Efficient & Effective Carbon Tax Needed

Political leadership contenders in Australia talk about “direct action” on climate change, but stop short of taxes or emission trading schemes. Economist Geoff Carmody says governments often aren’t good at direct action. Note the costly insulation shambles, the green loans debacle and the failed green car scheme. “We should be upfront about getting a globally applied, predictably rising, price on emissions in place. That delivers greater investment certainly, drives changes in technology and, globally applied, cuts emissions.”

Geoff Carmody in The Australian (14 July 2010):

IN terms of effectiveness and efficiency, a price on emissions is the way to go.

THE Coalition and Labor are leery of the idea of a carbon tax, interim or otherwise. They prefer the “direct action” path, which has a more positive political ring.

This is all smoke and mirrors. It delivers lousy cost-benefit results. Consider some examples.

Solar panels are widely touted as clean energy. Their economics are poor at present. So governments subsidise their installation. This puts a high price on reducing emissions. Taxpayers pay (where governments offer installation subsidies); energy users too poor to afford solar panels pay (where feed-in tariffs are financed by a surcharge on those not using them).

These direct action measures are expensive. One way or another, consumers pay.

There’s lobbying for subsidies for geothermal energy; this is also an expensive energy source, given market conditions and different energy source costs.

There’s lots of ranting against dirty coal as an energy source. Trouble is, it’s relatively cheap at present. How could we deal with that? Some suggest we regulate against its use. To back that up, some argue for mandated proportions of energy to be produced from renewable sources. Whether or not all renewables reduce greenhouse gas emissions, regulatory direct action mandates a shift to higher-cost energy sources. Guess who’ll pay?

There are hints about more extensive and demanding regulation to improve building energy efficiency. This is probably laudable. There’s large scope to reduce energy consumption (and associated emissions). But building costs will rise, and they will be passed on.

Similar points could be made about mandating fuel consumption standards for vehicles.

On the regulatory front, Australia seemingly can’t take a trick.

We seem to be good at encouraging higher-cost means to reduce emissions and preventing exploitation of possible alternative solutions. We are prepared to sell uranium to others for generating nuclear power but don’t trust ourselves to use it for the same purpose. Bizarre, no?

France relies substantially on this source of energy. Others are increasing their reliance on it. Why is it off the agenda here?

There are many more examples. Overall, politicians tiptoe around the basic proposition that putting a price on greenhouse gas emissions, applied comprehensively, is what’s needed.

The political consequences of this are depressing. The economics are more so. All direct action measures put a price on carbon. They do so in an inefficient, ineffective and hidden way. Yet it seems mainstream politicians are prepared to pay a lot to purchase a hidden approach to putting a price on emissions.

As recent experiences attest, governments often aren’t good at direct action. Look at home insulation, green loans and the green car debacles. The first two were rorted or abused. The third produced a market dud. It was old-style protectionism.

All three cost a bomb and failed to produce much – if anything – of their intended outcomes.

Should we go back to the Rudd-Turnbull Carbon Pollution Reduction Scheme and put a price on emissions that way? Certainly not. It was a dog of a policy, with too many escape clauses. It was dishonest, inefficient and ineffective. Putting it on the back burner was a step towards good climate policy.

More generally, emissions trading schemes are scams in practice.

Trading in emissions permits – especially importing them – would have been a paper-shuffling exercise using funny bits of paper, right up there with “collateralised debt obligations” and “securitised assets”, and all the other oxymoronic-sounding instruments that lay at the heart of the global financial crisis. Indeed, during the GFC, in Europe, liquidity pressures crushed the price of EU emission permits so much that they became subprime assets.

Let’s be clear. If we want to reduce man-made greenhouse emissions, we need a clear and broadly applied price on emissions as the signal to start reducing them. We need a price on carbon.

A carbon tax, based on our national consumption of emissions, is likely to be the most efficient and effective option. This would exclude our exports and tax imports. It won’t adversely affect our international competitiveness, even if we act unilaterally. That feature makes it attractive to other countries, too. It would greatly improve chances of a global deal, which has been the target of the ineffective flailing around we’ve seen from Rio (1992) to Copenhagen (2009).

It’s cheaper than direct action and delivers superior emission abatement results.

The lever driving emissions reductions is price, however introduced. We should be upfront about getting a globally applied, predictably rising, price on emissions in place. That delivers greater investment certainly, drives changes in technology and, globally applied, cuts emissions.

This isn’t a recipe for poverty.

We’re trying to raise prices of emissions-heavy products compared with greener products.

We’re not trying to cut real incomes. Using most revenue from a carbon price to cut other distorting taxes and increase welfare payments can achieve the first effect and avoid the second.

Geoff Carmody is director, Geoff Carmody & Associates. He was a co-founder of Access Economics and, before that, a senior officer in the commonwealth Treasury.

Source: www.theaustralian.com.au