A Lost Opportunity for Leadership


Given ever increasing concerns about climate change and this Federal Government’s strongly stated commitment to act, the failure of its proposed Carbon Pollution Reduction Scheme (let’s call it an emissions trading scheme, or ETS) to progress much beyond the highly flawed proposal of the former government is disappointing. More than just a failure of leadership, it suggests that our current political process is incapable of effectively responding to the challenge of climate change.

At this stage, of course, the Green Paper just presents the Government’s stated preferences. Some key information — like initial emission trajectories — won’t be provided until later in the year. The complexities of emissions trading mean that the outcomes of particular design choices depend on these other variables.

We have only limited international experience of emissions trading schemes to draw upon — primarily the EU Emissions Trading Scheme which has been operating since 2005. Limited as this experience is, however, it offers a clear lesson: emissions trading is easy to get wrong. In fact, it has not yet been shown that it can be done right. And the key reason? Poor governance.

Herein lies both the challenge and the opportunity for the Rudd Government. Getting a national scheme right should provide a sound basis for domestic action to reduce emissions. It could even provide an example to the international community of what can be achieved with an ETS. A bad scheme, on the other hand, takes us all backwards.

So what does the Green Paper reveal in this regard? The proposals suggest some progress on the flawed plans of the former federal government. On the upside, the Rudd Government is pushing a range of important complementary policies including an expanded renewable energy target, additional research, development and demonstration support, and new energy efficiency measures. It has also put equity concerns for those most vulnerable to the introduction of an ETS — low income households — firmly on the agenda.

However, the Green Paper clearly fails the key governance test for ETS design — it does not demonstrate the political resolve that will be required to design and implement an effective scheme.

The Government’s only current stated emissions commitment is to a 60 per cent reduction of 2000 emissions levels by 2050. Unfortunately, this is inconsistent with what the climate science suggests will be required to avoid dangerous warming. We require larger and faster global reductions than this. The emissions target also fails any test of international equity: Australia logs the highest per capita emissions in the world.

Furthermore, the Green Paper emphasises a ‘softly softly’ approach to the scheme’s introduction. This includes indicative calculations in the Green Paper based on $20 per tonne of CO2, — half the current EU permit price — a price cap and special exclusions. The message to industry: "don’t worry — you don’t have to change yet."

And then there is the issue of compensation. The Government appears to have accepted the general industry demand that they be compensated for the introduction of a national ETS. Compensation, after all, is generally taken to mean righting a wrong or imposition placed upon some party. Another message: "We don’t even have the right to require you to change".

In truth, of course, such claims for compensation generally have little merit. A price on emissions doesn’t represent an additional imposition on emitters, rather, it entails the removal of a public subsidy that they have been knowingly receiving for well over a decade. As Garnaut and others have noted, such "compensation" represents a wealth transfer to certain privileged "stakeholders" from the rest of us. In practice, compensation risks even more than this. For one, it puts the focus of industry players on maximising compensation rather than finding new and cheaper ways to reduce their emissions — victim mentality writ corporate.

Furthermore, the argument that introducing an ETS without compensation will adversely impact investor confidence in good governance has things entirely the wrong way around. Many investors over the last decade have made the judgment that climate change is a problem, and have seen "polluter pays" policies coming. Presumably, some other investors have judged that there wasn’t a problem or, worse, that governments would inevitably yield to corporate pressure. Paying such compensation therefore rewards precisely the wrong group of investors — those taking a bet against good governance.

Unfortunately the Green Paper proposes significant and highly distorted compensation to so-called Emissions Intensive Trade-Exposed industries with free permits, and even direct compensation to electricity generators.

People will draw their own conclusions from this. When corporate players see others being rewarded for claiming victim status, they are pretty much obliged to attempt likewise. After all, when governance is weak, if you’re not at the table in Canberra, you’re probably on the menu. And the public? If governments can’t stand up to unreasonable demands for compensation then they have every reason to question its ability to effectively respond to the climate change challenge. In which case — why bother?

In the end, an ETS will succeed or fail depending on how it changes the decisions and behaviour of all of us — the public, industry and governments — towards reducing emissions. That will require wide social consensus and that, in turn, will critically depend on whether we believe our governments are ready, willing and able to take the challenging decisions required. The risk with emissions trading is that it allows weak governance to parade as serious progress…for a while anyway. However, there is no escaping the physics — our climate system responds to physical greenhouse emissions, not rhetoric or sham policies. And the climate science suggests that avoiding dangerous global warming requires immediate action. Perhaps the Government has an iron resolve hidden somewhere beneath the timid scheme design being proposed in the Green Paper. Perhaps it is the best that can be achieved at present given challenging economic times. We shall see in time. Unfortunately time is just what we don’t have. And, therefore, the Government’s failure to demonstrate leadership at this critical moment for the scheme’s development doesn’t just threaten progress on climate policy; it risks taking us backwards.

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