14 April 2010

The greens’ proposal for a carbon tax

by David Spratt
[First published for the second Australian Climate Action Summit, 12 March 2010]

On 21 January, The Greens proposed a “levy on polluters” or carbon price/tax to break the Senate deadlock on climate change. The Greens are currently negotiating with the government on the plan.

Over 30 local community climate groups have thrown their support behind the Greens’ plan, in a statement released in February:
Neither Kevin Rudd nor Tony Abbott’s policy can deliver a safe climate.
It is time for Plan B, starting with the Greens fixed carbon price.
Australia needs a new direction if we are to urgently tackle the climate crisis.
Labor’s Carbon Pollution Reduction scheme is failed policy, it gives too much compensation to the big polluters and relies on overseas credits on the international carbon market to produce a reduction in emissions. It would lock in a high polluting economy.
The Coalition’s policy is no better, it also hands out money to the big polluters and relies on techniques to increase soil carbon to produce most of its claimed carbon dioxide reductions. We need to increase the planet’s capacity to absorb carbon and keep coal in the ground, not one or the other.
While a carbon price is only a small part of driving the necessary transformation to a zero-carbon economy, the Greens plan to set a two year carbon price could get the ball rolling on real carbon reductions in Australia.
We call on all parties in the Parliament to back the Greens proposal and get moving on a transition to a safe climate.
[See www.climateactioncentre.org/climategroups%20carbon%20price%20statement for list of signatories.]
National and State wide environment groups – including Australian Conservation Foundation, Greenpeace, Environment Victoria, Nature Conservation Council of NSW and Friends of the Earth – have also welcomed the plan. GetUp is looking at a campaign for a carbon levy also.

What is the Greens proposal? It is for a standalone carbon levy of $23 a tonne commencing 1 July 2011, increasing to $24 from 1 July 2012, and after that escalating at CPI plus 4 per cent a year. It would be reviewed after two years but the proposed legislation would be ongoing (no sunset clause), so the levy would continue unless revoked or amended (as is the case with
all legislation).

Greens Senator Christine Milne said that once the interim scheme was implemented: “We can then discuss the longer term solutions Australia will need over the coming two years, secure in the knowledge that a carbon price is already in place, helping to unleash innovative and job-creating climate solutions”. [It seems The Green’s position, as reflected in their Safe Climate
bills, is that a “good” emission trading scheme is better than a carbon tax, but a carbon tax is better than a “bad” ETS, such as Labor’s proposed CPRS.]

The Greens say their plan would generate $5 billion to compensate households, with the same amount for renewable energy and energy efficiency. There would be no compensation for domestically-consumed production and limited exemptions (20% of emissions) for emissions-intensive, trade-exposed industries.

Is a price on carbon effective in cutting emissions? A carbon price seems necessary, but not suffficient. It’s of limited use for liquid fuels/transport because there are at present few technological alternatives, and petrol prices are “inelastic”. This means a large increase in price produces only a small drop in demand. [It would require a carbon tax of around $500/tonne to double the price of petrol!]

But for electricity generation, a price of $23 a tonne ramping up towards $40 in a decade is enough to make renewables (especially wind) more than competitive now, and more so with innovation. As energy consultants keep on saying, a price in this range will kill off investment in coal-fired power stations now, and drive investment instead towards renewable energy. This change will start as soon as it is understood that the price is coming: even the possibility of the CPRS with a low price held back NSW from announcing new coal-fired power stations.

As well, a carbon tax now can help undermine the push for carbon capture and storage, because as well as the additional 40-50% cost of this technology, CCS would not scrub all carbon dioxide from emissions, so it would be hit by a carbon tax as well.

A carbon tax is not the full answer, but it doesn’t preclude the many other things that need to be done and it raises revenue that makes some other actions (direct investment, feed-in tariffs, energy efficiency) easier to fund.

Aren’t we just responding to someone’s else’s agenda? Yes, the nature of politics at the moment is that we don’t set the agenda as much as we would wish (looking back at 2009, did we really set the agenda at all?), and so our attention is often drawn to organising in response to those issues that are already in the public light and being talked about regularly in parliament, the media and the community. We are more likely to be heard when we participate in a conversation that has already started.

The problem comes if we simply respond on “their” terms, rather than also pushing the terms of the debate towards our territory. And there are other, less publicly recognised, but strategically important, issues which we seek to move to the top of the public agenda by mobilising broad support for them.

The recent public agenda on climate has been dominated by Labor’s CPRS (dying, if not dead in its present form), the Nationals opposition to it and Abbot’s alternative “plan” (which will result in increased emissions), and the “circuitbreaker” proposed by The Greens of a carbon tax.

Recently, climate denial, stuff-ups on green loans, energy efficiency (for the wrong reasons, thanks to Garrett), and Wong’s massacre of the RET have also gained public attention, unfortunately more so than renewables and replacing coal. But the big three — Abbott’s plan versus the CPRS, or a carbon tax — will likely be prominent in the next few months’ debate, with the parties and lobbies also launching new proposals as the election approaches.

Should we intervene in this current public debate by actively supporting a carbon tax? There are three possible reasons: it’s a good idea; it is a platform to push stronger proposals; and/or building support for good Greens’ policies so that they start to win lower house seats is strategically important, because until Labor materially fears The Greens and others with stronger climate action policies, their agenda of appeasing the big polluters will not change.

