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How Coalition and Labor can agree on scheme to price carbon emissions

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Climate change policy has reached an impasse. The government is committed to its current policy of purchasing emissions, which needs strengthening to meet harder emissions reduction targets beyond 2020.

But the best policy – a price on carbon through emissions trading – looks as far away as ever, in spite of it being favoured by the Labor Party. Strong objections from within the Coalition, in addition to the absence of broad public support when Australia introduced a carbon price in 2012, will make reintroducing carbon pricing – and making it stick – very difficult for some time.

Grattan Institute’s new report, Climate Phoenix: A sustainable Australian climate policy, sets out a roadmap to get past this impasse. The roadmap builds on the Coalition Government’s existing  framework, allowing the Coalition to stay committed to its policy. But the roadmap does more than that. It strengthens the policy in a way that gives it real teeth,  transforming it into a policy that could be adopted by the Labor party.

Grattan’s proposal is not perfect policy. It is not meant to be. It is pragmatic. If past climate change policy debates have taught us anything, it has been that pursuit of the perfect or near perfect has not produced good results. Emissions are rising again and the transition to a low-carbon economy has hardly begun. The Government’s current emissions reduction policy offers no guarantee it can turn these trends around.

Most importantly, the chopping and changing of policies has left business in the dark, and the chance of it investing in the low-emissions technologies we need seriously diminished.

To provide certainty to business and the community, we need a policy that both parties can support. Only then can Australia’s climate policy become stable and sustainable. The perfect policy is pointless if it is unwound after a couple of years.

What, then, does a pragmatic policy look like? The starting point is the government’s existing policy: the Emissions Reduction Fund (ERF) and its associated Safeguard Mechanism. The Safeguard Mechanism sets limits – or baselines – to the emissions of Australia’s largest-emitters.

The idea, to stop these companies increasing their emissions just as the government is purchasing emissions reductions, is sensible. But the baselines are set too high. The first step the government needs to take is to reduce baselines in line with Australia’s 2030 emission reduction target.

The government would then encourage low-cost emissions reductions through the auctioning of permits to emit. Baselines would be reduced to levels below where they would need to be to meet Australia’s target. Permits – the right to emit one tonne of greenhouse gases – would be auctioned to fill the gap. Such a policy would reduce emissions more cheaply than simply paying companies to emit less.

The final step is to replace baselines with permits and increase the number of businesses covered by the scheme. Baselines would be reduced to zero and all emitters would have to buy permits for their emissions. Australia would then have a policy that could be adjusted to meet the tougher targets that are inevitable in the future.

This approach covers all the largest emitters in Australia, except for electricity generators. In the electricity sector we propose an intensity baseline scheme. Under this scheme, high-emitters such as brown coal plants are penalised – they have to pay for their emissions.

On the other hand, low or no emissions producers, such as renewables, are rewarded – they generate credits which they can sell. An intensity baseline scheme encourages the switch from high to low-emissions generation, which will help the transition to a low-carbon electricity sector without the need for further government intervention. Importantly from a political perspective, an intensity baseline scheme lessens the impact on electricity prices.

If Australia’s main political parties support this roadmap, they must both get started and maintain momentum for the long haul. There are plenty of hurdles to overcome. Rising emissions at present are hardly an endorsement of the Coalition Government’s policy. But Labor will want to avoid any discussion that threatens a rerun of the ‘carbon tax’ debate. Keeping climate change out of the limelight during the upcoming election may actually create a window of opportunity, particularly if both parties can avoid ruling out options.

A large opportunity beckons after the election. Whoever wins, the Government will need a strong and politically saleable climate change policy, ideally supported by the Opposition. Going it alone is not an option. This roadmap provides a way forward that both parties can and should embrace.

David Blowers is Energy Fellow at the Grattan Institute.  

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  • david_fta

    “But the best policy – a price on carbon through emissions trading – looks as far …”

    More nonsense from the Grattan Institute. The best policy is a price on carbon through a revenue-neutral consumption tax on fossil carbon.

