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Climate policy

CEDA released the second in a series on climate change A Taxing Debate - Climate policy beyond Copenhagen in August 2009, reviewing and comparing trading schemes for carbon credits or permits with a more explicit tax on greenhouse gas emissions. The details of the volume are set out below.

The CEDA Research paper in the volume argues that while superficially a GHG emissions trading scheme such as the CPRS  is more of a market solution than a tax on carbon emissions, the facts go the other way. This is because the process for issuing greenhouse gas (GHG) permits and credits invites all manner of rent-seeking and bureaucracy, and leads to the prospect of maintaining emissions by importing credits from jurisdictions with a poor history of financial governance. The cap-and-trade system for trading carbon credits is really a market in derivatives of carbon trades, and as the GFC has demonstrated, has a potential for unintended financial consequences that could in fact create a "carbon derivatives bubble" rather than reduced emissions.

A tax can also be phased in gradually, as most economists agree is appropriate in contrast to a rapid wipe-out of industries with emissions intensive activities. While there is dispute over the extent to which man-made GHG are responsible for global warming, there is no dispute that variations in the precise timing and location of policies will have any predictable consequences. In contrast a policy of taxing emissions and rebating taxes or funding new technology will have far more predictable impacts.

The CEDA Research document argues that the CPRS is not trading carbon emissions, but carbon credits, and derivatives of financial obligations relating to greenhouse gases. In the year 2009 in which the world reeled from the pass-the-parcel dimension to trade in housing-backed derivatives, from an over-financed US housing sector, it is not at all timely to be advancing a carbon derivatives model that suppresses incentives to reduce emissions and creates the capacity for governments in fact to issue privileges. It is not surprising that the CPRS has political legs, given that the burdens on consumers are suppressed and rents created and allocated.

The paper by Geoff Carmody in the CEDA volume, and the modelling by Access Economics commissioned by CEDA on the workings of a carbon tax, plus general considerations of economic efficiency all establish a powerful case for Australia developing a Plan B for dealing with community pressures to reduce GHG emissions. Far larger emissions reductions can be achieved for a given cost to GDP under an explicit carbon tax c.f. a heavily compromised ETS (see modelling for CEDA by Access Economics).

The emissions tax can also finance both reductions in distorting income taxes, new technologies and R&D and assistance to countries for which the burden of adjustment is most substantial.

Professor Ross Garnaut's final report for the Climate Change Review favoured a carbon tax over a heavily-compromised emissions trading system: (Garnaut Climate Change Review Final Report 2008, p. xxiv.)

CEDA's recent activity in climate policy in outlined below.

• Consumption tax modelling
  Carbon tax - a genuine alternative to cap-and-trade: New modelling shows carbon tax would have less impact on GDP and more impact on reducing emissions than cap-and-trade
• CEDA Climate change public forum
  Climate policy is emerging as one of the world's most testing economic, political and social challenges since CEDA began nearly 50 years ago. In the lead-up to the UN Climate Change conference in Copenhagen, CEDA provides a platform for Australian and international climate policy debate.
• Growth 61: A Taxing Debate - Climate policy beyond Copenhagen
  CEDA's latest report aims 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.
• Climate Change: Getting it right
  CEDA's continuing mission is to promote intelligent analysis and vigorous debate on our biggest global challenges. The report aims to stimulate a better understanding of climate change issues. In particular, Robert Shapiro's paper examines the two most prominent strategies for reducing greenhouse gases: a carbon tax and cap-and-trade.
• Garnaut Climate Change Review: Final Report
  Following the much-anticipated release of the Garnaut Climate Change Review's Final Report, Professor Garnaut spoke to CEDA in Sydney on 3 October 2008.
• Garnaut Climate Change Review: Emissions trading discussion paper
  At a CEDA event in Sydney, Professor Ross Garnaut presented his options for an emissions trading scheme for Australia.