Report a mixed blessing for Labor

THE long-awaited Productivity Commission report offers more clout to Labor's climate change policy than that of the Coalition but its deeper picture is that abatement policy around the globe is inept, inefficient and often ineffective.

There are two core policy messages from this report - that Gillard Labor's carbon pricing policy is superior to that of the Coalition, and that Labor must confront the Greens and its own "spin" merchants still addicted to high-cost solar and renewable-energy rorts.

This Productivity Commission report is probably unique in the world. As far as is known, no other government body has attempted anything like such comparisons involving Australia and eight other nations (China, Germany, India, Japan, New Zealand, South Korea, Britain and US).

Every nation analysed has grounds for embarrassment. It is no surprise the Indian government declined to co-operate. The global picture is a shambles, with the PC identifying more than 1000 policy measures in total, including more than 300 in the US and about 230 in Australia, state and federal. It stresses the risks of overlap, contradictions and high compliance costs. The persuasive message documented across nations is that carbon pricing is the best policy response. This validates Labor against Tony Abbott's "direct action" alternative and Labor has seized this story with alacrity. It is neither new or revelatory, since the former Howard government embraced carbon pricing in 2007 on the type of advice offered in this report.

While Abbott has exploited brilliantly the electoral downside of a carbon tax, this report will help Labor hammer the economic argument that time is running out for Abbott's policy credibility. Over the long run his response is untenable and will require revision. Labor is determined to frame this as an economic issue to strike at the Coalition's economic management competence.

Illustrating the primacy of the pricing method, the commission conducted its own modelling to conclude that Australia's current 12.5 million tonnes of abatement for the electricity sector in 2010 could have been delivered by a price of $9 a tonne of carbon dioxide "at a fraction of the existing cost".

Alternatively, a carbon price that imposed the current 2010 costs would have reduced emissions "by more than double the abatement achieved". That is, our current efforts constitute appalling public policy.

Such conclusions, however, are lethal political ammunition for Labor against Abbott because they affirm the tactic of shifting more to carbon pricing. It is also noteworthy the commission argues, in effect, that the impact of current measures equates to a carbon price nearly halfway to $20 a tonne anyway. In its deadpan style it says: "The results highlight the potential gains from exploiting lower-cost opportunities for abatement over higher-cost ones."

It is not all bad news for the Coalition. Abbott will seize upon and promote the statement that no other country has an economy-wide tax on greenhouse gas emissions. The report contradicts the previous week's final Garnaut review, which argued Australia was left behind by much of the world on climate change action. The Productivity Commission found that measured by emission-reduction resources as a portion of GDP Germany is in front, followed by Britain, with Australia, China and the US in the "mid-range". When measured as an average implicit abatement subsidy Australia was estimated at $44 a tonne of carbon dioxide, with America at $43 and China $35 respectively. The Coalition deploys this to argue that if you believe in a proportionate Australian effort (and this Labor policy) then Australia seems in roughly the right place now. Does this constitute an argument against more Australian action? Of course not. It merely affirms the need for an ongoing proportionate Australian response.

On the pivotal question it was asked to investigate - finding an effective carbon price for the various actions taken by other nations - the commission said the methodology was too elusive. This denies Labor the political lever it wanted, namely, being able to point to a carbon price equivalent in China, India and America as justification for a carbon price at home. The report is emphatic: such policies in other nations "cannot" be summarised as a price or tax rate. Indeed, the PC goes further and brands as invalid the 2010 analysis by the firm, Vivid Economics, as commissioned by the Climate Institute and used by minister Greg Combet earlier this year when he argued the effective price in parts of China was $14 a tonne compared with $1.68 a tonne in Australia. The commission says "no" to such analysis and it can be expected to be quietly forgotten by Labor.

This leads directly to the report's second big message for Australia's political system, Labor, Coalition, Green and independents - if you believe in fiscal responsibility and consumer fairness you must wind back the long sanctified and hugely inefficient renewable-energy policies designed to milk votes via gesture politics.

The commission found that subsidies for solar photovoltaic systems were the costliest way of winning abatement in every country studied. It found most biofuel subsidies were "high-cost means of achieving abatement". It found policy support for renewable energy projects "more expensive" than carbon pricing. And it found in Britain that Europe's emissions trading scheme was easily the most cost-effective way to reduce emissions. Britain won substantial abatement because pricing carbon led to switching from coal to gas-fired power generation.

This report is an assault on the inefficiency and inequity of schemes that directly subsidise renewables. It estimates that for Australia in 2010 the combined impact of the Renewable Energy Target and solar PV subsidies equated to $149 million-$194m, with windfall gains going to homes that took up the option. The implicit abatement subsidy in relation to solar PV was in the astounding range of $431 to $1043 a tonne of carbon dioxide. If such programs did not exist the overall electricity sector subsidy would have been 25-30 per cent lower.

The PC proceeds to the incredible conclusion that because state and territory feed-in tariffs overlapped completely with the RET in 2010, "they did not lead to any additional abatement" and "could have actually led to higher emissions than if there had been no feed-in-tariff schemes".

It finds further that while the RET was responsible for more than half of Australia's abatement, its subsidy "was still high relative to more cost-effective policies" such as pricing carbon and an ETS.

Not all green policies are good policies.

The report finds Australia is paying too much for too little abatement. Yet many other nations are in even worse positions.

The debate now under way in Australia is not whether fresh action is taken. Both Labor and Coalition are pledged to action and the 5 per cent bipartisan reduction target by 2020.

The entire issue is about the most efficient and equitable means. This report shows both the anti-carbon pricing Coalition and pro-renewable energy subsidising Greens have got the core policy response wrong. So has much of the media, both the talkback radio industry that rejects carbon pricing and its cultural opponent, the ABC, with its polemic in favour of the renewable industry special-interest subsidies.

The international comparisons in the Productivity Commission report are stunning in the bizarre outcomes they show across different nations and cultures.

The report argues that high abatement subsidies do not equate to efficient results: witness Japan and South Korea. The abatement subsidy in these two nations is easily the highest in the group, yet their actual abatement achieved is the weakest. This logic allows only one conclusion - serious policy failure in both nations.

The country most conspicuous overall in this analysis is Germany. The report, in effect, offers a study of how different are Germany's values to those of Australia.

Germany is beloved by the Greens for its energy initiatives and Chancellor Angela Merkel has just announced a timetable to shut down nuclear power in favour of renewables.

Driven by domestic politics, this testifies to how much price damage Germans are willing to tolerate for clearer energy.

In the PC's analysis no other nation got remotely close to Germany. It achieved the highest abatement and paid a huge price - about 67 million tonnes at a subsidy equal to $10 billion or a hefty $137 a tonne abatement subsidy. By contrast, Australia's total effort was far smaller for a far smaller cost, an abatement subsidy of $44 a tonne, less than a third of Germany's.

Indeed, the PC found Germany's inefficient subsidies to renewables "swamped" the more efficient effects of the European ETS. The commission, always polite, is unable to make the obvious point - Australia would want to avoid the German model at all costs. Abatement at such extravagant cost to the public is incompatible with our politics where green policies are under pressure to show greater cost-effective justification.

The Productivity Commission's analysis argues that, outside Germany and Britain, the price impact of policies has been modest so far. But that will change.

The lesson for Australia, given further action will be taken, is to ensure it delivers maximum abatement at minimum cost. So far our political system, Labor, Liberal, Greens, have failed on this front. It is belated time for a better effort and a shift to superior policy over gesture politics.