Out they’ve come over the last two days, lured by the imminent announcement of the carbon price details — more corporate shills, more politicians, more unionists, more polluters, with their hands stuck out, making that distinctive bleating noise of the rentseeker in full cry. It’s like a zombie film, with a shuffling, clumsy but somehow inescapable horde of the undead — braindead, more correctly — roaming the streets, demanding “compensation”.
Ralph Hillman rose at the Press Club a short while ago to repeat his long-discredited claims about the impact of a carbon price on the coal industry, a sector which faces only one real problem, how to count all the money that’s going to roll in from China in the next few years. Instead, Hillman wants handouts from taxpayers for an industry that is the chief dealer to the cheap energy and cheap steel junkies of the planet.
Andrew Wilkie has joined in. Having declined to participate in the Multi-Party Climate Change Committee, he’s now pulled the classic swing vote stunt of issuing demands right at the death. Wilkie has his own version of “think global, act local” by demanding special measures for his own electorate and its industry. Nicely played.
This stuff will be incessant for the rest of the week and then really ramp up next week, when the rentseekers who missed out will lift the pitch and volume of their bleating. To cut through all the propaganda, self-interested analysis and political race-calling, it might be useful to keep in mind some basic principles in judging Sunday’s announcement. These are some criteria by which to judge a carbon price scheme.
1. Will it contribute to the possibility of an international agreement to curb emissions? Even a highly effective Australian scheme will make no difference to climate change — we’re a mendicant when it comes to preventing the impacts of climate change on our economy. So we need to maximise the possibility of an effective international agreement by appearing to take seriously the task of curbing our own emissions.
Fortunately, this is an easy hurdle to get over. Even a relatively innocuous carbon pricing scheme can be sold internationally as effective action. There’s no international version of the Productivity Commission to point out that we’re not doing much — until the scheme runs for a few years and it becomes apparent our emissions aren’t falling.
2. Will it reduce emissions by at least 5% by 2020, and hopefully more? The problem with the Rudd government’s CPRS was that it so muffled the price signal from the ETS under compensation that industry had no incentive to shift from business as usual until well into the 2020s. If the industry compensation measures are limited, then even a relatively low starting price will be effective, as long as business knows the price will increase in coming years — they can then make investment decisions based on that. The only real problem with a low starting price — assuming it will increase — is that it probably makes necessary the retention of interventionist and inefficient renewable energy programs that politicians like, such as renewable energy funds or the Renewable Energy Target.
Clearly, any CPRS-like scheme in which high levels of compensation continue up to 2020 will fail this test.
Those are the two critical tests. A scheme that passes these deserves support. Everything after this is secondary in importance, but worth considering anyway:
3. How fair is the industry compensation? Handouts to big polluters aren’t fair. They’re a reward for whingeing and rentseeking, further encouraging Australian business to put their energy into demanding handouts from government rather than innovation and entrepreneurship. But fairness isn’t a threshold issue for the carbon price, as long as it works. That was the problem with the CPRS — the levels of compensation weren’t merely unfair, they thwarted the operation of the scheme. But it’s now accepted in Australia that the price of reform is slinging money at people even when it isn’t justified. If the carbon pricing scheme within which the compensation will be provided will actually reduce emissions, unjustified compensation is simply the cost of our dreadful generation of reform-averse and inept political leaders, and not a reason to reject the scheme.
That said, there is more and less unfair. The steel industry is under the hammer from a high dollar and import competition. Its demands for compensation, while misplaced, have far more validity than those of the coal industry, which will grow significantly even with a high carbon price. There’s also an element of industry policy in all this — the only reason the steel industry is being taken seriously in its demand for compensation is because of the lingering conviction that the industry — on a long-term historical trend to shifting overseas — should continue to be propped up locally.
And then there’s the matter of the companies in our electricity sector, either state governments or multinational corporations, who have purchased and operated emissions-intensive assets for over a decade knowing that a carbon price would eventually be required and that, as producers of the most emissions-intensive energy, they would be the ones facing the highest costs. Their claim to compensation or “adjustment measures” is even less than that of the coal industry.
4. How fair is household compensation? Many of the same arguments apply here. Given the impact of a carbon price on household budgets will be small — significantly less than that of the GST — the only case for compensation is for low-income earners and pensioners, who have far less capacity to absorb the cost and spend proportionately more on emissions-intensive activities that will see prices rise. Middle and high-income earners receiving compensation is, like any form of middle-class welfare, unjustified, but again not a basis for rejecting the scheme. It’s just the political cost of bad politicians.
