China’s consideration of a modest carbon tax sends mixed signals for the Gillard government’s emissions-reduction plans.
After legislating for the world’s largest carbon tax, any foreign action to price greenhouse gases is good news for the government.
Until now there has been plenty of evidence that governments are failing to follow Australia’s lead, and all the UN summit in Durban last month achieved was to kick the carbon-cutting can down the road.
Countries now hope that international co-operation to cut emissions will begin in 2020. That remains an optimistic timetable.
In December, Canada withdrew from the Kyoto Protocol. Despite commitments in Durban to extend Kyoto past its December 2012 expiry date, the already failed treaty is likely to become moribund by the end of this year.
The New Zealand National government’s re-election ensures its uncapped emissions trading scheme will be watered down. Even the Europeans have mumbled about whether they are prepared to continue increasing their efforts in the face of international ambivalence.
China’s announcement that it is considering a carbon tax suggests it may not be following Australia either.
Labor’s fixed-price carbon tax, starting in July, was forced on the government by the Greens. Assuming it survives the next federal election, the centrepiece remains an emissions trading scheme beginning on July 1, 2015.
Since mid-2008, the Chinese government has indicated that it would trial province-based emissions trading, and that intent remains. Consideration of an additional parallel carbon tax suggests China isn’t putting all its carbon-cutting eggs in the emissions-trading basket.
The lack of Chinese resolve to use emissions trading as the instrument to cut emissions could create structural problems for Australia. Late last year, Climate Change Minister Greg Combet said Labor had initiated talks on how to link its scheme with those in Europe and New Zealand. But true international emissions trading will not be achieved without the US. Along with Beijing, Washington will set the standards for international trading.
Since the 2006 Stern review, advocates for cutting emissions have argued that the cost of doing so is cheaper if it is done earlier. It’s a debatable point, since cheaper future technology is likely to be central to cost-effective global emissions-reduction efforts.
Even if the argument is accepted, the theory holds true only if emission reductions are taken where it is cheapest to do so first. And that’s not in Australia.
Cutting emissions is expensive. As the Treasury’s modelling shows, it will come at the expense of economic growth.
Because Australia’s emissions originate principally from cheap, coal-based electricity generation, a high carbon price is needed for alternatives to be commercially viable. Making gas competitive would require a carbon price of $40-$70 a tonne based on current technology. For renewables, a tax in the many hundreds of dollars would be required.
This reality strikes at the heart of the contradiction facing Australia in its quest to cut emissions: to reduce the cost of cutting emissions on households and businesses, the carbon price needs to be kept low, but to actually achieve emissions reduction, the price needs to be high.
The Treasury’s fairytale “Strong Growth, Low Pollution” modelling ludicrously assumes Australia’s pain will be limited because other countries will be carrying an equivalent carbon burden.
Establishing a trading scheme for the right to emit is designed to reduce Australia’s economic pain. Pricing greenhouse gas emissions is an intervention into the free market, like tax or regulation.
Using market trading schemes to cut emissions makes only the cost allocation of cutting emissions more efficient — it doesn’t negate the fact that it remains a tax on the economy.
Using markets will provide those who have to pay the tax with an avenue to find the cheapest way to cut emissions. Because climate change is a global challenge, only global markets can ensure sufficient emissions reduction, and the only way to achieve it at lowest cost is by linking national trading schemes. This is especially true for a carbon-dependent economy such as Australia’s.
By adopting a carbon tax, the Chinese government may end up limiting the ability of Australia to trade in cheap Chinese emissions reduction. Last week, Beijing protested about its airlines paying for permits that reflect their fuel emissions for flights into the EU.
With China now hedging its emissions-reduction bets, the prospects of a comprehensive international scheme appear to have diminished. Longer term, this potential structural problem for Australia may exacerbate the already glaring economic divergence between the schemes of both nations.
Australia’s $23-a-tonne carbon tax eclipses China’s $1.55 tax. Similarly, Australia’s tax will cover a majority of the private economy, while China’s will cover mostly state-owned enterprises.
Equally, with no parallel to Europe’s declining $10 carbon price, talk of a Chinese carbon tax provides little comfort to Australian households and businesses about to shoulder the world’s largest carbon price. The pain will be even more acute if China’s carbon tax makes it harder to lower the economic pain of an emissions trading scheme in the future.
