Why a price on carbon is good news for Australian trade

Without a carbon price, other countries may lose interest in our exports. Joost J. Bakker IJmuiden/Flickr

In the lead up to the carbon price announcement, much of the criticism of the scheme has talked about the damage to Australia’s exports. But the move to price carbon could save us from a far worse economic future.

Australians do not need to believe in global warming to have faith in the benefits of carbon pricing. There is a strong case in favour of such measures for Australia, and they don’t have anything to do with fighting climate change.

In fact, there are many are very real benefits from reducing Australia’s extreme dependence on fossil carbon - coal, natural gas and petroleum - as its major source of energy and global “salary”.

The main arguments are rather selfish and really quite simple.

Everyone else is doing it

The recipe for the alternative case beyond climate change is based on three very concrete ingredients and one highly likely condition. Let’s begin with the latter.

Australia’s trading partners generally accept the need to prevent potentially catastrophic impacts of rising CO₂ levels. The level of concern varies across the countries, but our trade is likely to be deeply affected by their strategic actions within five to ten years.

Australia may think that it should be largely immune from such international policies. Don’t do anything rash and our trade - focused upon the sale of carbon-intensive output to the growth dynamos of Asia - will keep the cash flowing in.

Unfortunately, this view ignores the highly interdependent nature of global trade. Strong domestic policies to reduce fossil carbon use and emissions are almost inevitable. They will occur within years across many of the world’s major importing, high-income regions (Europe, the United States, Japan).

These actions will not be taken without careful thought about the consequences. Nations will be very interested in the impacts of their policies upon their own trade competitiveness.

They will also be deeply concerned about their effectiveness in terms of overall global emissions.

In the future, the main issue will be what to do about nations that don’t price carbon.

A carbon tariff will punish laggards

The only real option to level the competition playing field, and ensure global reductions in emissions, is to adopt some form of “carbon tariff” system.

With carbon tariffs, competing imports will be taxed according to their carbon content throughout their full supply chain. This includes the carbon in any imports used in manufacturing.

It won’t be possible for a nation to hide its carbon content. There is currently a flurry of research activity in the development of “global economic input-output” tables. These impressive databases will clearly show economic and accompanying environmental flows between nations.

If a nation exports “embodied” carbon raw materials to a carbon energy producer, or its own production is heavily geared to fossil carbon energy, then it will suffer cost competitiveness and decreased export demand. This will happen regardless of where a country lies in the global production chain.

There have already been strong calls for carbon tariff systems in Europe and the US over the past few years. While they haven’t quite made it yet, you can bet they will form a key part of future national plans for progress towards low-carbon economies.

Our carbon-heavy economy could drag us down

Combine this effective ability to crack down on carbon using accurate accounting and charging systems with two key features of the Australian economy.

Australia is heavily reliant on exports of carbon-based resources and manufactures. And the things we make in Australia for our own consumption are also highly carbon-intensive. This is because we depend on coal-fired electricity generation.

Then, throw in a hefty serving of global peak oil. As global production peaks, prices of petroleum (and hence coal and gas) are likely to rise prohibitively within 5-10 years.

Now, slide it in the stove. With this recipe there is only one positive outlook for Australia if it follows its business-as-usual path. We will have to capitalise on the situation (and intensify our carbon economic addiction) by pushing the sale of our coal (and gas) reserves.

Nations seeking a transformation to sustainable economies would meet this approach with the same reprehension they would have for economies specialising in exporting tobacco, banned medications and pesticides, fuel-inefficient and polluting vehicles, and junk food to children.

And this course may not just be unpopular. With widespread carbon tariffs, it may also be unviable.

Clinging to carbon is a five-fold mistake

To cut a long story short, even if we ignore possible climate change impacts, there are at least five major adverse effects if Australia doesn’t adopt carbon pricing and other forms of concerted related action.

  1. Carbon tariffs and peak oil will push up prices and decrease export competitiveness.

  2. Demand will reduce for Australia’s existing exports as the world’s economies become less dependent upon fossil carbon energy.

  3. There will be poor gains in energy efficiency throughout the entire economy (due to lack of incentives).

  4. The economy will become increasingly inflexible and there will be more barriers to competitive change as we continue to invest in industry, urban and social infrastructure based on fossil carbon energy.

  5. Our fossil carbon dependence will reduce confidence and international capital flows into the Australian economy.

This is a price correction, not an imposition

There are numerous other reasons for both Australia and the rest of the world to avoid getting trapped in an economic system based on unsustainable, non-renewable fossil carbon resources.

One is fossil energy’s swag of negative “externalities”. These are the impacts that are not included in the market price and hence lead to overuse from society’s point of view.

Externalities include the loss or degradation of economically and ecologically productive land, air pollution (other than CO₂) and health effects, hydrological changes, water pollution, oil spills, accidents, ash disposal and disrupted communities.

They span all stages of production and consumption from exploration and open-cut mining, to transport, processing and refining, use and disposal. The latter stages include the environmental, congestion and land use and biodiversity problems associated with urban sprawl.

A 2011 report published in the “Annals of the New York Academy of Sciences” says that coal’s externalities , even without any climate change effects, mean that it should be at least twice its market price.

Indeed, “carbon pricing” is better termed “carbon price correction”. Most alternative renewable sources do not have anywhere near the same levels of externality costs.

Further delays will reinforce the creation of fossil carbon societies in China, India, Indonesia and the suite of other rapid-growth economies. The negative externalities will intensify (perhaps many times) and make major changes towards sustainable economies even more difficult down the track.