Published by the National Times.
The silver bullet view of carbon pricing is a common theme in Australian climate change policy debates. It is argued that by establishing domestic carbon price signals the nation will reduce its greenhouse gas emissions and address the challenge of climate change. International examples of carbon pricing initiatives are often cited in these debates. Unfortunately, incomplete accounts of them hide important lessons for policymakers at home. A recent opinion piece by Dr Peter Wood and Paul Burke of the Australian National University is no exception.
Wood and Burke present several international cases where carbon pricing is now operating, or is on the cards, to make the case that Australia is behind many nations in adopting such measures. While this contention is correct, Wood and Burke do not consider whether the carbon pricing measures adopted abroad have been effective. They do not consider the initiatives that preceded carbon pricing proposals or the fact that carbon taxes are often used to generate revenue rather than creating a price signal for the private sector.
Wood and Burke’s partial analysis includes the European emissions trading scheme, which the authors spruik as “the world’s most comprehensive carbon pricing scheme”. Comprehensiveness is good, but policy should be judged on its effectiveness, not just its breadth. A recent study by the UK-based NGO Sandbag questions the efficacy of the EU scheme. The Cap or Trap? report showed that the scheme is on track to deliver a “miniscule” 32 million tonnes of reduced carbon emissions in its second phase. Adding insult to injury, the report author Damien Morris says: “Regulating a single power station over the same period could have had a greater impact.”
According to Sandbag’s Morris, the scheme’s flawed design has the potential to trap Europe into a continued high carbon economy. Firms covered by the scheme are permitted to carry unused permits from earlier phases into the 2013-20 phase. This means that cheap permits bought during the economic downturn can be traded to allow for future carbon increases. Then there’s the additional problem of cheap offsets that “could allow Europe’s domestic emissions to grow a staggering 34 per cent from current levels by 2016″.
Europe provides a test case for poorly designed emissions trading schemes. Its flaws should not be glossed over by those who support emissions trading in Australia.
In their article, Wood and Burke also point to carbon pricing efforts in Asia and the subcontinent. It’s true that South Korea is investigating a carbon tax, however, this is on the back of a massive “green new deal” investment package aimed at increasing the nation’s clean technology competitiveness. Korea’s green stimulus will invest about $A85 billion over five years (2 per cent of GDP per year) in renewable energy, LEDs, hybrid vehicles, and new smart grid infrastructure. To put this into context, Korea’s clean technology investments are double the Labor government’s planned investment in the National Broadband Network.
A similar pattern can be observed in China. Although China’s 12th five-year plan is rumoured to establish carbon pricing for the energy sector, this is only after massive government investments helped China emerge as the world-leading clean technology powerhouse. China has rapidly built their domestic manufacturing capacity over the past several years. China-based companies are on track to make 39 per cent of the wind turbines and 43 per cent of solar panels sold worldwide in 2010. As a result of this concerted effort, Ernst & Young now rank China as the most attractive destination for private investment in renewable energy. On top of all this, the nation has pledged to invest A$743 billion over the next decade to meet ambitious renewable energy deployment targets.
South Korea and China demonstrate the benefits of staged policy implementation. Both nations preceded carbon pricing with large-scale public investments and industry development to create economies that benefit from reducing emissions. This approach is economically sensible and politically strategic, yet the Australian government has not undertaken comparable measures to lay the foundation for a low-carbon economy.
Lastly, Wood and Burke note that India has already introduced a levy on domestic and imported coal. Importantly, this is measure is not for the purpose of establishing a price signals, but rather for deploying clean technology. The $633 million generated by the levy per year is earmarked for India’s National Clean Energy Fund. The pool of money will help India achieve its goal of leading the world in deployed solar technology as set out in the government’s National Solar Mission.
The underlying logic of India’s approach is to tax fossil fuels for the explicit purpose of investing in clean energy infrastructure. Sadly this is not on the agenda in Australia. Carbon pricing advocates are happy to leave decarbonisation to the invisible hand of the market regardless of its ability to deliver the reductions needed to avoid dangerous climate change.
Australia can learn valuable lessons by taking a closer look at the climate and energy policies of the EU, Korea, China and India. We can only benefit from paying greater attention to the tried and tested approaches of others. My hope is that as climate debates continue commentators like Wood and Burke draw on real life examples of what works.
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October 18, 2010 at 10:06 pm
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December 3, 2010 at 7:36 am
Mike
Interesting cost analysis, however the reality would likely be combinations of regulation within an ETS and allocation of revenue from permits combined with subsidy to promote renewable energy sources.
You should also acknowledge the role the CDM and the EU ETS has had in promoting renewable energy in some of the fastest growing and largest emitting countries. China is currently erecting a wind turbine at a rate close to one an hour thanks to the CDM helping Kyoto signatories meet their emissions reduction targets.
