Carbon tax and the climate change solutions on offer

Note: if you just want a quick, visual summary, scroll down and check out the diagrams.

I’ve been following the debate on the carbon tax in Australia very closely lately, and there hasn’t been much focus in the media on the actually policies presented by the Coalition, beyond that it is a ‘direct action’ approach. So I’m going to take a look at the more sober coverage (no ‘great big tax on everything’ rubbish) around the place and see if I can get a handle on it. Try not to get distracted by the climate skeptics you see around the place; they are entitled to their opinions, but when making policy, governments must go with the scientific consensus, or you risk another South Africa.

Background reading, if you want it. Here are the countries who are legislating action on climate change. This is Wikipedia on Emissions Trading Schemes, of which there are a few forms. Here’s some background on carbon taxes as they compare to ETS.

First, the red: Labor’s policy. If you prefer it in pictures, skip to the diagram below. Here’s an article on the carbon tax by Greg Combet (Labor, Minister for Climate Change and Energy Efficiency) that was in The Australian four days ago. Here’s a ‘dummies’ summary from Adelaide Now. And here’s my summary:

  • A fixed, to-be-announced, price on carbon will begin on July 1, 2012;
  • Initially, this will work like a tax, but the intention is to move to a full ETS no sooner than three years later;
  • The money raised by the tax will go to support low-income households (income tax rebates?) and to support businesses in transitioning to cleaner energy.

Additionally, Labor is pursuing research into improving long-distance transmission lines to make renewable energy more practical, tighter vehicle emission standards, and tax breaks for green buildings. No amount has been provided for emissions reductions, but it is likely to be between 5% of 2011 levels as proposed by Labor previously, and 20% as advocated by the Greens.

I still have lots of questions about this policy. Implementation is the key: how will the price be set, will this be used for revenue raising by the government (or will it truly be budget neutral, as they claim), how will the compensation work, how soon do we actually reach an ETS, and how will the ETS itself be structured?

Here is a diagram describing way money would flow under the carbon tax strategy. I haven’t made a diagram for how the ETS might work eventually.

Now, the blue: the Coalition position; again, skip to the diagram for the visual summary. Caveat: the Labor policy has been announced recently, whereas the Coalition policy I’m describing here is largely drawn from the policy documents they released during the last election. So I might have missed new details given by Opposition spokespersons during the recent coverage; tell me in the comments if you notice.

Anyway, the policy. Here’s a blog post about a third way to cut emissions, posted by Greg Hunt, the [Liberal] Shadow Minister for Climate Action, Environment, and Heritage. The media generally refers to this as the Liberal’s ‘direct action plan’, which implies that it is not market based. The reality is a little more complex and is described in this document (pdf). Here’s my summary:

  • Establish a ‘Emissions Reduction Fund’ and call for tenders for projects that reduce CO2 emissions below historic baselines or ‘business-as-usual’ levels. This is basically the government paying firms according to the reductions they achieve;
  • Firms that emit above business-as-usual levels will be penalized by an undetermined amount. I’ve bolded this item because it has not received much attention in the press at all.
  • Encourage ‘soil carbons’ as the primary reduction mechanism. This involves farming procedures that capture and retain carbon inside agricultural soil.

Additionally, the Coalition is proposing direct infrastructure investment in the form of increased home solar installations, placing solar on schools, adding geothermal and tidal energy to small towns and communities, and many other initiatives. We don’t know any details about precisely how this would be funded, but if it is to be budget neutral it will require either a tax increase or spending cuts.

The goal is a 5% reduction in carbon from 2011 levels by 2020, which is in line with the old Labor government target; the new Labor target is unknown and TBA. Here’s a diagram, which is incomplete because I haven’t included all the direct initiatives suggested by the Coalition policy document:

How the Plans Differ

Here is a short summary of the similarities of the plans as far as I can determine. I haven’t analysed how the ETS might work or how it compares, so this is just a direct comparison between the Carbon Tax and the Emissions Reduction Fund.

  • High emissions will be costly, as both plans will penalize emissions;
  • There will be a business incentive for many firms to cut carbon emissions;
  • The tax payer will wear some or all of the cost;
  • The Government will increase its administrative burden, either by requiring the selection and investigation of tenders under the Coalition, or by managing a new tax and compensation payouts.

And here are the differences:

  • The carbon tax does not require the Government to ‘pick-the-winners’, but they will try to anyway;
  • There is no proposed compensation scheme under the Coalition scheme, but there is also no proposed increase in the cost-of-living;
  • Firms are not guaranteed of receiving the abatement under the Coalition scheme even if they do reduce emissions;
  • The Emissions Reduction Fund would achieve 5% reductions if all goes well, whereas the Carbon Tax and ETS could potentially achieve even greater reductions if the fundamental economics of energy change.

The administrative burden of both schemes are hard to guess. Emissions reporting is already happening either way, and taxes are nothing new for government. Details on the compensation for the Labor scheme would be great. The Coalition’s scheme would see a centrally managed tender process that will have to be sizable to support the proposed reductions.

Since this is politics, there is a fairly high risk that the government would break its promise and use the revenue from the carbon tax to fund unrelated projects, or to throw parties.

The Labor scheme will theoretically (tell me if I’m right in the comments) give incentives for investment in both large and small (long-tail) emissions reduction. The Coalition scheme will do so only if the tender process is managed carefully and the tender fund is large enough to support it, and the scheme does not directly penalize the business-as-usual emissions that are actually the problem.

Which is Better?

It’s impossible to tell at this stage. The debate at this stage is largely political while we await further policy details, but, ironically, the Labor plan is relatively market-based, while the Coalition plan is relatively left-wing. Also ironically, the Liberal plan has a carbon tax element. The better plan depends on the unannounced details and the successful implementation of either system, but, looking back, I seem to have made the Labor scheme appear more attractive, which was not what I planned!

We are likely to receive more details about the Labor plan first – they are in government, after all – so we probably won’t learn more about the Coalition plan unless they get elected. I’ll post more updates as I get them.

Michael

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4 thoughts on “Carbon tax and the climate change solutions on offer

    1. Michael Bertolacci Post author

      Go for it, Adam. This post started just as a whinge that the Coalition was rejecting a market-based solution, but the situation ended up being much more complicated, as these things usually are.

      Reply
  1. Thara

    Nice one Michael. I think I will say that I would go for Labor policy. One thing that occurred to me was that industry wants certainty over the next several years, essentially for planning purposes. Although both policies will achieve that certainty initially, Labor has potential to turn really badly. As we have seen in the European market, in the last few years. When you subject such system under market, it can collapse. But here, we are talking about reducing carbon emission quickly. Having collapsed carbon market wouldn’t help this cause. Good article, Berto!

    Reply
  2. Lachlan

    It is great to find some sensible commentary based on the actual data available. Thanks for contributing to clarity, Michael!

    I would be interested to explore how this comparison might change when the interim policy turns into a proper trading scheme. Philosophically, I like the idea of limiting the “sink” in the system and then letting people make deals to set the price of releasing waste into the sink. The economic systems we have inherited tend to assume that there is an infinite source of raw resources and an infinite sink for waste. This is clearly a faulty assumption (regardless of your position on climate change), and it would be nice to tackle this more general problem.

    In the long term, I find myself persuaded by William McDonough and his “cradle to cradle” design philosophy. Is it too hopeful to anticipate a future where the word “waste” is eliminated from our design vocabulary?

    Reply

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