What Would A Quick Transition To ETS Really Mean?

July 4, 2013 – 12:05AM Matthew Wright and Trevor Jack Read more: http://www.theage.co…l#ixzz2Y06Kt4Wm The newly minted Rudd government may bring forward the date at which the Gillard carbon tax converts to an emissions trading scheme (ETS), currently legislated for July 1, 2015. What would an earlier transition to an ETS, linked to the European system, mean for the community, business and global warming? An early transition may be impractical or at least fraught with difficulties (ref Greg Combet). If an ETS was linked to the European scheme and the price there remained low (around $6 a tonne), income from issuing ETS permits would be substantially lower than budgeted for the carbon tax ($24.15 a tonne in financial year 2014 and rising). This budget shortfall could be averted by applying a floor price – in which case the resulting ETS would just be the current carbon tax but with window dressing, a different name and substantial logistical and bureaucratic technical difficulties. Although technically different, an ETS and carbon tax have similar objectives. An ETS sets a limit on pollution (supply constraint) and allows the market to determine the price. A carbon tax sets a price for polluting and allows the market to determine demand (which equals supply). If the defining factors of each system are set consistently, each will result in the same price and demand (i.e. volume of pollution). But the factors need to be set in advance of the period in which they are effective. Accordingly, these factors are based on projections. The problems with the European ETS, principally a price that is too low to have any meaningful effect, arose mainly because the key factor (the volume of permits) was based on a projection that didn’t allow for the GFC. This is not a criticism – not many people saw the GFC coming. But it explains why the scheme is so ineffective and the price so low. An argument for transitioning to the ETS earlier than currently legislated is that it would be cheaper. True, in the short term, given that the carbon tax would be around $25 and the ETS cost would be about quarter of this. But this is cheaper in the same sense that buying a five-litre can of fuel is cheaper than buying a 20-litre can. Each is a can of fuel. But the useful content is different by a factor of four. Similarly, a $25 carbon price buys much more real abatement than $6. And the policy objective is surely real carbon abatement and not just “anything so that we can be perceived to be doing something”? Changing to an ETS and linking with Europe would be similar to retaining the carbon tax but reducing it to $6 a tonne – but a lot easier. But what is the effect of a carbon tax at $6 a tonne? On consumers? A lower carbon tax might flow through to lower prices for electricity and goods heavily dependent on electricity for production. But this assumes that generators would pass on resultant cost reductions. Is this likely? Government control/monitoring is likely to be necessary to ensure such behaviour – as it was to ensure price increases were not excessive when the tax was introduced. Assuming the compensation package – including lower personal taxes, based on a higher carbon price – is not changed, the net result would be lower prices. It is likely that such changes in prices would be imperceptibly small. And such lower prices would be offset by the cost of higher taxes/lower services necessary to make up for the forgone tax revenue. (TANSTAAFL – There Ain’t No Such Thing As A Free Lunch.) The effect on businesses not liable for the carbon tax? Essentially similar to consumers – generally imperceptibly lower input prices but with the possibility of higher taxes to make up for forgone government revenue. On businesses liable for the carbon tax? Lower costs, much of which might flow through to higher profits. The effect on global warming? Carbon pricing can affect short-term production decisions and thereby change short-term CO2 production. A lower carbon price should increase, by a small margin, CO2 emissions. But the main imperative for any carbon abatement policy, is to affect long-term investment decisions and transform the community and economy to a cleaner future. For example, any serious response to global warming must result in no new fossil-fuelled power stations. Decisions on investments with 30-year-plus lifetimes are based on all the future circumstances, including explicit carbon costs. If investors perceive the Australian government taking a token approach to global warming and expect this to continue well into the future, they should factor lower future carbon prices into their decision making – i.e. more coal-fired power stations rather than better/smarter grids, energy conservation measures, renewable power. On the other hand, if investors perceive that the government and community generally want action, they will expect carbon pricing to rise steeply over time. Thus, investors would invest in renewable alternatives, rather than fossil fuels. Combined with the Coalition’s policies, which provide no incentive for economy-wide transformation, the effect on global warming of the government implementing a lower carbon price is likely to be further delay in de-carbonising the Australian and global economies. On political standing? With appropriate spin, (possible) lower costs to consumers, higher profits to generators, and omission of the need to fund the revenue shortfall, there may be short-term political gain, relative to the “ban the carbon tax” alternative, in switching to a lower carbon price. But the government’s credibility in terms of having a serious long-term strategy to address global warming would become similar to that of the opposition – essentially non-existent. If the political need is to be seen to be doing something, then an ETS, with a floor around $25, might dissociate Rudd’s “new policy” from Gillard’s so-called dishonestly introduced carbon tax yet maintain the price at a level at which it is plausible, that investors would believe the government to be serious and thereby consider cleaner rather than more carbon-intensive investments. Matthew Wright is the executive director of climate and energy think-tank Zero Emissions. Trevor Jack is an actuary with JAC Actuarial Consulting. Read more: http://www.theage.co…l#ixzz2Y06GVUtC Taylor Scott International