Carbon pricing in Australia

by John Quiggin on July 20, 2013

A number of people have asked me about the recent move by newly restored PM Kevin Rudd to “terminate the carbon tax”. I’ve given some of the political background here, explaining why the term “carbon tax” has become politically toxic in Australia. In this post, I’m going to try to spell out the story a bit more.[^1] There’s more detail here, but I’ll make the crucial points up front

* Australia never had a carbon tax, as the term is usually understood. Rather, we had an emissions permit scheme, with a period of fixed prices (initially until 2016) after which emissions would be tradable
* In 2012, it was agreed to link our scheme to the EU Emissions Trading Scheme, beginning in 2015. This didn’t attract attention, and legislation was passed to put the link into effect
* Following his restoration, Rudd announced that the link would be brought forward to 2014. To undercut the Opposition, which had been waging a campaign to “Axe the Tax”, he described this as “terminating the carbon tax”

The initial fixed price was set at $23/tonne which was, at the time, a plausible estimate of the likely price of emissions in the EU scheme. Despite dire predictions the carbon price had no visible impact on the economy except the desired one of reducing emissions. However, as it turned out, EU prices have been much lower than the Australian price, making a link to the EU a cheap way of meeting Australian targets for emissions, net of imported permits.

As US readers will be aware, the big division in climate policy is between those who want to do something and those who want to do nothing. Among those who want to do something, there are two main divisions

* Between market-based policies (carbon taxes and emissions trading schemes) and regulation/direct action
* Within market-based policies between taxes and trading schemes

The do-nothing lobby, when it can’t get away with outright denialism, seeks to oppose whatever is the currently favored policy option, and line up with the most politically plausible alternative. Australia’s conservative leader, Tony Abbott, accurately described by his leading rival as a ‘weathervane’ at the issue, has at various times supported carbon taxes, emissions trading, direct action and denialism.

Among those concerned to do something, it’s now widely agreed that a price on carbon, perhaps supplemented by direct intervention should play a central role (Obama is stuck with regulation, as the only way to get around the Congressional Republicans). The key arguments are

* Is it better to fix the quantity of emissions, guaranteeing the environmental outcome, or the price, giving certainty as to the economic costs
* Do you want international links, in which case a trading scheme is the only real option
* How good is verification of offsets and similar (mainly a problem for trading schemes)

However, a lot of support for carbon taxes derives from the assumption that, with a tax, polluters will pay the full cost, while with an emissions trading scheme, they will get free rights to pollute. This turns out to be wrong. On the one hand, emissions trading schemes are typically designed to move to a situation where all permits are auctioned, so there is no free right to pollute. On the other hand, it is possible to set up a carbon tax with exemptions equivalent to free permits. Alternatively, as in Australia you can implement the “tax” as a fixed-price permit scheme, and give away lots of permits.

As I argued above, the big shift in Australian policy, made with little fanfare, was the link to the European scheme. What you think about that depends on how likely it is that Europe will adopt more stringent targets for the period after 2020, thereby raising the price of emissions permits, and whether you think Australia does more for the world by setting a higher price or by joining international action.

[^1]: I’m a member of the Climate Change Authority, which makes recommendations to the government on various aspects of the policy. That limits me in discussing some matters of detail, but not in describing the policy.

{ 30 comments }

1

Vance Maverick 07.20.13 at 10:28 am

By…?

2

rwschnetler 07.20.13 at 2:14 pm

Despite dire predictions the carbon price had no visible impact on the economy except the desired one of reducing emissions.

John, can you cite publications where it shows that carbon emissions were reduced?

3

Martin 07.20.13 at 2:24 pm

I’d argue that the simple dichotomy between people who want to do something and people who want to do nothing doesn’t quite reflect reality. There is a very obvious difference between, for example, Joe Romm and William Nordhaus. Both want to do something, but yet Romm distances himself loudly from people like Nordhaus. Yet, Nordhaus surely is not Benny Peiser, who arguably wants to do nothing.

