There is a common misconception about the climate change policies being debated in parliament at the moment. The constant refrain is that the proposed climate change policy will embed market forces in efficiently removing carbon from the economy. Paul Kelly reports:
“Treasury’s July 14 minute to Wayne Swan gives the expected answer on costs: Abbott’s direct action scheme ‘would roughly double the economic cost’ of hitting the target. Why? Because of Abbott’s refusal to embrace the market mechanism.”
This is both absolutely right while being completely irrelevant.
It is true that market forces will efficiently act towards the outcomes set by the Government. Market forces will establish the price of removing additional tonnes of carbon. This price will efficiently embed all available information and will respond to changes in the broader macroeconomic environment in a much more responsive fashion than any government could hope.
As a consequence, market forces are the most effective mechanism for achieving the governments quota of reductions in carbon emissions in the economy.
Yeah for market forces.
I have two key problems with the proposal:
- The variability arising from the carbon pricing of markets will be managed by companies by a range of activities but particularly via lobbying; and
- The wrong efficiency is being sought.
The first point is discussed here under The Political Nature of the Market.
The second is that the market will efficiently price the marginal cost of removing carbon from the economy – but that should not be the goal!
Given the nature of the environmental problem carbon emissions are causing, the only effective long term policy response is to focus on the marginal benefits of removing carbon emissions from the economy.
Climate change is not a problem that will be solved tomorrow. The best focus of public policy attention should be on creating a cost on carbon emissions that is linked to the social benefits of it being removed from the economy.
This is probably going to be very low at first. Actually, it probably will be pretty cheap initially as we remove initial forms of carbon emissions. But then, when we run out of cheap and easy ways to remove carbon emissions, it will get expensive. Very expensive.
The core problem in addressing climate change is that the modern economy utilises a great deal of energy. This energy is, currently, based on burning fossil fuels. Until we develop reasonable alternatives mitigating climate change is going to be very expensive.
Do I care if Australia hits the Government’s targets by 2020? Not one whit. I care deeply that the world keeps carbon emissions at a manageable level. But not what targets Australia reaches. (To my mind, the fact Australia can fund the removal of carbon emissions elsewhere in the world is the best aspect of the program.)
The global economy is like a luxury ocean liner that is ploughing through the ocean at full speed in a direction that produces lots of annual carbon emissions. The best policy response is to slightly, subtly nudge the ocean liner until it
I fear that the current policy proposal of imposing a quota is like trying to slam on the breaks. It doesn’t halt momentum and, when the costs of slamming the breaks are finally borne, it will result in future voters (those that bear the cost of the brakes being applied) to be willing to endure the costs.
I fear they will reject the costs – particularly if they are widely divorced from the benefits of reducing carbon emissions.