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“Direct action”: The coalition’s voluntary approach to environmental policy - part 1

The Coalition has repeatedly stated that the carbon pricing scheme will be repealed should it win office. Given recent polls, the alternative policy they propose must be scrutinised and despite their attempt to avoid this interpretation, they advocate a voluntary approach to environmental policy.

Assuming a Coalition government would replace the carbon price with their 2010 “direct action” proposal, at first glance this appears to be an incentive-based policy instrument. Indeed, this is how the Coalition would like it to be interpreted. For example, in the 2010 document they emphasise: “We are committed to incentives rather than penalties”; and “Australia needs a scheme that will provide the incentive for firms to reduce their carbon emissions”.

Yet, ironically, the carbon pricing mechanism it would replace is the archetype of incentive-based policy instruments, albeit a much compromised one due to industry concessions. The incentive arises because firms are punished for polluting and households bear the environmental cost of consuming emission-intensive goods.

It is true that providing subsidies to firms to reduce emissions, as the Coalition proposes, also incentivises emission reductions but this is generally regarded to be morally unacceptable because it rewards industry for doing something they should be doing in the first place – that is, reducing the social impact arising from their pursuit of profits.

However, the Coalition’s proposal actually resembles a ‘voluntary approach’ to environmental policy. Business can continue to emit without cost and are only invited to participate.

Three policy approaches

‘Voluntary approaches’ are the third wave of environmental policy instruments after ‘regulatory instruments’ dominated from the 1960s to 1980s and ‘incentive-based mechanisms’ have dominated since.

Regulatory instruments such as technology or emission standards can achieve efficient pollution levels but because, from a practical standpoint, they require uniform emission reductions across different types of firms, they are not the ‘least-cost’ solution. That is, ‘high-cost abaters’ must reduce pollution by the same percentage as ‘low-cost abaters’ and this increases the total cost of abatement.

In theory, incentive-based mechanisms achieve efficient and least-cost emission reductions because each firm only abates until their own particular marginal cost of abatement equals the price they must pay (carbon permit price or tax level) for emissions. Thus, high-cost abaters abate less than low-cost abaters.

The third wave of environmental policy instruments - voluntary approaches - are not conceived in, or prescribed by, economic theory, except those resulting from efficient bargains between individual polluters and their pollution sufferers. Efficient bargains require a very local form of pollution, zero transaction costs – the costs of bargaining, establishing, and enforcing contracts – and neutral power relations between polluter and sufferer which is obviously not the case here.

Aside from these ‘private agreements’, voluntary approaches generally come from ‘unilateral commitments’ made by polluters for corporate social responsibility reasons, ‘negotiated agreements’ – contracts between public authorities and industry to achieve environmental targets – and ‘public voluntary programs’ where industry is invited to participate in a program developed by public authorities.

‘Direct action’ is a public voluntary program

The Coalition’s policy resembles a combination of these last two kinds and particularly a public voluntary program. They propose to utilise the existing National Greenhouse and Energy Reporting Scheme – which requires firms of a certain size and emissions intensity to report their emissions – to set ‘baseline’ and ‘proposed emission reduction’ levels for individual firms.

The baseline or ‘business as usual’ emission profile would have economic growth projections built in and will therefore allow a higher level of emissions through time. It is not clear – that is, the language is ambiguous – whether the baseline will also incorporate a natural “trend toward lower emissions-intensive activity” which would reduce baseline emissions somewhat.

The ‘proposed emission reductions’ for each firm could be determined in a number of ways but presumably these are based on the Coalition’s target for carbon emission reductions, which are identical to the Government’s for 2020 – that is, 5% below 2000 levels by 2020. However, there appears to be a significant degree of flexibility for individual firms to bargain for higher or lower levels and this invites wasteful ‘rent seeking’ by firms – that is, the resources used to lobby governments to maintain extraordinary profit levels could be used elsewhere and achieve a greater social benefit.

The plan then relies on the following mechanism. If firms emit more than their business-as-usual level, they will be punished (with the penalty “set in consultation with industry”; see part 2). If they achieve lower emissions within their ‘proposed emission reduction’ levels, they “will be able to offer this CO2 abatement for sale to the government”.

Thus, the Coalition would set up a program and invite industry to participate, the definition of a ‘public voluntary program’. There is no requirement to participate and no cost to continuing at business as usual levels. This suggests the Coalition’s policy is subject to ‘regulatory capture’ which occurs when there is essentially no regulatory cost to firms.

Other factors suggest that the policy is a voluntary approach. For example, small business can ‘opt in’, and new entrants to an industry or business expansion at ‘best practice’ will not be penalised.

As discussed in the following post (part 2), amongst other issues, such voluntary approaches cannot achieve efficient pollution levels in theory unless there is a significant threat of stricter policy should the voluntary action fail to achieve the target. Ironically, this is in contrast to the Coalition’s starting point of repealing the carbon price.