Emissions Trading: Towards the biggest economic change in Australian history

With Alan Moran
‘Placing a limit and a price on emissions will change the things we produce, the way we produce them, and the things we buy’, states the Federal Government’s Carbon Pollution Reduction Scheme Green Paper, which compares the economic impact of the proposed emissions trading scheme with the breaking down of tariffs and liberalisation of the financial sector in the 1980s.
The introduction of a wide-ranging emissions trading scheme (ETS) is, as the Minister for Climate Change and Water, Penny Wong, acknowledges, a ‘tough … whole-of-economy’ measure. It is an unsettling statement of politics in the 21st century that this dramatic change to the economic structure of the nation is being formulated without any clear appreciation of what it will cost, where the costs will fall and whether the costs will bring any benefits.

The ETS vs. the GST

Many commentators have pointed to the introduction of the GST in 1999 as an economic reform on the equivalent scale of the ETS. In fact the ETS is a far more comprehensive policy measure than the GST. The GST saw the introduction of a flat and stable broad based consumption tax, to raise revenue. By contrast, the ETS seeks to penalise energy intensive forms of production, such as coal, and to a lesser degree, gas based electricity production. And it plans to do so in ever-increasing increments.
After its introduction in 2010, the government plans to steadily raise the price of emissions permits by restricting their supply, until, in 2050, the country is emitting 60 per cent less greenhouse gases than it was in the year 2000. The government’s objective is for an ETS to bring snowballing price rises spreading across the economy for at least the next four decades. But the outcome will be far more injurious than this. It will mean-at least if Australia’s tax approach is not followed by all nations-the disappearance of staple industries like smelting, cement production, cattle and sheep rearing as well as the coal based electricity industry which supplies 90 per cent of our needs, and for which there is no alternative.
It will also mean a vast increase in the taxation of petrol. The price of petrol would need to rise to over $5 and perhaps $10 per litre to choke off the demand to the level proposed by the government.
As a consequence, the ETS will vastly devalue homes, factories, and commercial premises. It will require revolutionary and painful changes to the way we socialise, work and play.
The ETS differs from the GST in many other respects. Not least among these is the duration of its prior consideration. The GST was a policy initiative debated in political and business circles for nearly two decades and road tested in many nations around the world. Since it was promoted by then-Treasurer Paul Keating at the 1986 tax summit, the country fought three elections on the issue of a consumption tax. 1993 saw John Hewson’s FightBack! package partly flounder on the GST issue, 1998 saw John Howard successfully take the GST to the ballot box, and in 2001 Kim Beazley asked voters to support a partial rollback of the now implemented tax.
By contrast, the federal government’s approach to the ETS has been to emphasise urgency, and to produce a steady stream of draft and interim reports, green papers and government responses that add to the air of inevitability.
Moreover, we are not even going to see any modelling of the economic impact of the ETS until Treasury reports back in November this year.

An open-checkbook…

Less than 18 months away from the implementation of a ‘whole-of-economy’ reform, Australian businesses and consumers have almost no idea what is going to happen to prices. It is no surprise that investment is drying up in vital sectors like energy and energy intensive activities, while firms nervously wait to find out what impact the ETS will have on their business models-or what concessions they are able to squeeze out of the implementation process.
The level of ignorance about the facts and the rationale for an ETS is widespread. In July, an ACNielson poll reported that while 67 per cent supported the introduction of the system, only 39 per cent professed to understand what it was. Confusion is also apparent in political circles. For example the Treasurer, Wayne Swan, has claimed that the inflationary effect of the ETS will be a once off. Unless the initial permit allocation somehow manages to dramatically reduce carbon emissions to 60 per cent in the first twelve months after implementation, the ETS demands a steady price increase over a number of years to achieve that goal. The government is hoping that technological change will be able to offset some of the price rises, but this is surely the first time that the health of the Australian economy has been bet on the entirely unpredictable pace of invention and innovation. And throwing money at research and development-as the government plans to do with some of the proceeds of the ETS-is no guarantee of commercially viable technology.
The ETS is the largest change to the Australian economy since settlement 220 years ago. For such a significant reform, it is being designed, prepared and implemented at unprecedented speed. It lacks the comprehensive nature that would be crucial to ensure its impacts are felt equitably-the inclusion of major sectors like agriculture is being deferred and other sectors are receiving preferential treatment.
The opportunities created by inconsistent burdens and political favours will be targeted by lobbyists seeking competitive advantages around the new system.