Further to this is the fundamental reality that a market mechanism will promote ongoing carbon price consciousness, domestic supporting services such as monitoring, reporting, validation/verification, trading and investment services while allowing the market to find the lowest price for emissions reductions.
There is definitely a role for large scale government investment but emissions trading is complimentary to this, not mutually exclusive.
December 3, 2010 at 3:20 pm
Mike
It’s no silver bullet but it is a bullet and we’re shooting blanks right now.
You have put forward an interesting analysis, however I would suggest that the reality of carbon pricing and emissions trading in Australia would likely be combinations of regulation within an ETS and allocation of revenue from permits combined with subsidy to promote renewable energy sources.
You should also be fair about the role the CDM and the EU ETS has had in promoting renewable energy in some of the fastest growing and largest emitting countries. China which has been mentioned is currently erecting a wind turbine at a rate close to one an hour thanks in no small part to CDM investment.
Further to this is the fundamental reality that a market mechanism will promote ongoing carbon price consciousness, domestic supporting services such as monitoring, reporting, validation/verification, trading and investment services while allowing the market to find the lowest price for emissions reductions for projects.
The issue of renewable energy, energy efficiency and addressing climate is already a political football in Australia and our history of government spending on large projects is riddled with waste and accusations of negligence.
Your rather scathing criticism of the EU ETS overlooks the progress and relative miracle that an international emissions trading scheme exists at all, especially when we still find ourselves having debates at political level as to whether climate change is indeed human influenced. The UNFCCC and EU has always adopted a learning by doing approach which has seen ongoing refinement of the CDM and EU ETS at all levels. It is by no means perfect and has turned some of my own hair grey recently but it continues to deliver emissions reduction, technology transfer and capital transfer to small and medium sized industry and is an example of international cooperation and partnership that is increasingly rare.
The lessons and flaws of the EU ETS (should we ever find ourselves with an ETS) provide invaluable lessons and guidance. It is ludicrous to suggest that these would simply be ignored but whether they are incorporated or not is a domestic political issue here.
There is definitely a role for large scale government investment but emissions trading is complimentary to this, not mutually exclusive. Emissions trading engages industry and business at a resolution (industrial plant level) and cost efficiency government action can never hope to, allowing energy efficiency gains, decentralised renewable energy gains and supporting the development of businesses and services further contributing to the economy and domestic intellectual capital.
I apologise for the poor structure of this comment, it was written on a bus, but I felt compelled to comment as I passionately believe that market mechanisms have a crucial and beneficial role in our response to climate change. There is no silver bullet (those that spruik one are understandably enthusiastic but lacking a realistic view) but any bullet that takes effective action out of the hands of fickle, impressionable and uneducated politicians and into an enterprising free market should be welcomed with open arms.
December 13, 2010 at 9:36 pm
Leigh Ewbank
Thanks for the comment Mike and apologies for the delayed response.
Firstly, this piece is focuses on the domestic climate and energy debate which is why the Clean Development Mechanism was not discussed. Second, my ‘scathing criticism’ of the EU ETS is not mine. It is the analysis of the pro-carbon pricing group Sandbag, whose analysis has found deficiencies with the current emissions trading scheme. I was simply presenting some of the findings of their Cap or Trap? report.
You claim that I present investment and carbon pricing as mutually exclusive. This is not the case. In fact, you will find that throughout my writing, I present public investment as a way of increasing the prospects of effective carbon pricing measures. I have argued on many occasions that strategic public investment in clean technology research, development, demonstration and deployment as well enabling infrastructure can lay the foundation for a decarbonising economies.
In the context of Australia, investment in enabling infrastructure, clean technology procurement, and other initiatives that make clean technologies cheap will help the nation avoid implementing a carbon-pricing regime that resembles a block of Swiss cheese.
Earlier this year, the Melbourne-based public policy think tank the Grattan Institute identified compensation worth $20 billion (over a decade) for Australia’s most carbon-intensive industries in the government’s Carbon Pollution Reduction Scheme. This generous industry assistance would delay the structural adjustment needed to decarbonise the Australia economy. Similarly, the Australia Institute’s Dr Richard Denniss found that offset mechanisms contained in the CPRS would allow Australia to import international offsets in lieu of reducing domestic carbon emissions until 2033.
In your comment you argue that ‘a market mechanism will promote ongoing carbon price consciousness, domestic supporting services such as monitoring, reporting, validation/verification, trading and investment services while allowing the market to find the lowest price for emissions reductions for projects.’ Energy technology innovation is an interesting omission (I wonder if it was intentional?). The Breakthrough Institute and the ITIF argue that energy innovation is a complex process and will require a comprehensive energy policy not just a price on carbon.
This position is consistent with the International Energy Agency’s Peter Taylor (Head of the Energy Technology Policy Division), who said earlier this year that ‘…[A] price on carbon is needed to send a strong signal to the market, but it’s unlikely this will be enough to transform our energy system. Other policies will be needed to support technology development and deployment.’
Cheers, Leigh Ewbank