4

Rich Puchalsky 07.20.13 at 2:38 pm

“What you think about that depends on how likely it is that Europe will adopt more stringent targets for the period after 2020”

I might as well link to a two-years-old argument on my blog about infrastructuralism. So far what’s happened since then matches my prediction that carbon taxes / emissions trading schemes will never become a major factor in reducing actual emissions, because if they start to become serious constraints, they’ll be revoked. They put pressure directly on the masses of voters who can least afford to be economically pressured, and who don’t directly make any of the important decisions. The important decisions are about what infrastructure we build, and that’s basically a matter of governmental decisions.

Since the only reason that anything would be done at all is because of people putting pressure on governments, there’s no reason for governments to then create economic schemes to do it. No major infrastructure is built without governmental permission / support in any case, so you might as well just go to what you call direct action.

5

bob mcmanus 07.20.13 at 3:27 pm

Controlling emissions via consumption taxes may marginally help in terms of new technologies and efficiencies, but since GW is global (and unused carbon will be sold & shipped to the least efficient user location) I belong to a faction, however new or small or ineffective that wants policies to keep the damn carbon in the ground. Now.

So tax carbon heavily at extraction, futures & sales, and distribution sites.

6

john c. halasz 07.20.13 at 5:13 pm

@4:

That’s why there should be a tax-and-rebate scheme. In effect, as carbon prices ratchet up, it would create a kind of carbon anti-rent or anti-carbon rent, to be distributed as a citizens’ dividend in the same way as energy and resource rents are in some provinces or countries nowadays. And once the idea/practice of a citizens’ dividend is firmly institutionalized and habituated, it can be further supplemented and extended toward reducing work-hours and re-orienting employment away from wasteful over-production and toward a more genuine determination of social and personal needs.

7

hix 07.20.13 at 5:45 pm

Wheter the planned shift towards aucitioning most EU certificates will take place is rather questionable. In addition, too many are sectors are excluded in the first place.
The sadest story is that electricity production is included. At the same time many other expensive measures like quotas and subsidies for renewable electricity generation are in place accross the EU, which crowd out any efforts in other sectors.

8

Tim Worstall 07.21.13 at 10:45 am

“That’s why there should be a tax-and-rebate scheme. In effect, as carbon prices ratchet up, it would create a kind of carbon anti-rent or anti-carbon rent, to be distributed as a citizens’ dividend in the same way as energy and resource rents are in some provinces or countries nowadays.”

I understand the point. But I don’t think it actually works. For the amount to be raised by a carbon tax isn’t enough to offer a citizen’s dividend large enough to make any difference to anything at all. Apologies as I know the UK numbers best.

Let’s take the Stern Review’s numbers for what the carbon tax should be. $80 per tonne CO2-e. This includes the low discount rate etc etc. A reasonably high sensitivity and an emissions path worse than the SRES A2 one. So it’s very much an outlier on the high side (Nordhaus starts at $5 a tonne, Tol I think is at something like $16. Hansen is at $1,000 but his calculations to get there are very odd indeed. He has taken the extreme upside of every component of the calculation rather than what he should have done, the expected value. So Hansen’s number should really be read as “the right rate could be up to $1,000”, not “the rate should be $1,000”). So let’s stick with Stern.

UK emissions are around 500 million tonnes CO2-e a year. $40 billion or, say, £30 billion in a righteous and just carbon tax. There are 48 million adults in the UK. So the rebate is £625 a year: or £12 a week. At current London prices, three pints of beer a week.

Note that the Stern level of the tax is not something that should rise endlessly into the future (unlike Nordhaus). This is the just and righteous rate which it should be at into the future. And it’s not, as a dividend, enough to make much difference to anything at all. As a tax it would indeed, levying it is a great idea. As a citizen’s dividend though it doesn’t seem large enough to make much difference to anything at all.

This is also leaving aside that we’ve already got emissions taxation in the UK, just that it’s not at the right rates on all things. Fuel duty has been massively raised over the last two decades. The fuel price escalator, as it is called, was specifically brought in to “meet our Rio committments”. So yes, it’s a carbon tax. As is Air Passenger Duty and so on. These taxes already provide some £15 billion to £20 billion (all fuel duty is £30 billion or so but not all fuel duty is about CO2 emissions) in revenue a year.

