Friday, March 21, 2008

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.


Anonymous said...

This auctioning will yield up to $20 billion in revenue.

That's rubbish. The good prof G doesn't know what he's talking about. Those aren't bloody revenues. They're costs.

What a stupid, stupid decision to exempt aluminum. The industry receives big subsidies and is one of the biggest polluters yet they get a free pass while other industries have to take the can.

This guy is a disaster as an advisor.

At first he was offering the government scientific advice about the need to reduce carbon emissions by 90% on 42 years time. But was asked to offer an economics paper using the current science available such as the IPCC.

I'm surprised you're supporting this twit, Harry.

Anonymous said...

How can auctioning permits be a "growing revenue base" if fewer permits are auctioned every year?


Anonymous said...

Sorry I was anon 1

Anonymous said...


hc said...

Spiros's question is a fair one.

Fewer permits will be listed and my presumption is that the price will rise.

My claim will only be true if the price effect dominates.

The conditions for that to be true are strict. Indeed after a while the price might drop off if the right innovations are made.

drwoood said...

My understanding (so far) of Garnaut's ETS discussion paper is that heavy-polluting trade exposed industries would not be exempt from the ETS (thankfully). On p78 it states "Transitional financial assistance (possibly in the form of free permits) should be provided to account for distortions arising from major trading competitors not adopting emissions limits (or pricing)." This is very different from exempting these industries.

IMO financial assistance or free permits for these industries is a bad idea (but nowhere near as bad as exemptions). Free allocation of permits lead to major problems in Stage 1 of the EU ETS because before the ETS was introduced firms would measure emissions at the upper limit of the margin of error (so they get more free permits) and after the schemes introduction they would measure emissions at the lower limit of the margin of error. This lead to more permits allocated than there were emissions and a collapse in the crbon price.

If some of these industries decide to close down, so be it. Governments should know better by now than to waste taxpayers money on uncompetitive industries. The amount of capital investment from industries like aluminium that exists would suggest that for it to be a good idea for them to 'close down' would require a very low discount rate on their capital investment and a very high carbon price. There is a large amount of 'crying wolf' from these industries that is used to extract subsidies from governments.

Rixaeton said...

I have to agree in not letting any industry have a free ride. Environmental costs are like any other costs, and should not be presumed to be "free" when it is a limited resource. For example, the proper accounting of livestock production which takes into account the transport and storage costs that are also involved, which results in a staggering 159.03 Mt CO2-e, (1990's and 2004 figures) which accounts for 31% of all of Australia's emissions, and is more than road transport. There is an excellent summary at

Now here is the good bit; with no livestock in Australia, we would reduce CO2-e by 31% (ie: a lot). Furthermore, this could be done by consumers in Australia spending less instead of more. All other strategies are about increasing the cost of items to include their CO2-e cost, but it is so hard to reduce consumption of electricity, fuel etc without significant capital cost. Vegetarian diets are cheaper than meat diets already, and with CO2-e costs included the cost difference will be even greater. So, not all greenhouse reduction strategies are about costing consumers more. Vegetarian diet will cost less.

As I am not an economist, I would be interested in an economist's view on this.