Command and control no substitute for a carbon market

Politics all the way down

Then there’s the anticipated but yet-to-be-announced add-ons: energy efficiency measures, an electric vehicle strategy, and more hydro-electric projects. This is government-winner picking on a grand scale, just like the array of industry policies of the post-war era almost all of which failed.

The government itself offered, as examples of its approach, measures like support for small business to replace lighting, airconditioning and refrigeration systems. It won’t be the market that determines which businesses get the inducements, or what sort of lighting and refrigeration qualifies. It will be politics, all the way down.

One need look no further than how these programs worked in the US recently. This included high-profile bankruptcies of companies like Solyndra that were given federal loan guarantees. And, as the Washington Post put it “Obama’s green-technology program was infused with politics at every level.”

The irony, of course, is that the Labor Party is no better on this score. Their intervention is to mandate an aggressive renewable energy target. They get points for ambition, but it is also command-and-control stuff — an explicit repudiation of the market-based solutions they once championed.

Any meaningful, long-term policy to tackle climate change has to be just that — a long-term policy, with no obvious gaps, which involves markets.

On these pages in November last year, we outlined one such policy: a plan for an Australian Carbon Dividend — a $50 per tonne tax on carbon returned to all voting-age Australian citizens equally. It would leave about three-quarters of Australians better off, with the average households $585 a year ahead. The bottom fifth of households by income would do better still, more than $1300 a year better off on average, because their expenditures are lower in dollar terms.

Level playing field

This plan was inspired by that of the US-based Climate Leadership Council which recently received the endorsement of more than 3300 economists, 27 Nobel laureates, all four former chairs of the Federal Reserve, and 15 former chairs of the Council of Economic Advisers.

Why are so many economists, not just environmentalists, behind the plan? The tax would encourage consumers and producers to seek out and implement the most carbon-effective, reliable energy solutions. But by returning the proceeds equally to citizens, it would provide progressive compensation and address energy affordability head on.

The Australian Carbon Dividend Plan could also be combined with the kind of shorter-term solutions that both sides of politics are drawn to. If you want to throw a few billion dollars at tree planting and solar panels, go right ahead.

We prefer the level playing field between different types of energy provided by our plan. But an additional investment in renewables — say like the $15 billion Labor, or $2 billion the Coalition, is proposing — could speed up the market-based transition from coal to renewable energy that our plan provides for.

Australia has done nothing meaningful about climate change for such a long time that a majority of voters are fed up. And the Prime Minister knows it.

But voters should not confuse direct action for the right kind of action. We urgently need a new approach in this area, but one that is long-term, market-based and takes compensation seriously.

Richard Holden and Rosalind Dixon are professors of economics and law, respectively, at UNSW Sydney and academic co-leads of the UNSW Grand Challenge on Inequality.

Source link Finance News Australia

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