Won’t the tax be bastardised in negotations and end up being a dud? Of course that possibility is an occupational hazard with everything in politics, and support for a carbon tax should be premised on sound foundations, which should not be compromised.

But if you only support something when you are 100 per cent satisfied that you are going to get exactly the result you want before you start, you may end up doing a lot of sitting around.

The effectiveness of any policy depends on the intent and motivations of the government implementing it, and that depends on the broader balances of forces in the society and how keenly governments feel the pressure and/or reflect the views of the climate movement and lobby. Ditto whether the “polluter pays” or not.

Isn’t this still creating a carbon market? A carbon tax/price in not an ETS and it is not the CPRS. With a proper carbon tax, there is no market in pollution rights, no financial speculation on permit prices, no purchase of scam offsets (through the CDM, rainforest credits and other mechanisms) as an excuse not to cut domestic emissions, banks cannot trade in permits, there is not the disincentive to voluntary action, and it does not create a “floor” on emissions.

Won’t a carbon tax increase energy prices for poorer people? Yes, but some of the revenue can be used for compensation, as is the case in The Greens’ proposal. Energy efficiency programmes can also help reduce energy costs. However we also need to recognise that coal and gas-fired electricity is cheap because its price fails to account for its pollution that is killing the planet. [Not that the pollution can simply be reduced to a monetary price!] There is a question of equity, but keeping the price abnormally low for coal-fired power is also an inter-generational equity question.

Isn’t the price too low to be effective? It needs in the end to be much higher, but $23 a tonne and rising would straight away change a lot of investment decisions, especially once it was understood the price was there to stay for the long term. Under The Greens proposal, it would get to around $40 in a decade. In 1991, Sweden imposed the world’s first carbon tax at $US100 a tonne and today is one of the four most competitive economies.

Aren’t there better ways to cut emissions? When all is said and done, there are only a limited number of ways to reduce emissions, principally:
  • pricing mechanisms, which can be a tax on carbon pollution so that these technologies become more expensive than the low-pollution alternatives; and/or subsidies (negative taxes) such as feed-in tariffs and direct subsidies for investment;
  • regulations which outlaw certain emissions, technologies or processes;
  • investing in innovation and scaling up alternative technologies so they they become price competitive with fossil fuels; and direct government investment in the safe, clean-energy technologies; and
  • encouraging behavioural change.
A carbon tax does not preclude any of the other actions, and can generate revenue to support them.

What about feed-in tariffs or paying people to store carbon in soils? These mechanisms also involve carbon pricing. Instead of taxing the carbon pollution, they provide a subsidy to engage in actions that reduce carbon dioxide levels (storing carbon in soil) or a subsidy to produce clean energy (feed-in tariff). Thus they are a negative carbon tax which subsidies the pollution not emitted, rather than putting a price on pollution which is emitted.

But aren’t carbon markets bad? A carbon market (trading in the commodity known as carbon pollution rights or permits, such as the CPRS) is very different from putting a carbon tax. A carbon tax does not create tradeable emission permits at all, it simply prices pollution at a point in the production process.

But isn’t a price on carbon a market mechanism? Yes, and a few people say they are opposed to market mechanisms (and hence using taxes to change market prices) in principle. Sure, the world would be a different place without commodity and capital markets, but that’s not the reality within which we must make big changes now. The climate system will be longpast big tipping points if we simply wait to abolish the “free market” before acting decisively.

If you really thought all carbon prices were bad, then the first thing you would need to do to be consistent would be to argue that the current excise on petrol should be removed, because for all practical purposes, it is a carbon tax too. A feed-in tariff is also a market (negative mechanism, and judging from the experience in Europe, it works. Corporate tax is also a market mechanism (it changes the rate of return in capital markets), but few beyond big business think it should be cut or abolished.

Can’t we just regulate emissions out of existence? Some people say “there should not be a price on carbon and it should be regulated out of existence”. But you can only progressively regulate certain technologies out of existence once there are replacement technologies and sources of energy. So how do you get the new technologies built, when their current cost is greater that the current fossil fuel systems? At the moment, the options are through price mechanisms (RETs/RECs which have prices) and using subsidies such as feed-in tariffs and/or tax concessions (also price mechanisms). If these are also out because one is opposed to pricing mechanisms, what you left with is the state directly investing and building the whole system.

That’s one proposition, but in the current political climate, what’s the chances of that alone (as opposed to a suite of measures?) actually being realised in the near term? In an economy with markets and prices, the simple reality is that by making something scarce (prohibition/ regulation/rationing) tends to increase its price, whether on the black market or a legal market for the rationed good (as the experience of war rationing shows). We can’t easily get away from a relationship between the supply and demand for carbon pollution and the price on it. For example, if you use administrative measure to ration everyone to fewer litres of petrol that they presently on average use, what would happen to the black market price? It goes up!

Why not campaign for total, direct government investment in renewables instead? Yes we need that as well, at a scale that isn’t on the political radar yet, but it is silly to counterpose one to the other. Saying we need an action that is off the mainstream agenda and is unlikely to be implemented at scale in the near term (massive state investment in the tens of billions of dollars annually) is no reason not to support a proposal for a carbon tax that can drive down emissions, and is on the political radar, and has a chance of being implemented
relatively soon.

In the end, the question is whether a carbon price helps the transition to the new economy and the new energy system, or not, and whether we can develop the political power to drive a broader agenda.