Ross Garnaut has endorsed the government/Greens proposal for a carbon price scheme but substantially revised his approach to industry compensation.
In another update to his climate change review, Garnaut today released a paper on mechanisms to reduce Australian emissions. As expected, the paper endorses the Labor-Greens approach of a initial fixed-price scheme, followed by a move to emissions trading. Garnaut had supported that model when it was initially advanced by the Greens in 2010. As part of the framework for assessing models, Garnaut proposes a test for mechanisms to reduce Australia’s carbon emissions: “First, they must be a fully proportionate contribution to a global solution. Second, they must impose the least economic cost. Third, the costs of the domestic mitigation effort must be distributed equitably across the community.”
Garnaut goes to some lengths to emphasise that, contrary to the claims made by opponents of carbon pricing, the economic impact of a carbon price scheme in Australia is likely to be small and well below that of naturally-occurring factors such as interest rate changes, currency fluctuations, oil price rises and droughts. He also suggests a carbon tax is likely to be significantly more efficient than many other taxes and warrants consideration as part of a tax reform program, quite apart from its benefits in addressing climate change.
His updated mechanism is an emissions trading scheme, starting with a fixed, indexed price between A$20-30 per tonne, indexed at 4% pa, moving to floating price after 3 years, pending an independent review of international emissions trading conditions. That matches the Labor-Greens proposal, although that is based on a 3-5 year initial fixed price, rather than 3 years.
On compensation, which remains undetermined even at the policy proposal stage by the government’s climate change committee, Garnaut proposes using about half the revenue from permit sales to compensate households via income tax cuts and via the transfer payments system for low-income earners. Garnaut also flags that compensation be paid via assistance to improve energy efficiency in low-income households, but acknowledges potential problems with that approach — although not that the government is likely to be extremely wary of programs that risk a repeat of the home insulation or Green Loans sagas.
Crucially, though, Garnaut has made his biggest shift in the update process so far, and in effect given in on the issue of industry compensation for the three-year, fixed period. While originally a critic of the high levels of compensation offered under the CPRS, today’s paper in effect echoes Julia Gillard in saying that the compensation model of the CPRS has been the subject of extensive work and has credibility with industry, and therefore should be used as the initial compensation model rather than starting over from scratch. However, Garnaut calls for the round of handouts added to the CPRS model by Kevin Rudd in early 2009 as a “global recession buffer” to be removed, in effect restoring the original level of CPRS compensation.
After the three year fixed period, however, Garnaut calls for an independent body like the Productivity Commission to determine industry compensation levels, based on a comprehensive system of principles, in effect removing politicians from the debate. He sees household compensation as eventually consuming most of the revenue from the scheme, along with funding of about $2-3b for technological innovation — the same recommendation as in his original report.
The update is an unexpected win for Labor in what is looming as the key battle of the new carbon pricing regime, over industry compensation. Previously Garnaut was an ally of the Greens in their fight against generous handouts to polluters. Garnaut hasn’t now sided with the enemy in that battle, but his support for CPRS-style handouts for the initial stage of the scheme will bolster what is clearly Labor’s preference — to carry the CPRS compensation arrangements into the new scheme to minimise industry opposition.
Hi Bernard,
He has to support it, this issue is his source of income
Astro………
………Turf.
Astro – How come those opposed to this govt always want independent analysis but as soon as it supports the govt’s postion the analysis is branded worthless?
This to me seems to vindicate the govt’s softly softly approach to announcing their policy, they used Garnuats first few updates to reiterate the need for action, then they announced their plan for action (presumably after discussions with Garnaut) and now they have a report supporting their position and recommendation on some of the details which they will no doubt take up in the policy.
Would love to see some bipartisan certainty on at least certain aspects of this report.
If both parties are at polar opposites in terms of actions or even basic belief then we are doomed to be stuck in a legislate / repeal cycle like the US appears to be at the moment as power changes hands.
This is not sufficiently certain to be able to predict ROI on multi million dollar,
20-50 year asset investments that need to be made in the next few years.
I particularly have a problem with Abbott here as there is an inconsistency
that is worrying on his basic belief in climate change, statements in public
vs. statements to his base and what is politically expedient when the political
winds are blowing.
All parties (if we are to take them at their word – ‘gospel truth’ or not) now have various climate change policies, the difference of opinion is (hopefully) on how best to achieve these targets through policy.
Garnaut should be respected as an economist and the believe / don’t believe
part of AGW almost becomes secondary for this report as this is a policy review that can be viewed as a means to insure against climate change risks and cover the costs of an
externality that gives a right to pollute not currently corrected by our ‘market’.
This right has proven to cause impacts to the economy that are not borne by the emitter and should be curtailed by taxes or a market mechanism like the right to smoke cigarettes.
Garnaut’s recommendations here can be seen as an independent economic review of how best
to achieve this at least cost and impact to the Australian economy.
At the moment Labor’s (& the green’s?) policies seem to get more ticks
than the Coalition’s in achieving this.
A large part of the most recent elecricity rises has been uncertainty over climate
policy, this is reflected by commments by business leaders like Marius Kloppers. Being stuck in a reform/repeal cycle on this critical issue is unlikely to help this.
Ideally would like to see some basic bi-partisan principles to at least put
some certainty under companies actions on the type of electricity generation,
infrastructure and society we should aim for that typically span decade long
investment timeframes.
Man – I agree with what you are saying but I don’t think we will have to worry about this being repealed, in all liklihood the greens will have control of the senate for the next lower house term which will make it alomost impossible to repeal in the short term and by the time it is possible it will have become accepted. Plus there is still a reasonable chance that someone other than Abbott will lead the Libs into the next election.