Opinion & Commentary
We need to start emissions debate
The Australian Government commissioned, reviewed and reported on an emissions trading system four times in the past year, but it wasn't until now that it finally asked the fundamental question of whether we should have a trading scheme at all.
This may sound like a Monty Python joke but it's exactly what the Government has done.
Following the Garnaut report we have seen a discussion green paper, Treasury costings, then a white paper exploring the details of the proposed carbon pollution reduction scheme. All this was done before we had a proper debate about which policy approaches provided the most benefits and least costs to Australian society. This back-to-front approach needs to change.
To his credit, last week Treasurer Wayne Swan announced an inquiry into whether there was something better than a trading system. The loud answer from scientists and economists from across the political spectrum was yes: a carbon tax.
Some of the most prominent climate change activists - from NASA scientist James Hansen to former US vice-president Al Gore - prefer a carbon tax to a trading system. They are joined by economists, including free-market Nobel laureate Gary Becker and Harvard professor Gregory Mankiw.
Left-leaning groups such as the Earth Policy Institute, Sierra Club and the Australia Institute have a shared interest with free-market groups such as the American Enterprise Institute, the Centre for Independent Studies and the New Zealand Business Roundtable in recognising the relative merits of a tax compared with a trading system. Even the chief executives of Duke Energy and ExxonMobil have come out in support of a carbon tax.
Of course, the climate change policy debate should not be based on popularity but careful analysis of the benefits and costs of various options. The problem in Australia is not that the wrong policy won in the battle of ideas. The problem is that the battle never took place. We need to have this debate.
If the Government is determined to introduce further climate change policy, there are plenty of reasons a carbon tax may be better than a trading system.
While they both put a price on greenhouse emissions, the carbon tax provides certainty about the price, while traded permits may vary from nearly free to exorbitant. Not only would a carbon tax provide certainty for business but a consistent stream of tax revenue would allow the Government to offer offsetting tax cuts.
Linking a carbon tax with offsetting tax cuts would go a long way to reducing economic fears of climate change policy.
Opponents of a carbon price correctly point out that all taxes have costs and that a carbon tax may lead to distorted decisions and capital destruction. However, if a carbon tax were linked to other tax cuts then the economic costs of one tax would be offset by the economic benefits from lower taxes elsewhere.
There have been several suggestions regarding which other taxes should be reduced. I previously have raised the prospect of cutting income tax or the present fuel tax. The American Enterprise Institute has argued for a reduction in payroll tax. If done well, it is possible that a revenue-neutral carbon tax may be good tax policy, irrespective of its effect on greenhouse gases.
There are other reasons for preferring a carbon tax.
Because a carbon tax doesn't impose a fixed amount of carbon emissions, it allows a greater degree of flexibility so that businesses and consumers can adjust to the changing circumstances.
In trade theory it is well understood that tariffs are better than traded quotas. Similarly, a carbon tax is more flexible and efficient than the trading system.
Other costs of a trading system include compliance costs, administration costs, wasteful rent-seeking behaviour and the cost of picking winners when carbon credits are allocated.
Climate change is an important political issue in Australia. But if we are serious about tackling the challenges of climate change in an intelligent way, we need to get past the easy promises of just doing something and work out which policy approaches are the most beneficial and least expensive.
A modest revenue-neutral carbon tax is preferable to a trading system and the House of Representatives inquiry announced by the Treasurer offers the Government an opportunity to reopen the climate change policy debate.
John Humphreys is a Research Fellow at The Centre for Independent Studies in Sydney. He is the author of Exploring a Carbon Tax for Australia and spoke on 19 February at a CIS roundtable on climate change policy.
