Garnaut on emissions trading

The carbon emissions trading scheme released yesterday (in full here, brief version here) by Professor Ross Garnaut is worthy of careful analysis. The Age has a useful brief report.

Garnaut argues the scheme should be developed before a comprehensive global agreement but the intensity of its operation should depend on the response of other countries. Permits for the right to emit carbon should be auctioned so they go into their immediately identified highest value. This auctioning will yield up to $20 billion in revenue.

Garnaut suggests this revenue should be spent on improving the productive or adaptive capacity of the economy in ways consistent with reducing greenhouse gas emissions. I disagree with this claim – the revenues should go to those parts of public sector activity where they yield maximum benefits. Indeed it would be a positive outcome for revenues from carbon taxes to be seen as a way of cutting income taxes or the GST since they have the double-dividend advantage of tackling a public bad as well as providing the basis for a large and growing revenue base.

Proposals for $1b compensations to power companies for their higher costs are rejected but compensations will be paid to associated local communities. Garnaut argues such compensations would not reduce the electricity prices they charge which is true if the compensations are lump-sum. For the same reason I disagree with the claim of generators that the failure to compensate means that electricity generators have reduced incentives to introduce carbon-saving technology. Price rises for electricity are (of course) inevitable.

Heavy-polluting industries exposed to overseas markets, such as aluminum and cement, would be exempt from the quotas to prevent the destruction of their businesses and the leakage of carbon emissions to countries such as China which will not limit emissions.

I like the fact that three emissions trajectories are selected depending on the carbon mitigation responses elsewhere. The first would meet our 2020 target. The second would be more ambitious, which we would switch to when the West (the US and Japan) adopts a target to reduce emissions by 60%. The third would be the most ambitious, going beyond a 60% cut, but we would move to it only when developing countries such as China and India adopt effective responses. That’s limits the potential for Australia to be stuck with a first-mover disadvantage and provides some incentives for other countries to comply.

Each year fewer permits would be issued, as the trajectory chosen by the Government is pursued but the running of the scheme to an independent carbon bank. This means an intensified effort to cut emissions through time.

Hoarding and lending of carbon emission quotas is generally approved of by Garnaut - borrowing was prohibited by the earlier PM taskforce..

Penny Wong sounded more positive about this effort than the earlier work of Garnaut. She made the position of the Government on their carbon policies as clear as a sooty East Gippsland smokestack in a brilliant piece of Ruddspeak:

“We want to get the best results for our climate and for future generations, while minimising the pressures on working families and the risks for our economy. The Government is committed to taking international leadership by reducing Australia’s greenhouse emissions by 60 per cent of 2000 levels by 2050 but currently has no interim targets”.

The press as a whole seems much more enthusiastic about the Garnaut approach than the close to equivalent proposals unveiled during the time of the Howard Government by the PM's taskforce. It was probably Penny Wong’s references to ‘working families’ that did it.