A recipe for making the carbon tax a success

Hazlewood coal-fired power station would be uneconomic under a carbon tax. AAP

The carbon tax is the latest attempt by an Australian government to legislate in order to avert disaster, this time to the climate.

Whether the tax will become law sits on a knife edge, and the stakes are high. The tax is the latest solution promoted by politicians and regulators as the ultimate fix to our climate woes. But will it succeed?

To do this means taking a step back to understand the seismic challenges any regulatory initiative, including the tax, faces.

These challenges go well beyond their technical capacity to reduce risk. In my new book The Paradox of Regulation: What Regulation Can Achieve and What it Cannot I argue that regulation designed to avert disaster is caught in a paradox which renders a good deal of regulatory action ultimately ineffectual. There are significant lessons for the carbon tax.

The book covers a series of case studies covering major regulatory responses to the 1998 Longford gas plant explosion in regional Victoria, the collapse of Australian insurer HIH, as well as international incidents such as the 2001 attack on the twin towers in New York.

This research demonstrated that many of the responses to disaster did not directly address the fundamental issues that gave rise to them, or promised too much in terms of protection from future harm.

On the one hand, politicians, much of the media and the wider community are increasingly anxious about increasing levels of regulation, leading to fears that a “Nanny State” is blunting growth and innovation.

On the other hand, we demand more and more regulation to protect us from more and more risk, particularly in the wake of major crises, such as financial collapses or terrorist events, or natural disasters like floods and bushfires.

Tease apart this paradox and you will find that demands to address a specific problem or event means regulation often is too narrowly focused which limits its ability to anticipate and address future risks.

When promised regulation to solve a crisis meets the inevitable complexity of this risk paradox, the objective of “never again” heard in the wake of catastrophe is, more often than not, rendered hollow.

Too much new regulation is conceived, constructed and analyzed through narrow “actuarial” frameworks that are overly compliance-focused and procedural. They focus on the event rather than the society itself. For regulation to be effective, it must broaden its horizons.

Regulation is increasingly political – that is, the outcome of an unending contest between political parties to demonstrate that regulation can make communities, environments and finances “safe” from future harm.

Lurking in the background, too, is government fear that regulation will scare away investment. As a consequence of being pushed in two contradictory directions – to keep the economy going and make people feel safe – regulations that run the gauntlet of intense lobbying and parliamentary processes often fail to live up to expectations.

This need for regulation to reassure us is critical but often misunderstood. It is not the same as preventing industrial disasters, catastrophic climate change, corporate collapses or any other calamity that we have faced and will face in the future.

Our vulnerability comes from the reality that we are dependent on one another, “no man is an island” as the trite saying goes. Our security comes from the fact we care and are cared for, that we depend on others and they depend on us, our experience of being valued and our respect for others. Threats to that security make us anxious.

Initiatives to avert disaster, like the carbon tax, face three distinct challenges: they must reduce actuarial risk – in this case provide an effective transition to a low carbon economy.

The second challenge is that they must reassure us about who “we” are – they must promise a more secure future. Finally, they must not irreparably damage political legitimacy. Regulation-making can minimize risks of future harm, but only when this richness of the regulatory task: its full political and social – as well as actuarial – character is appreciated.

This research holds one more lesson. Each of my case studies showed that addressing risk was the most vulnerable. Regulatory reform designed to bolster political legitimacy and meet demands for security trumped dealing with the potential for future disaster. Success could only be achieved when all three problems were solved through the one regulatory initiative, solve only two and the seeds for future disaster were sown.

Climate change is not going away. So, we cannot afford to ignore it. To deal with it means that eventually political consensus and leadership needs to emerge to reassure us that we can – and will – thrive in a low carbon future. This is the real challenge facing the carbon tax.