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Growth 61: A Taxing Debate - Climate policy beyond Copenhagen

Posted : Wednesday, November 18, 2009

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About the report

While the Australian Government has settled on a greenhouse gas (GHG) emissions cap-and-trade scheme (the CPRS) as its primary policy response to climate change, A Taxing Debate: Climate policy beyond Copenhagen asks whether this is really the best and most durable approach.

Contributors to the report argue it should not supplant the idea of a carbon emissions tax that would deliver more price certainty of price signal, transparency to consumers and clearer signals to investors.

The aim of this report is to advance the development of sensible and measured policy responses to the risk of climate change. A carbon tax may not be the policy of choice now, but the ETS bubble may burst and the world may - in the not too distant future - be looking for a viable "Plan B" to replace the problematic cap-and-trade system.

Carbon tax: A simpler solution

Part 1 of the report examines whether cap-and-trade should really be the policy of choice in the debate over how to reduce greenhouse gas emissions. The Australian community doesn't seem to be aware that it is not GHG emissions that will be traded, but a form of carbon derivatives.

International challenges

Part 2 highlights perspectives from major countries on the Copenhagen process and what, if anything, is likely to emerge from it (see chapters by Morris on the US, Yin on China, Ghosh on India and Bardt on the EU). It asks whether the introduction of a global strategy with the flexibility necessary to adjust to national circumstances (see chapter by Alan Oxley and Bill Bowen), would be more effective than the current emphasis on negotiating binding international or national emissions limits.

Key points from the report authors

• An emissions trading scheme should not supplant the simpler idea of a carbon emissions tax (see chapters by Dr Michael Porter, Geoff Carmody, and prominent Yale economist William D Nordhaus).
• Cap-and-trade may be a more politically acceptable approach than a carbon tax but only because it hides the true costs to consumers and creates a false sense of financial and economic security.
• By contrast, a carbon tax would deliver more certainty of price signal, stability and transparency. It would provide clearer signals to investors; better enable firms to plan for investments in capital equipment and new low-emissions technologies; and introduce much needed simplicity and directness to climate policy.
• There is a very real prospect that emissions trading would create a vast and uncertain set of derivatives trades based on carbon debits and credits, and that a carbon finance bubble could eventually dwarf the recent GFC problems (see chapter by Porter).
• A consumption-based carbon tax would also fit within the GST and WTO system (see chapters by Carmody and former WTO Director Gary Sampson ).Taxes are less vulnerable to manipulation, evasion and corruption - a significant risk in any international emissions trading scheme (see chapters by Porter and Nordhaus).
• A carbon tax creates the incentive and ability for people to reduce their carbon footprint; unlike an ETS which has no incentives for the community directly.
• The papers point to a "policy ramp" as a more effective approach to efficient emissions reductions. Judgements about the level of discount rate used are critical to the calculation of costs and benefits. For example, Stern and Garnaut use a very low discount rate to derive their conclusions on the costs of delay and the benefits of acting early. However, an artificially low discount rate distorts the nature of the tradeoff between future and present generations (see chapters by Nordhaus and Porter). A steady ramping up of policies provides a better response to intertemporal and intergenerational equity considerations.