play a major role, as businesses look to substitute away from carbon. But a policy of government deciding what carbon abatement initiatives to support is likely that much money will be channelled in to inefficient abatement initiatives. The bottom line is we are just not sure about the efficacy / long term efficiency of carbon abatement initiatives.
Can you imagine the scope for environmental rent seeking from those seeking a piece of the pie?
bianconieri,- i agree that a subsidy creates a price of polluting - in terms of a sort of opportunity cost. However, in this case, we have a convenient unobserved counterfactual - the supposed BAU case. How the hell is someone supposed to know if a business is above or below BAU - if BAU is never actually observed?
Second, the subsidies outlined in the policy paper are case by / “in consultation with industry”. This is bad economics. For efficiency, the price of carbon must be the same across industries and across countries. Furthermore, there must be a fair level of certainty over the price of carbon for businesses to make decisions over investment into abatement activities. Ad hoc “industry consultation” is not certainty.
Finaly, the tax payer will foot the bill for carbon subsidies. This is stupid. It’s more efficient to tax a bad such as carbon pollution and then lower taxes on goods (income etc), or subsidise market failures such as R&D/innovation rather than the other way around.
I feel disappointed.
ashanker and how is that any different from the govt’s “consultation with industry” over the thresholds for EITE assistance, and the separate assistance given to the coal industry? On which they have caved in at least twice that I can remember.
Giving into rent-seekers seems an unfortunate side effect of both of these schemes.
And the actual establishment of the BAU is not all that important from an efficiency perspective. As you say, the marginal price is the same regardless of whether they are above or below that line. In effect, the CPRS already establishes BAU’s for EITE industries. It just gives them free permits rather than subsidies. In either case, the taxpayer is hit.
Of course the BAU does impact the relative burden of the emission cuts between industry and taxpayers. But that’s an issue of transfers, not one of efficiency.
bianconieri,
I think you’ve slightly misread me.
I do point out in the article that the Emmissions Reduction Fund will create a kind of shadow carbon price. But it will be a low one, mainly because there will be no cap of the total amount of carbon pollution across the economy, and because of the low prices the Coalition is pegging it’s main abatement measures at.
In addition, the “business as usual” case has not actually been laid down by the Coalition, so there will be endless scope for special treatment and rorting, worse even then the free permits proposed in the CPRS.
So, basically your jumping to conclusions.
Well, I don’ t think it’s much a jump: the price signal is very weak, and so are the incentives for emissions reductions.
We need to be clear about something here… Abbott hasn’t “lost faith” in the market system for carbon. He doesn’t believe (and never has) that carbon reduction is something that needs to be done. This system is being put forward, as a thin window dressing, to try and fool the electorate into thinking that the LibNats are not the climate deniers everyone knows they are.
Rising prices for fossil fuel energy is the ONLY way its usage will be reduced.
One only needs to see what happened when petrol prices went from 90c per litre to $1.60.
Large numbers of people immediately started making positive changes to reduce the amount of fuel they used. Remove the cost, and the incentive to reduce evaporates.
One of the main complaints from ‘the right’ when hearing requests for more funds for alternative energy was that “you can’t pick winners”. Do the Coalition have any ideals left apart from doing anything to frustrate sensible change until they worm their way back into power?
I read the situation this way. The long run marginal cost of coal generation is about $50/MWh. Wind farmers tell us they need $90/MWh to be viable. So to make wind viable you need to penalise coal by $40/MWh, ie roughly $40/Tonne CO2 in NSW. Alternatively you need to subsidise wind generation by $40/Tonne. Either way, consumers will be paying $90/MWh. The only difference is how they pay it ie through their quarterly bill or through a tax. The former falls heavily on the poor as also would a VAT. A subsidy from general revenue falls more heaavily on the better off who would effectively be subsidising the poor. The rich won’t give a damn either way because electricity takes so little of their disposable income and they don’t pay tax anyhow.
I take this discussion to the next level:
The atmosphere is a natural resource. Has business ever paid for the use (and abuse) of the planet’s natural resources? No, but they happily pocket the economic rent, the profits.
A natural resource does not appear on balance sheets.
I don’t like the ETS, but I like the Abbott formula even less.
Let’s have a good old carbon tax, a penalty. Firms pay for the use and even more so for the abuse.
In a letter to TIME (which surprise surprise they even published) I argued that access to fossil fuels should progressively be restricted to force companies to accelerate the development and implementation of renewable and clean energy.
Surely no can can believe that Rudd & Wong had much to gloat about with their rejigged and watered down Howard policy?
Should we not simply ignore the Abbott one, which barely deserves a comment one way or another, and concentrate on the Rudd one, which was, as far as I could make out from the Wonglings of Penny and the obfuscations of Rudd, not-much-chop in the first place?
Debating the merits of anything dreamed up by the likes of Abbott, Joyce and Wilson Tuckey has to be a total waste of time, and a diversion that will let Rudd and Wong off the hook.
I wouldn’t have thought there was much of a ‘market’ under Rudd either, with so much pollution gifted to industry, and whether it be Rudd or Abbott, it’s always the consumer who pays, never industry.
