Why Australia needs a carbon bank

Good governance makes for boring pictures, but trustworthy carbon pricing. AAP

The World Bank ranks Australia among the top five countries in the world in terms of its regulatory environment. Australia also ranks in the top ten countries in terms of control of corruption.

International rankings can be fickle things. But when it comes to these measures of institutional quality, there is little doubt that it is better to be nearer the top of the rankings than the bottom.

Australia has generally been served well by our key regulatory and governance institutions.

The current balance of Australian politics suggests that we will see a carbon price legislated during 2011.

Given that we have bilateral support for emissions reductions, a move to price carbon would be a win for good economic governance. But the carbon governance challenge does not end with the establishment of a carbon price.

Market credibility

A market for greenhouse gases is an unnatural market, the functioning of which relies on the quality of the market’s administration.

Following the transition to a floating price, the value of emissions permits will depend strongly on the credibility of the market regulator’s commitment to limit emissions to the capped level.

A poorly-managed carbon market would open up many opportunities for shonks and shysters.

As recent experiences in Europe have shown, fraud tends to occur in difficult-to-predict ways. The future regulator of the Australian carbon market will need to be on its toes.

Rorting is a particularly important risk when it comes to links between any Australian scheme and carbon credits generated in countries with weak governance.

As he did in 2008, Professor Garnaut has recommended the establishment of a carbon bank to manage the emissions trading scheme, and to administer assistance to emissions-intensive, trade-exposed industries.

The role of the recommended carbon bank is similar to the role of the regulator of the dead-in-the-water Carbon Pollution Reduction Scheme.

As with other regulatory agencies, a key advantage of the idea is that it keeps the politicians at arm’s length from the day-to-day running of markets.

Other models

Garnaut is not the first to call for a carbon bank.

Professor Warwick McKibbin of the Australian National University has been recommending a carbon pricing system with a strong carbon bank for years.

McKibbin’s hybrid model includes a carbon bank that has the ability to set the short-term price of carbon, in much the same way as the Reserve Bank of Australia sets short-term interest rates.

McKibbin’s model has many merits. But it appears that for the moment the horse has bolted in favour of a conventional emissions trading scheme (with the government setting the price for the first years) and a more limited carbon bank with mainly regulatory and market facilitation functions.

Independent advice

Carbon pricing will generate big bucks. The past few years have seen a large amount of lobbying by those who want a share of this revenue.

An additional suggestion in the latest Garnaut Review is that of providing a role for the Productivity Commission (or another independent agency) to make recommendations on industry assistance.

The Australian public would benefit substantially from having an assistance regime that is based on principled economics rather than political calculations. So the idea of seeking the ongoing advice of an independent agency on assistance measures is a good one.

Garnaut also recommends that an independent committee be established to provide advice on emissions reduction targets and other matters, an idea modelled on the United Kingdom Committee on Climate Change.

High-quality independent advice is a good thing. But ultimately the big decisions will be made by the parliament.

Making sure that politicians and the public are better informed about climate science and economics is perhaps the most important prerequisite for sound long-term climate policy.

Institutions are key

The carbon bank, or whatever it ends up being called, will need to strive to protect Australia’s image of strong institutions.

It will be the most important facilitator of Australia’s climate change mitigation efforts. Its stewardship will also be important for the health of Australia’s financial system more broadly.

Without confidence in the regulatory regime underpinning the carbon market, emissions trading would be untenable.

This would be a significant setback to our efforts to mitigate climate change risks.