5. How efficient is household compensation? Ideally, household compensation should be delivered in a way that minimises economic and administrative costs or even, as Ross Garnaut argued in recommending Henry Review-style tax reform measures, actually has benefits in areas like productivity. It should also be delivered in a way that has the lowest cost in terms of foregone abatement opportunities. Exempting petrol for everyone isn’t particularly efficient, because there may be some abatement opportunities foregone that cost less than others (and middle and higher-income earners can afford to pay higher petrol costs anyway). But reducing fuel tax concessions, by reducing the current pro-emissions bias in the tax system, will increase the effectiveness of a carbon price economy-wide.
6. Does it make any provision for adaptation both in Australia and overseas? The grim reality is that world emissions will continue to rise, and Australia will be an early casualty of the resulting rise in global temperatures. Efforts to curb emissions don’t have to exclude an acknowledgment that Australia faces a substantial economic cost from warming that will happen regardless of what the world decides to do in the short-term. The best form of adaptation is to give those who face its costs greater resources to do so, via a sovereign wealth fund or some other mechanism of inter-generational transfer. Australia also has a specific responsibility toward Pacific states which are already dealing with the problems of rising sea levels. This is a foreign aid problem that is not merely a moral responsibility for Australia, but a direct political responsibility whether we like it or not.
All that remains is to see the actual package. Until then, everything else is speculation and self-interested rhetoric.
I’d add a 7th criterion, ‘Does it result in obviously perverse outcomes?’
If the Hobart zinc smelter (not ‘zinc mine’ as it says in the Herald Sun), primarily powered as it is by low-carbon hydroelectricity, is truly disadvantaged by the carbon price legislation, then Wilkie has every right (indeed, a responsibility) to arc up. Tasmania and its industry deserves to reap a benefit from having had the good sense to invest in industrial-scale renewable electricity decades before everybody else.
If the zinc smelter in Hobart runs on low emissions hydroelectric power, then surely a price on carbon will barely affect it. If, then, our efforts contribute to international efforts to reduce emissions intensive power use, then that smelter will have an increasing competitive advantage against zinc smelters around the world.
Good on them!
I would expect that rent seekers would not make half as much progress this time around (other than Wilkie) as if the govt moves from the agreement it will lose the votes it needs from the independents and the greens.
The fact of the matter is the deal is done, no matter what it is vested interests and News Ltd will attack the govt so they have nothing to gain by appeasing rentseekers.
“It’s like a zombie film, with a shuffling, clumsy but somehow inescapable horde of the undead … roaming the streets, demanding “compensation”.”
True. But equally true of the renewable energy spivs, hoarsely demanding “subsidy”.
At least fossil fuellers produce baseload power at reasonable cost.
Let’s see if Keane can transcend his bias and analyse (say) Flannery’s Geothermal fantasy in the desert, Geodynamics, which has swallowed over $100m in public money so far, for no result. Or give us a run-down of Denmark’s wind turbine fiasco…or on the net job losses in UK and Spain caused by “renewables”…
(I wonder how long Keane would last at Crikey if he converted to AGW scepticism…would he make it past lunchtime? Frog-marched to the street by security, his coffee mug chucked after him? )
A generally good summary BK but …
[#1 Will it contribute to the possibility of an international agreement to curb emissions?]
This is really key but your claim that appearance and reality in the effectiveness of the scheme is dangerous, because it assists those that argue for a tiny carbon price and utterly piffling targets. There would be very strong demands in this setting for significantly more swingeing regulation and direct state investment in abatement.
A scheme that not only looks credible but is, remains the best counter to this both against the opponents of action and the more wide-eyed and credulous proponents of non-market driven systems.
One may add that this is the problem with substantial industry compensation and to some extent too, with household compensation. I’m less against household compensation because this does less harm to scheme effectiveness and get more support per dollar of handout than industry compo does. This is one reason why some opponents of action are slyly suggesting there should be no household compensation– it allows two arguments that contradict each other to stand side-by-side (compensation shows the scheme is just a money-go-round and won’t work & abolishing compo would be unfair). I’d prefer much of the compensation to households in the low income bracket to be only semi-liquid — stored value cards that could be used to purchase staple groceries, pay doctor & dental bills, public transport costs, clothes and household items etc …
I’d much prefer that those industries that thought they were being harmed by competition with those not subject to a carbon price be required to demonstrate that this was so, and the extent of any trading disadvantage bound up exclusively with carbon pricing. If they could then demonstrate that after best compliance, their position would be prejudiced by, say $10 tCO2, they could then get either a BTA to that value (for goods coming into Australia from those traders in the category they specified) OR permits to the value of that post-adjustment disadvantage for that part of their production going into that market.
An adjunct to the scheme in which “dirty energy” costs in business became progressively less deductibly by 2020 would increase the effective cost of carbon emissions without greatly affecting the operation of an ETS. It would largely catch those businesses outside the ETS. Again, funds raised by this could be channelled back into households and other public goods (such as new thermally efficient centrally located quality public housing stock).