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An emissions reduction policy beyond comparison?

An oil extraction project in Canada – a country absent from the Productivity Commission’s carbon report. AAP

One of the most basic questions to ask in any analysis of Australia’s carbon policy has always been: what is the rest of the world doing?

Last week, the Productivity Commission (PC) published a partial answer to this question; but this report seems to have been more quoted than read.

That is unfortunate because it contains a wealth of information that suits neither side of the policy the debate.

The PC has put a lot of work into the report, but it has clearly found the task much harder than anticipated. The fact the analysis was complex – and only a very partial answer could be given – reflects poorly on the policy objective itself.

The report reveals it isn’t just the Coalition that has a hodgepodge policy to tackle climate change. Hodgepodge policy emerges in the report as the global standard.

Incomplete comparison

The PC had been asked to establish an effective carbon price per tonne of CO2e in Australia and a number of other “key” economies.

The PC could not actually perform that task, and we are told as much in the report:

This would be a relatively straightforward task if all countries applied economy-wide carbon taxes or quota schemes … none does, eschewing broadly-based explicit pricing for a myriad of less transparent, more narrowly-focused interventions designed to assist the production and consumption of selected, less emissions-intensive technologies, or penalise particular emissions-intensive products and processes.

The PC examined the policies of nine economies, including Australia. Those nine economies had at least 1,096 policies addressing some aspect of climate change.

Australia has the second-highest number of policies, with 237, while the United States led the tally at 307. To some extent, that reflects the federal nature of the two economies’ political systems. In both countries, many policies are implemented at the state level.

But given that the US has 50 states and Australia has just six (plus the territories), this implies that we are well served by the number of climate change policies currently in place.

The coalition’s direct action policy is more of the same. The PC tells us that, subject to some caveats, “Australia generally has a similar mix and stringency of energy efficiency regulations for electricity usage to those in most other study countries”.

The nine economies selected for the study were drawn from the terms of reference, which were determined by the government.

There were clearly political motives behind the choices. The report excludes economies such as Canada, South Africa, the former Soviet economies, and even Indonesia – all of which compete with Australia in the global minerals market, particularly in the export of coal.

The PC suggests that including Canada in the report would have been desirable, but time constraints prevented that analysis.

Incomplete schemes

Despite all these limitations, there can be no doubt the PC has done the very best that could be done given data gap.

Despite all the media comment that the PC supports the government’s position, the report itself is far more nuanced than its overview – which time-constrained journalists would have skim-read.

At page 50 we read, “no country currently imposes an economy-wide tax on greenhouse gas emissions or has in place an economy-wide ETS”.

That is consistent with the argument that Australia would lead the world in introduction of such a policy.

Those countries that do have emissions trading schemes in place usually operate regional schemes or have specific sector schemes in place – such as the electricity industry.

New Zealand’s scheme has been in place for such a short period of time that it would be very difficult to draw any policy conclusions from it.

The meat of the report can be found in the chapters that estimate policy-induced abatement, the cost of those abatements (the PC actually calculates subsidy equivalents) and then a “bang for buck” measure.

On a policy basis, the European emissions trading schemes do not appear to be particularly economical. That, the PC tells us, is due to the policy including generous subsidies to renewable energy.

When the PC compares policies and technology, however, it appears that the emission-trading schemes are economical, especially when compared to renewables such as biomass, wind and solar. Solar in particular is very expensive.

Much has been made of this particular finding. Given that it goes to the very essence of the Australian policy debate, it is somewhat disappointing that the PC did not spend more time discussing this particular result.

Taking this result at face value, the implication is clear: an emission trading scheme with no complimentary policies is the most cost-effective policy to pursue.

The fact that the PC spends little time on this result that is the major take-out from the report should raise some suspicion.

Finding a price

The other factor that should be closely examined is the use of average market exchange rates to convert all foreign prices into Australian prices. It would be more correct to have used purchasing power parity for that purpose.

The PC calculates an implicit abatement subsidy of $44 to $99 per tonne CO2 for Australia on current policy settings. They are adamant that this is not a proposed carbon tax price.

Any carbon tax proposal, however, needs to be justified relative to that figure.

The PC claims that an emission trading scheme without complementary policies is most cost-effective. We now know the prices of those complementary policies.

Of course, what the PC don’t tell us – and can’t tell us – is whether any scheme will actually meet the 5% reduction policy target.

Finally, the closing paragraph of the PC report cannot pass without comment:

In summary, while the overall impacts of the policy measures analysed appears to be relatively small for most countries, the consistent finding from this study is that much lower-cost abatement could be achieved through broad, explicit carbon pricing approaches, irrespective of the policy settings in competitor economies.

That might look like cautious support for government policy. Notice, however, the weasel words: “appears”, “relatively” and “could”.

The point about “broad, explicit carbon pricing approaches” is not really what the PC found. They found over a 1000 policies and no country with a broad, explicit carbon pricing approach’.

They also didn’t really look at competitor economies; they mostly looked at Australian trading partners – those countries that already buy our mineral and coal exports, and not those who hope to take our place.

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