Abbott has only put this out because he has to, and he knows Rudd’s rubbish won’t get up either.
So, let’s just ignore Abbott and his crew of misfits and carry on ‘irregardless’, as Senator Rubble would say, with demolishing the Rudd-Wong package so they are forced to come up with a genuine policy well prior to the election.
Ben Eltham always provides food for thought in his excellent articles. Also I watched Abbott being dissected by Kerry O’Brien on the 7:30 report and his body language suggested that he really wasn’t a happy man. Kerry as good as called him a liar and Abbott didn’t quite know what to do. As Ben points out, Abbott’s ‘policy’ is a no-goer and as respondents point out, Rudd’s isn’t much better. My main (and faint) hope is that Rudd will negotiate with the Greens, both sides make concessions, and something gets up this year. When oh when will this country get a statesman in charge, I ask myself?
Abbott exuded confidence on the 7.30 report, but zero intelligence. He doesn’t believe climate change is anything to worry about, so how can he be expected to write a good policy about reducing emissions? It’s like expecting someone who can’t cook, to write a recipe. But KRudd’s effort is not much better - expensive and useless.
I’ve posted a further analysis of the Coalition’s carbon figures at the blog Larvatus Prodeo - available here:
http://larvatusprodeo.net/2010/02/03/putting-a-figure-on-the-coalitions-…
Arguing about which is better [ALP or LIB] is a total waste of time and energy and Bianconieri got in early to sidetrack the conversation into that vein.
Keep going if you wish.
Otherwise, tackle Ben’s article from the point of view of whether the policy he was looking at will make any difference to GHG pollution. If it is a genuine attempt to reduce pollution then the contributors will want to show how - unless of course they don’t agree with the need in the first place - in which case, attack Abbott and Hunt for being deceptive politicians Christopher
Abbott’s plan is thoughtful and careful and has much merit. More detail is needed, but it’s early days and we can expect further refinement. It’s refreshing to find politics largely absent. No sanctimonious bashing of the wicked big polluters, those evil State owned energy providers. Better still, no great big tax on the rest of us. Of course there’ll be extra costs, but we’ll still have jobs to pay them.
I noticed when Tony Abbott was speaking about his greenhouse plan he was very careful to say that polluters would not be penalised as long as their emissions INTENSITY did not increase - he used the phrase several times so it was not an unintentional slip.
What this means is that polluters can continue to increase their emissions as long as the ratio between the amount of the emissions and the unit of energy produced remains constant.
In other words if you are putting out ten tonnes CO2 per measured unit of energy and you double the number of units produced you will not be penalised for doubling your emissions because the emissions intensity will remain the same. And if while doubling your emissions in this fashion you also manage to reduce their intensity by a small percentage you might get a bonus government payout as well……
Great way to reduce atmospheric CO2 - a truly magic pudding!!
I saw some of an interview with Bob Brown on Lateline last night.
Seems the Greens have a half-a-plan, borrowed from Stern, and Wongers is busy renegotiating with Milne.
I hope so.
Abbott’s nonsense needs to be by-passed, and the Wong-Rudd ‘plan’ is dead.
How is it that Brown seems to manage to answer the questions he is posed by Tony Jones, whereas Rudd and Abbott go off on ludicrous tangents all the time, whilst busy trying to inject a few ‘religious’ overtones too?
Tony Abbott is gaining headway with the average voter. He’s relying on uncomplicated plans, plain language and simple sense to move forward.
It’s becoming increasingly more obvious that Mr Rudd and followers were conned about the warming facts because political urges were allowed to distract scientific authentication.
With the Greens it’s more about ideological and emotional issues. However, that won’t stop them from playing hard-to-get along the way, but eventually compromising principles for political expediency on the final round.
Carbon TAX would be the best solution. Carbon CREDITS should be avoided like the plague. Too much scope for middle men (like Goldman Sachs) to profit on driving up the prices for no reason (other than to boost their squillions in profit), thus gouging the polluter, who will, in turn, gouge *us*.
I still think AGW is a load of old dingo’s kidneys, but I have nothing against reducing pollution for it’s own sake. I drive a 900cc, three cylinder car, have CF globes all through the house, etc. Just because it saves ME money.
d.
Oh, and Ben, try not to make such a point of Abbot’s scheme costing taxpayers a fortune when you KNOW Rudd’s scheme would ALSO cost taxpayers a fortune. Makes you look partisan.
Umm, iview… I hope the ‘average’ voter is not falling for the Abbott smoke and mirrors, but I wouldn’t be too surprised if they were.
After all, it’s them that still hanker for Hanson too.
But the appeal of the Abbott scam might lie more in the inherent racism of Senator Rubble’s promise to slash foreign aid, and to the Liberal fear of public servants in his call to slash public service jobs… no doubt to privatise them for the Friends of Abbott Faith Groups to employ later doing the same, but worse, job.
Mind you, I don’t think too many average voters would cry much if all the jobs that were slashed belonged to the political party factotums that cling to each and every politician, the so-called ‘advisors’.
If we really need to save money, we should withdraw the billion dollar tax break that religions get in this country, and get them contributing to the welfare of the nation at last…this one… here on earth, now.