…and the minister with the pen

And in charge of all of this is the Minister for Climate Change and Water, Penny Wong. Her stewardship of the political negotiations necessary to implement the ETS make her one of the most powerful government ministers in Australian history. Under the banner of the ETS, there is no sector of the economy which is outside of Wong’s purview; no price in the country which will not be affected by the political decisions made in her ministerial office.
One particular example of the scale of these ministerial decisions is the issue of ‘trade-exposed’ industries, which will be granted some free permits until there are ‘broadly comparable’ ETSs developed in competing countries. There are numerous unanswered questions about these measures, which will involve making arbitrary distinctions and relative value judgements. For instance, not all industries can be neatly siloed off into ‘trade-exposed’ – a small army of lobbyists are descending on Canberra with their briefcases full of trade statistics for the industries they represent. How ‘broadly comparable’ must international ETSs be to make industries ineligible for free permits? Those lobbyists will have a view on that question as well. The same challenge will be presented by the energy industry, many of which will be granted some degree of assistance as the scheme is implemented.
And as some industries are in part excused from paying for the cost of carbon, achieving the ETSs short and long term goals will be ever the more challenging, and borne by those industries which are unable to receive government assistance. Further discretion will be available to the Climate Change Minister as targets are set and adjusted and other sectors are dragged into the scheme. The complexity of the ETS and the political manoeuvring which will be necessary to implement it will make the administration associated with the GST look like a family picnic.
What of the goal of the ETS? The IPA Review has long been one of the few outlets in Australia which publishes views that dissent from the global warming consensus-from critiques of the science around carbon dioxide pollution and its impact on global temperatures, to discussions of green political ideology.
The government has to be asked how the ETS will be adjusted if the now ten-year-long period where the global climate has been stable continues. Is the ETS a policy to be pursued no matter what, or is it contingent on long term temperature rises and the sturdiness of the model of relationship between carbon dioxide emissions and temperature?
Nevertheless, even if we accept the government’s goal of reducing greenhouse gas emissions, there is much to be critical of in the ETS. How does the government intend to leverage a domestic ETS into a global carbon pact, when the self-interest of China, India, Russia and the United States seem firmly opposed to such a pact? Australia’s contributions to global emissions are as little as 1.1 per cent of the total. Do Australian politicians have such a surfeit of hubris that they imagine others will follow simply because of the example they set or be persuaded by the rhetoric they offer?
Australia is staring down the barrel of long-term, entirely unpredictable price increases, coupled with the opportunity for rent-seeking and political opportunism to redraw the contours of the Australian economy.
And, as the government points out, a domestic ETS is only the prelude to an international agreement – one which may take these complications out of the hands of our domestic climate change minister and into international bureaucracies.
The ETS may be ‘brave’, it may be ‘tough’ and it may even be ‘courageous’ economic reform. But that does not mean it is desirable.
Australia already has in place a plethora of taxes, subsidies and regulatory measures targeted at reducing emissions. These include requirements on electricity suppliers to use renewable energy, subsidies for low carbon dioxide emitting technologies and regulations on the design of houses and whitegoods. If there is a political imperative to maintain and augment these, the government’s approach should be one that is carefully targeted and able to be withdrawn or intensified causing minimal disruption, while avoiding jeopardizing international competitiveness. Recognizing the consensus that petrol is now out for the time being, a tax on gas and electricity that is directed to the household consumer would be a place to start-offering some incentives to start on what may or may not be a long haul to diminish the nation’s wealth and transform its economy.
But in the manic rush to implement the ETS, such a measured – and reversable – policy appears to be off the government’s table. It will be the Australian economy that suffers.