We’re already close to having a Stern sized carbon tax in the UK: if we went the whole hog and fulfilled the recommendations then that citizen’s dividend would be of the order of £3 to £6 a week. Not enough to really do anything.

It always does rather surprise me about the carbon tax: how few people seem to understand what a small amount of money a proper one would raise.

9

John Quiggin 07.21.13 at 11:32 am

The Australian scheme, before allowing for exemptions etc, raised about $10 billion a year or a bit under 1 per cent of GDP. I’ve argued that the price ought to be two or three times as high in the long run (about $50/tonne),
http://johnquiggin.com/2011/06/02/why-the-global-carbon-price-should-probably-be-around-50tonne-nerdywonkish-but-not-too-difficult-i-hope/
but it’s clearly not a huge amount in a national budget.

On the other hand, if we had a universal entitlement per person, the associated transfers to people in poor countries would be enough to finance the millennium goals and more – I argued this somewhere but can’t now find the link.

10

Shane Donohoe 07.21.13 at 1:06 pm

Tim Worstall,

take your £625; a quick Google gets the Telegraph telling me the average annual household power bill is about £1250 or so. So you’ve just paid half of that (two adults and you’ve paid the whole thing). Even your pessimistic numbers are between ten and twenty five percent off and that ain’t nothing.

Then we can think about targeting it. Focus on the poorer 50% doubles your individual impact.. the top half either won’t vote for you or want the carbon tax anyway and don’t need the bribe.

Ok. There’s lots of obvious problems with being that ham-handed, but I trust more measured ways of focusing the benefits will occur to you.

11

PGD 07.21.13 at 2:30 pm

My vague impression is that the EU trading scheme has been a mess? Massive abuse of offsets, low cost of permits, not much emissions reduction? Or am I wrong about that? (As you can tell by all the question marks, I am far from an expert here and very curious about others’ views).

12

Omega Centauri 07.21.13 at 2:35 pm

Tim, The rebates wouldn’t be that big, but after substitutions greater efficiency etc. would the consumer think he was better/worse off because of it? This is of course about perceptions more than reality, as we’ve seen that politics and popular media are a giant reality distortion field. Getting a check in the mail that the citizen has the pleasure of cashing is a lot more visable than some undetermined change in a bill somewhere?

13

Tim Worstall 07.21.13 at 4:04 pm

Massive abuse of offsets, low cost of permits, not much emissions reduction? Or am I wrong about that?

Not quite wrong but…..

The price of permits is low because emissions have been reduced below the target set by the number of permits issued. This is what the system is supposed to do so claiming that it’s been a failure isn’t quite right.

Of course, the reduction in emissions below target has partly been because we’ve had something of a recession and also partly because the first issuance of permits was generous. Trying to get people used to the idea and tighten in future rounds.

I have to admit that this is another thing that amazes me about this whole how do we deal with climate change thing. People do seem to think that a low permit price is a bad idea. But in a cap and trade system a low permit price is absolutely bloomin’ fabulous. It means that it’s much cheaper to hit the emissions target (that target having been set by the number of permits issued) than everyone had thought. Which is great news.

What seems to get forgotten is that it’s not the price of the permit which reduces emissions: it’s the having to have one at all which does. And low prices for something you have to have are great.

14

john c. halasz 07.21.13 at 7:04 pm

Tim Worstall @8:

Actually, $20 per week, $1000 per year, doesn’t sound like chump change to me, (though your beer sounds a bit expensive). But my point wasn’t that carbon pricing alone could form the basis of a citizens’ dividend. Rather the point is to raise the relative price of carbon-based resources, while cushioning the impact on ordinary people and thereby maintaining popular support. But once people have become accustomed to the rebate, further extensions of the citizens’ dividend become more acceptable, though taxing other “resources”, (hint, wealth). “Economizing” doesn’t mean pursuing endless “growth” for the sake of meeting profit expectations; it means producing more with less. And surely part of the solution is taking out increased efficiencies in the form of more “leisure” rather than increased material consumption, or IOW in the form of social activities that don’t require increased resource consumption.

