Economists condemn flawed carbon trading scheme

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On February 18, 10 Australian economists criticised the Rudd government’s proposed carbon emissions trading scheme, and called for a science-based policy to achieve 25%-40% cuts in emissions by 2020. The statement is reprinted below.

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The Australian government is to be congratulated for its decision to take part in the global effort to reduce greenhouse gas emissions. However, the proposed Carbon Pollution Reduction Scheme (CPRS) cannot be regarded as consistent with the government’s expressed goal of a global agreement to stabilise the climate.

Among a number of serious flaws, the proposed target of a 5% reduction in emissions (with a 15% reduction conditional on a global agreement) is simply inadequate to deal with the problem.

In our view, the CPRS fails on the following criteria:

First, while there can be no doubt that a high carbon price will result in a significant transformation of the Australian economy, it must be remembered that such transformation is the actual goal of an emissions trading scheme.

It is ironic that, while the usual purpose of compensation packages is to ease the pain of such transformation, in the case of the Rudd government’s package, compensation is being used to prevent such a transformation. The CPRS actually rewards the major corporate emitters for failing to act, despite having been on notice since at least 1997 that the emission reduction targets would be adopted.

Second, the most significant consequence of the global financial crisis is to increase uncertainty and, in turn, reduce new investment. The creation of more ambitious emission targets would provide certainty that would stimulate major investment in renewable energy infrastructure.

The consensus scientific and economic opinion is that the consequences of failing to address climate change will dwarf the costs of the current financial unrest.

Third, the Rudd scheme structures the compensation opportunities for energy-intensive, trade-exposed corporations in such a way as to provide an incentive for these corporations to expand production and emissions.

This will effect further restructuring of Australian industry that consolidates its energy-intensive character to the disadvantage of low-energy, energy-efficient industries.

Fourth, the proposed compensation of trade-exposed energy-intensive industries is underpinned by the implicit notion that government should ensure a level, and thus competitive, playing field. Yet the proposed compensation package will benefit industry sectors dominated by international corporations that hold considerable market power. The proposed compensation package will further enhance that market power, not create competitive markets.

Fifth, the Rudd government has designed a scheme in which every tonne of emissions saved by households frees up an extra permit for the aluminium or steel industry to expand their pollution.

In addition to destroying the moral incentive for households to “do their bit” to reduce emissions, this design feature renders all other policies aimed at reducing emissions pointless.

For example, households who spend $7000 installing photovoltaic solar panels might believe that they are helping to reduce emissions but in fact the only impact of such investment will be to slightly lower the demand, and in turn the price, of the fixed number of pollution permits issued by the government.

Sixth, the Rudd scheme fails to cost the complex administrative arrangements that will be required in order to effect the auctioning, the free allocations and the redistribution of permit revenues across the economy.

The CPRS is based on neither sound economics nor sound science. We call on the government, or the senate, to make major improvements to the proposed “solution” to Australia’s rapidly rising greenhouse gas emissions.

These improvements should include:

•Lifting the targets to 25-40% by 2020 based on the latest scientific evidence,
•Abolishing the free permits granted to the biggest polluters and
•Ensuring that individual action results in lower emissions, not lower carbon prices.

Unless these major flaws in the CPRS can be fixed the government should introduce a carbon tax as a matter of urgency.

In the meantime, we would strongly urge all Australian governments to immediately introduce incentives to maximise investment in the development and use of renewable and low-emissions technologies.

Dr James Arvanitakis, University of Western Sydney
Dr Lynne Chester, Curtin University of Technology
Dr Richard Denniss executive director of the Australia Institute, and adjunct associate professor, ANU
Associate professor Steve Keen, University of Western Sydney
Dr Andrew Mack, Macquarie University
Professor Barbara Pocock, University of South Australia
Professor John Quiggin, University of Queensland
Dr Stuart Rosewarne, University of Sydney
Dr Ben Spies-Butcher, Macquarie University
Professor Frank Stilwell University of Sydney