Carbon Price Makes No Policy Sense

Gillard will need a big policy win this term. Even better if it’s a win on the policy that sank her predecessor.

So it was hardly surprising that the call by Marius Kloppers of BHP Billiton for a carbon tax was quickly affirmed by the new climate minister Greg Combet.

Julia Gillard announced the makeup of the oddly secretive climate change committee yesterday. She’s getting all her ducks in a row for a price on carbon of some description.

But domestic politics isn’t the main climate game. International politics is. And right now, the prospects for a global agreement on climate change couldn’t be lower.

Diplomats are pouring as much cold water as they can on hopes for securing an agreement in Cancun in December. “The likelihood of a continued deadlock remains significant”, said the director of the UN Framework Convention on Climate Change last week. George Monbiot wrote in The Guardian, “The closer it comes, the worse it looks.”

You don’t have to be a climate change sceptic, denier, pessimist, realist, optimist or scientist to recognise dealing with real or potential consequences of greenhouse gas emissions is the ultimate collective action problem.

As it’s a problem of collective action, it makes little sense for countries to “go it alone” – particularly nations like Australia, who would easily see their carbon emissions move to jurisdictions which aren’t playing along.

The government implicitly agrees. It’s why we have two proposed emissions reduction targets – an unconditional 5 per cent for now, and 15-25 per cent if there is a binding global agreement to do so. The difference between these two targets is an admission that reduction is substantially less meaningful without international action.

Treasury agrees too. Their modelling of the Rudd government’s Carbon Pollution Reduction Scheme in October 2008 assumed all countries around the world would implement the same scheme at the same time.

There’s a precedent for international policy action: the sixty year long quest for multilateral free trade agreements. Like emissions reduction, trade has been the subject of numerous international conferences and diplomacy.

But unlike emissions reduction, free trade is unambiguously in the self-interest of every nation. This is true even if other nations do not open their markets. In a world of high tariffs and subsidies, a country which unilaterally lowers trade barriers – as Australia did – is still better off.

Despite this, the fight for freer trade through global agreements is excruciatingly slow and now seems to be stagnating.

Those failures say nothing of the worthiness of the free trade project. Just that international politics is an ineffective and frustrating mechanism to pursue policy goals.

That’s not a good omen for a global treaty on emissions reduction, where countries can benefit by avoiding their emissions reduction obligations. Unlike free trade, it’s in their self-interest to cheat.

Recognising that is not being a sceptic about climate science, but a realist about politics.

Certainly, many countries are doing little bits of climate change mitigation here and there. We’ve had a national Mandatory Renewable Energy Target for nearly a decade now, and countless subsidies and programs.

We’re hardly alone. Even China is talking about imposing a domestic carbon trading scheme. And on Friday last week, a senior Chinese climate negotiator declared his country would seek a binding climate treaty by the end of next year.

Sounds definitive, but there’s more to that declaration than a headline may suggest. The Chinese blame the Americans for wrecking Copenhagen: “The biggest obstacle comes from the United States”, according to their negotiator. But after China’s calculated theatrics at the Copenhagen summit, it’s hard to take them at their word. Chinese statecraft is increasingly cantankerous and contrarian. Big statements have to be seen through that prism.

Yes, China is cleaning up its coal-fired power stations – as they should – but their average efficiency is still well below those in the developed world.

And the country has generous subsidies for renewable energy. There’s more to those than the headlines suggest too: a report in the South China Morning Post last week pointed out they badly underperform. Wind turbines turn for an average of 75 days a year, compared to 110 days in England. Few wind turbines and solar plants are even connected to the electricity grid.

In Australia, the Green Loans scheme was exploited by opportunists looking to make a subsidised buck, with negligible environmental benefit. In China, those green subsidies are much larger, in a much larger country, and embedded in a much more corrupt and opaque political system.

Yet as business writers keep pointing out, China has an “advantage” in the climate game. It’s a dictatorship. It only has to justify its policies so far.

The rest of the world will be even harder.

The International Energy Agency said last week energy poverty in the developing world is a big reason it doesn’t look like we’re going to achieve the Millennium Development Goals.

1.4 billion people lack access to energy. Most of those are concentrated in Africa and on the Indian subcontinent. The health and wellbeing consequences are substantial. Those nations – 1 billion people in Africa, 1.1 billion in India – will be unlikely to go along with any policy that would restrain development. When you live below the poverty line, a ‘small’ price on carbon is not trivial.

China’s public relations blitz notwithstanding, the chances of a binding and meaningful agreement have diminished since Copenhagen, not increased. The European Union’s climate action commissioner Connie Hedegaard said last month “These negotiations have if anything gone backwards.”

The Stern Review said “no country can take effective action to control the risks that they face alone”.

And it’s now clear we can’t rely on international action.

It makes political sense for Gillard to jump into a comprehensive carbon price this term. But it still it makes little policy sense.