Clearing the air over emissions

THE Productivity Commission says a market-based scheme is best to cut emissions.

Liddell power station

JULIA Gillard's favoured climate change adviser Ross Garnaut raised a few laughs when he told the National Press Club last month that someone should give Minerals Council boss Mitch Hooke a comforting squeeze.

Launching his final update, Garnaut said Hooke, like many people, had expressed concern that Australia risked economic self-harm from getting too far ahead of the global curve on action to limit carbon emissions.

"I said in the report if you're sitting next to someone who fears that Australia might get ahead of the rest of the world, take him by the hand and assure him there's no reason to fear," Garnaut said.

A large part of Garnaut's updated climate change report was devoted to building the case that Australia risks becoming a climate change laggard.

It argued that greater financial distress would result from falling behind the rest of the world rather than getting too far ahead.

Given the findings of the Productivity Commission report into comparative climate change actions being taken by seven leading economies, released yesterday, it may be Garnaut who needs a hug.

According to the commission, Australia's carbon abatement actions are mid-ranking in international terms but on par with the two countries responsible for about 40 per cent of global CO2 emission: the US and China.

The one area where Australia does risk leading the world, however, is in failing to get value for its carbon abatement money.

This is largely due to the overlapping state and federal schemes that have led to a boom in the take up for high-priced options such as rooftop solar.

The Productivity Commission has a history of challenging some of the environment movement's high-profile sacred cows.

Its cost-benefit analysis of recycling schemes almost a decade ago produced counter-intuitive results, to the chagrin of many lobby groups. And its report into the lack of environmental benefit in banning plastic shopping bags left former environment minister Peter Garrett red-faced.

In short, unlike many organisations working in the climate change field, advocacy and good-hearted prescription were never likely to feature heavily in the commission's work.

The Productivity Commission report has been keenly awaited.

Key independent MP Tony Windsor has said it will play a large part in his deliberations over the Gillard government's plans to introduce a fixed carbon price that will eventually link into a global carbon trading scheme.

As such, the report represents a mixed bag for the government.

In headline terms, the report found that no other country has introduced an economy-wide emissions trading scheme.

Germany and Britain are doing the most to cut CO2 emissions. Australia's response is on par with the US and China.

And in terms of getting value for money, carbon reduction policies are costing Australia $100 a tonne to cut emissions from electricity production which could be achieved at a fraction of the cost through a carbon tax.

Not surprisingly, Treasurer Wayne Swan used the report's release to highlight efficiency of a market-based scheme over the opposition's favoured approach of direct action.

"So-called direct action policies, direct action policies like Mr Abbott's, are not only ineffective they are also very, very expensive," Swan says. "The research highlights that far from striking out on its own, Australia risks falling behind the rest of the world if we fail to put a price on pollution."

Opposition Leader Tony Abbott seized on the absence of an economy-wide emissions trading scheme to justify his rejection of the government's carbon tax proposal. "What that means is that any move towards a carbon tax or emissions trading scheme would be an economic own goal. It would be an act of economic self-harm by Australia," he says.

Abbott has built his defence on page 50 of the report which says: "No country currently imposes an economy-wide tax on greenhouse gas emissions or has in place an economy-wide ETS.

"Of the study countries, the United Kingdom, Germany, some parts of the US and New Zealand have emissions trading schemes operating but these apply only to particular sectors, such as electricity generation.

"In some cases too, the imposition of generous caps, combined with the impacts of economic recession, have meant that, at least in the early years, the caps have not been binding to any great extent and prices of emission permits have been low."

Despite this, the commission found a large range of abatement measures had been adopted in the countries studied. Applying a broad interpretation of emissions-reduction policies it identified more than 1000 measures in total.

More than 300 are in the US (federal and state), around 230 in Australia and 100 in Britain.

The commission say that while the sheer number of policies says nothing about how effective they are, they do indicate how complex the policy environment can be.

This is particularly so in federal systems where there are often overlapping policies with high administration and compliance costs.

This has certainly been the case in Australia where the federal government is proposing to introduce an ETS that will begin with fixed-price permits and move to a floating price in three to five years.

Among the countries in the Productivity Commission study, Britain and Germany are part of the European Union's cap-and-trade ETS, which began in 2005.

New Zealand introduced its own ETS in 2008.

Japan and South Korea have announced but delayed implementation of an ETS.

China is considering trialling a pilot ETS in some provinces as part of its 12th five-year plan.

In the US, it appears that only California among the states is committed to implementing an ETS by 2012. The report went into some detail about why a market-based scheme is the best approach.

"A carbon pricing mechanism raises the price of products generating carbon emissions (thus reducing demand for those products) while, at the same time, effectively subsidising production of low-emissions substitutes, by increasing the price that can be charged in the market," it says.

"A carbon pricing mechanism will therefore give rise to a wide range of responses generating abatement, based on consumer and producer assessments of the relative costs and benefits to them.

"It is this market-based objective assessment of the costs and benefits of abatement options that underpins why direct pricing mechanisms generally will deliver any given amount of abatement at least cost."

The commission's analysis clearly demonstrates that the cost of abatement programs is not a good measure of their worth.

"If effort were measured in this way (on the basis of cost) a country that adopted more inefficient abatement measures could be inappropriately given greater credit than others generating more cost-effective abatement," the report says.

It says the best way to rank countries would be on the basis of the carbon tax (or emissions permit price) that would achieve the same amount of abatement when applied economy wide.

Unfortunately, the commission says it did not have the time or resources to do this. Instead, it provided a snapshot of the cost and performance of big emissions-reduction policies in 2010.

The commission says its report has some similarities to a report prepared by Vivid Economics for the Climate Institute, which found Australia was at the bottom of global efforts to price carbon emissions in power generation.

Britain is estimated to have an effective carbon price of $US28 a tonne compared with $US8 in China, $US5 in the US and $US2.30 in Australia.

But the Productivity Commission says the Vivid report was largely confined to a subset of policies that supported "low-carbon" electricity generation, such as wind and solar.

By comparison the commission says the methodology of its study differed from that used by Vivid Economics in important respects.

The commission says its study includes a broader coverage of policies and sectors, and the use of a more extensive set of data sources and expertise.

But it does not attempt to determine the appropriate starting price of a broadly based carbon pricing scheme in Australia.

Similarly, it kept out of the debate over what the appropriate level of compensation would be for energy intensive and trade exposed industries.

The commission says additional countries and relevant industries need to be assessed.

Nonetheless, the report provides a useful reference for policy makers.

It highlights that, as usual, good policy beats a good heart and deep pockets.

A key finding of the report is to confirm how big a waste of money rooftop solar schemes have been.

The implicit abatement subsidy for rooftop solar in Australia was estimated to be in the range of $431 to $1043 a tonne of CO2.

"If these policies did not exist, it is likely that there would have been much less small-scale solar PV installed, and the electricity sector average implicit subsidy would have been around 25-30 per cent lower," the commission says.

Furthermore, because the state and territory feed-in tariffs overlapped completely with the commonwealth's Renewable Energy Target in 2010, they did not lead to any additional abatement, and only added to the total financial costs of meeting the target.

The bottom line is that if Australia had concentrated on a market-based scheme to cut emissions rather than get sidetracked by overlapping state and federal schemes it could have done more, or achieved the same result, for a lot less cost.