Why a carbon price adds up: Bartholomeusz

The Productivity Commission’s study of carbon emission policies in other major economies has been seized upon by the Gillard Government to support its carbon tax proposal. While the commission does provide support for pricing carbon over policies like the Opposition’s direct action plan, the report does reveal that Australia isn’t lagging the rest of the world in carbon abatement and the cost-efficiency of that abatement.

Tony Abbott was also quick to point out that the commission found that none of the countries studied have economy-wide carbon taxes or emission trading schemes.

The core of the commission’s report, however, was finding that in a relative sense policies that put an explicit price on carbon are likely to be significantly more cost-effective than direct or implicit subsidies. That, of course, says nothing about when and at what level a carbon price should be introduced or whether it should start as a tax or as a trading scheme.

Nevertheless it is a useful finding. One of the more surprising aspects of the report is that Australia isn’t trailing the countries studied in terms of the levels of abatement being achieved – it sits “mid-range” with China and the US behind Germany and the UK – the existing measures in this country have been delivered relatively efficiently.

The implication of the report is that, with a carbon price, we could have higher levels of abatement for a fraction of the existing cost (i.e. at a low carbon price) or conversely, by simply displacing the existing schemes with a carbon price that imposed the same costs we could achieve far higher levels of abatement. In the commission’s terms, price-based instruments appear to be relatively cost-effective where they are not crowded out by other policies.

In other words, we should dispense with the hotchpotch of existing abatement schemes, like mandatory renewable energy targets, feed-in tariffs, incentives for energy efficiency and direct subsidies for construction or installing sources of renewable energy. (It would have been helpful had the commission reported before we embarked on installing pink batts and offering solar subsidies).

Apart from the relative lack of cost-effectiveness, the commission also makes the point that if subsidised renewable energy sourced from wind or solar displaced gas-fired generation, the abatement achieved would be far less than if coal-fired generation were displaced. Yet, because gas is a higher-cost energy source than coal, it was probable it would be displaced first.

That won’t please the Greens, who are fixated with renewables and who interpreted the report’s description of more than 1,000 different emission-reduction schemes, the vast majority of them explicit or implicit subsidies for renewables, as encouragement for even more support for them, despite the clear evidence in the report that they are an utterly inefficient approach to achieving abatement.

The commission wasn’t directed to look at either the price of a carbon tax or the merits of a tax versus a trading scheme, nor was it asked to look at compensation levels and distribution.

Those issues, which the peculiar coalition of non-Coalition forces are considering, are central to the questions of how efficient and effective the scheme might be in reducing emissions, to the cost of any scheme to the economy and community and the way that cost is distributed.

This article first appeared on Business Spectator.