Monday, December 15, 2008

The Soft Option

In attempting to pursue a sensible course in its white paper on Climate Change, the Australian Government has apparently delivered a compromise position which will please very few. At the centre of the announcement is the setting of an emissions reduction target for 2020, as part of the Carbon Pollution Reduction Scheme which will see a trading system commence in July 2010. While many in industry were calling upon the government to delay the introduction of carbon trading, the government has confirmed the 2010 start date in the interests of providing certainty for the business community. What is less certain is the targets themselves.

Rather than identifying a hard number as the emissions reduction target, the Government has committed to an unconditional reduction of 5%, and a reduction of up to 15% on the condition of a strong global agreement. Even if the rest of the world should miraculously agree to more aggressive cuts, the Australian target is capped at 15%. Again, this cap is supposed to provide certainty, but the fact is that the target has a range of between 5% and 15% and is by definition less than certain.

Despite that, it is likely that business will breathe a sigh of relief as the targets are smaller than anticipated, while the compensation measures remain quite substantial. On the other hand, environmentalists will be bitterly disappointed. Scientific opinion has favoured much deeper cuts ranging from at least 25%, up to 40%, as a minimum to avert damaging climate change. It would seem to be logical to argue that smaller targets are worse than a waste of time because they will cause massive economic disruption without any discernible benefit for the environment. If you believe the scientific advice, there is no soft option.

When the trading scheme commences emissions will be priced at $25 per tonne of carbon dioxide, disappointing those who were pressing for a zero price to provide a soft start. The scheme is expected to generate $12 billion a year, and the bulk of that will be redirected to compensation, not only for families and individuals, but also for industry. The problem with that though is that very little of it will be directed to energy efficiency measures or the development of alternative energy sources. While it is important that pensioners and families are given assistance to accommodate higher electricity prices, there is an element of the dog chasing its own tail here.

If the revenue from what amounts to a new tax is paid out as compensation to those most affected by the imposition of that tax, why impose the tax in the first place? If the problem is the impact of pollution from traditional sources of energy, shouldn’t more of this money go into developing alternatives? Yes, there is investment in renewable energy sources, but the point here is that, like so many other aspects of the plan, the compromise delivers a diluted result. As long as the existing energy sources are propped up with compensation, the incentive to develop alternatives is undermined.

And that’s the big failure from this plan. You will hear a great deal from the government about getting the balance right, but the truth is that this is a compromise which will please no one. Now that might be OK in politics, but when it comes to science, that just doesn’t work.

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