Have The Libs Lost Faith In The Market?


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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