Rudd’s Carbon Cop Out

Karl FitzgeraldCommentary, True Cost Economics2 Comments

Still in shock at the ALP’s audacious handout to the nation’s biggest polluters, we thought it time to broach a few of the details hidden within the 824 page Carbon Pollution Reduction Scheme (CPRS) White Paper.

Billions of dollars of the commons is proposed to be given away by the climate scheme. Permanent and inalienable carbon permits will be handed over to the biggest polluters if it passes both houses of parliament. These do not expire. Five year windows have been announced where ‘4 year vintages’ of the proceeding trading period permits are sold, presumably in tranches.

If the rapidly melting permafrost demands a drastic reduction in carbon permits, the taxpayer will have to compensate the polluters in buying those permits back. However, even then a case could be mounted in the courts to delay this.

Pricing Undermined

The CPRS relies on the pricing system to reduce outputs. However, the pricing system will be undermined by the ability to import carbon permits from international markets.

The international market will be flooded with permits, as world wide the development of carbon sinks has been growing but the purchasers are yet to come online. Australia will be one of the first carbon markets with a viable demand for carbon permits.

This will ensure that the carbon price will be low, threatening the viability of the system and risking the need for buybacks from polluters.

One wonders about the credibility of foreign permits that may not undergo the same levels of compliance in terms of qualitative property rights. A preliminary vetting of international permits has been announced, but one wonders how stringent this will be. Consider the example of a smokestack lobbyist owning a forest in PNG (probably bought for next to nothing). One can imagine it will not take them long to receive approval to import carbon credits from ‘their’ forest.

All this and more with $3.9bn in hard cash handed over to polluters with no strings attached. Over two thirds of the heavy polluters’ permits will be grandfathered in the first 5 year period.

What must be asked is whether we can expect polluters to billow their pollution quantities over the next few years as they attempt to prove they deserve “x” amount of carbon permits in handouts. Perhaps the ensuing carbon administration ‘will be learning’ so they can fudge these figures.

One must ask whether we learnt anything from the grandfathering of the European Trading system?

And to think the white paper quotes:

This was echoed by BP Australia:
A well-functioning market and its resulting forward carbon price expectations is a particular need in the oil & gas sector, with its long development timelines and requirements of significant upfront capital investment. (Submission 355, p. 6)

How will plummeting carbon prices during the first 5 year free for all, contrasted with rapidly escalating cases of extreme weather, hold true to long term ‘developmental timelines’? This contradiction in behaviours will only serve to undermine the system as weather patterns devolve.

Speculative Playground

The playing field has been arranged so that a speculative playground is possible. The unlimited banking of permits, the security of property rights plus the ability for foreign ownership of our carbon permits will ensure middlemen manufacture capital gains at the expense of the market. The absence of holding charges on these ever more valuable permits is of great concern. If speculation is harmful to our objectives, we will face no option but to compensate those middlemen and buy them out to enable reform.

Of particular danger is the possibility that polluters could play the market, using the speculative profits to offset the costs of purchasing more permits, just like Enron and others have done in the past.

Necessary Reforms

Under an ETS (Emissions Trading System), if carbon permits are re-sold, the secondary market could be charged a holding cost for these permits, ushering speculators out of the market.

However, why have millions of transactions amongst the people, when we could go upstream to the source of the pollution with a carbon tax and ensure that the 1000 or so major emitters pay the majority of the polluting costs? Then polluters deal with the compliance directly.

A carbon tax is much easier to administer.

A carbon tax sees the government earn revenue, whereas the ETS sees middle men and industry take the profit. This is magnified when so many permits are given away or can be imported. A carbon tax could be revenue neutral such that company taxes are reduced at a similar rate. Alternatively, the GST could be reduced as many large companies only pay 3% of the 30% in company tax they are expected to contribute (due to the prevalence of tax loopholes).

The government’s white paper says that not enough is understood between the inverse behaviour of pollution and pricing to rely on a carbon tax. With the fate of the planet in peril, one would hope the government would be willing to be conservative and understate its tax impacts. If we do cut back more on pollution than expected, then that helps future generations. This danger is nothing like the loopholes that the ETS allows. Any family or business doing the right thing by investing in solar power is simply subsidising the price of carbon for polluters. This would not happen under a carbon tax.

Under the ETS, one way to avoid the ‘solar panels subsidising polluters’ side-effect is for any clean energy development to trigger a reduction in carbon permits equivalent to the carbon savings such renewables deliver. This will be an administrative challenge. it will also be a legal challenge as any such move threatens the property rights of polluters.

Neither an ETS or a carbon tax is enough on its own to deal with the monumental challenges of sustainability and affordability. Still needed is a holistic approach to climate change from an economic perspective. We desperately need the most accurate economic tools on our side. The planet is demanding urban density, self funding public transport/ infrastructure and more time to slow down and live a sustainable life. A green tax shift off our labour and incomes and onto natural resources can ensure this happens. Tax efficiency, affordability and sustainability are then harmonious.

2 Comments on “Rudd’s Carbon Cop Out”

  1. The carbon trading scheme – brought to you by the same people who sponsored the global financial crisis! Weird stuff!

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