    The Grattan Institute should get out more, and have a read:

    Forget Kyoto: Putting a Tax on Carbon Consumption – http://e360.yale.edu/feature/forget_kyoto_putting_a_tax_on_carbon_consumption/2590/

    Why We Support a Revenue-Neutral Carbon Tax – http://www.realclearpolitics.com/articles/2013/04/08/why_we_support_a_revenue-neutral_carbon_tax_117849.html

    A Taxing Debate: The forgotten issues of climate policy – http://www.environment.gov.au/submissions/emissions-reduction/green-paper/95-david-arthur-attachment5.pdf

    Tax carbon consumers to see real action on climate change – https://theconversation.com/tax-carbon-consumers-to-see-real-action-on-climate-change-27563

    Climate targets are letting ‘outsourced emissions’ slip through the cracks – https://theconversation.com/climate-targets-are-letting-outsourced-emissions-slip-through-the-cracks-41257

    Politics aside, a simple carbon tax makes more sense than a convoluted emissions trading scheme – https://theconversation.com/politics-aside-a-simple-carbon-tax-makes-more-sense-than-a-convoluted-emissions-trading-scheme-45433

    After that, they should get in touch with the people at the Carbon Tax Centre: http://www.carbontax.org

  • Chris Fraser

    RE has capably reported the effects on the previously existing price on emissions. In the case of large polluters which are not generators, it wasn’t even a price required on all emissions, just a small percentage. We all saw the effects, didn’t we ? The market impact was profound.Then we saw emissions grow again after July 2014 when some idiots removed the price – and then celebrated it like a juvenile schoolyard prank.If a market mechanism is desired (ie you’re not a dictator insisting on set methods), a price on emissions is the only answer.

    • solarguy

      I’m with you here Chris, a carbon price was working and this needs to be re-introduced. As things stand now old coal plant is being retired, new build coal plant can’t compete with RE on price and no finance for it either, so there is plenty of incentive for those companies to build replacements with Solar thermal with storage, like Solar Reserves technology, Wind and PV with storage. And they should have no problem getting finance.

      All new homes should be built with PV, including storage and a Solar Hot Water system as a mandatory requirement. I wish I had $1,000 for every customer who asked me why it wasn’t already so.

  • david_fta

    testing

  • david_fta

    There’s a thoughtful article in Nature Geoscience, a Commentary by Oliver Geden of the German Institute for International and Security Affairs. Under the title “An actionable climate target” [Nature Geoscience (2016) doi:10.1038/ngeo2699], Dr Geden sets out reasons why temperature rise goals are lovely talking points, but fail as effective actionable guides for decision-makers.

    Instead, Dr Geden suggests that if the actionable goal for each and every decision-maker is zero net emissions, then it is clear and unambiguous what needs to be achieved by each and every player, from the individual consumer to the corporation to the nation.

    Under the heading “Differentiated tasks”, Dr Geden writes:

    “Comparing the two types of mitigation targets incorporated into the Paris Agreement, the net zero emissions target is clearly the more actionable one. It addresses problematic human behaviour more directly, and non-compliance could also provide a basis for legal action.

    “The main — and most serious — argument against prioritizing a net zero emissions target in its current form is the partial disconnect between such a target and carbon budgets compatible with different DAI thresholds such as 2 or 1.5 °C. But the political reality is that climate diplomats did not even try to agree on a carbon budget in Paris. Right now, it is impossible to say how fast the world will be able to reach net zero or how things will develop politically, economically and technologically.”

    Then he writes this: “Therefore, it would be an act of hubris, rather than lending motivation to the key actors, to specify exactly at which point in time zero must be reached. Even if many policymakers signed on, we should not reasonably expect them to act accordingly.”

    My point is, exactly the same point holds for every single interim emissions “cap” set under any emissions trading scheme – hence my preference for revenue-neutral consumption taxes that are increased each year until the goal (elimination of all fossil fuel consumption from the nation’s economy) is achieved.

  • JeffJL

    I cannot see Labor complaining too much about doing this but the LNP (in their current incantation) would just use any move by Labor to achieve consensus as a back flip and play politics along with the Murdoch rags.

    Still another worthwhile contribution by the Gratton Institute.

  • Robert Comerford

    Sadly, I can’t see anything that smells remotely like a tax on carbon coming from any party that wants to get into power in Australia for some time to come.
    REAL direct action might be possible e.g. fund replacement of the brown coal power stations in Victoria by building a replacement renewable supply. New jobs for old!
    Removing those blights on the landscape would go a long way to reducing the country’s emissions.