And I don’t think a carbon price would be a self-sufficient solution. Rich Puchalsky had it 2/3 right, in that the main point is transforming our infrastructure and capital stock, which market price mechanisms alone will not achieve with sufficient alacrity. IMHO it will require a good deal of public investment and publicly guided indicative industrial policy to accomplish. But a carbon price (or more correctly a GHG equivalent price) is also essential. And I prefer a tax to a ETS scheme, because, though formally they are functionally equivalent solutions, the ETS assumes that the required quantities are a priori known, whereas a tax would have an information gathering function: once you put a cost-price on emissions, you create an incentive to actually find out and measure the full extent and sources of emissions, (rather than assuming Mr. Market knows everything and has no incentives toward cheating or misrepresentation). I’m thinking here especially of methane emissions and the currently promulgated mythology of NG as a “bridge fuel”.

15

Omega Centauri 07.21.13 at 7:39 pm

A scheme with a cap makes sense if the cost/benefit function of the externality to society has a sharp rise, and the cap is set just below that rise, i.e. there is a strong threshold effect. If instead, as with global warming, there may be some steep rises in the form of tipping points, but we don’t know where they are, so the damage function continually rises -no cap other than zero, is a safe cap, and any cap we choose is completely arbitrary. In that scenario, we are likely to let the estimated cost of the permits versus the size of the cap determine its level, and we would correctly conclude that a lower than expected permit price means we were not agressive enough.

16

Tim Worstall 07.21.13 at 7:48 pm

(though your beer sounds a bit expensive)

That’s London for you….

17

hix 07.22.13 at 12:33 am

Im a big fan of an externality fee that gets redistributed on a per head basis on a national level. Since this externality fee reflects the damage everyone has to bear, it would naturally be on top of every other transfer program, since it is not a transfer at all, just a reflection of the health costs everyone has to bear. As for this is not much money – 1% of gdp is on top of welfare or stipend makes a huge difference. There is no reason to stop at co2 emission or 1% of gdp. The ridiculous feed in tarifs we did in Germany already amount to almost 1% of gdp in direct costs (at least 19billion this year and rising, 26 would be 1%). One could tax and redistribute environmental damage at a multitude of 1% and still have the same overall impact on living standards. How does 2000€ for everyone, including children sound? That would be 5% *1.19 (VAT). A German welfare receipant or student on a stipendia could spend arround 60% more every month on general consumption with that amount of money. On top, it would reduce environmental damage a lot more than stupid feed in tarifs set at moon price levels for certain “renewables” (some of which do not even avoid co2 emissions).

18

Omega Centauri 07.22.13 at 12:50 am

hix: Looking at it from across the pond, the German FIT program looks to have been hugely successful. They do cut the rate roughly twice every year, which is really the right approach for nuturing an industry then gradually removing the subsidies. In the US the subdidies have been for installation, and prices of installation have not fallen very much, whereas in Germany the price to put a panel on a roof, is less than half what it is the the US. The boost that German demand gave the global solar industry, is a big part of the reason prices have fallen as far and fast as they have. They’ve done the rest of the world a huge favor by nurturing the PV industry to (almost) the point where it can takeoff without subsidies. You should be proud of the critical contribution your country made in this regards.

Also be suscipicious that some of the cost numbers thrown around are politically motivated fabrications. The large daytime PV supply, has in fact reduced the price premium for daytime power in Germany. To the serious detriment of the traditional coal powered producers, who counted on selling daytime power at a premium.

19

hix 07.22.13 at 3:36 am

Ive thrown arround that number myself. The numbers thrown arround by lobby groups are quite different and they usually are not numbers for overall costs.
About those no one cares. Rather it is all about who has to pay/gets how much. In June, feed in tarif payouts were 2.2billion. Revenues from resale arround 170 million at arround 3.2 cent market price. Even if the non merit order effect price were twice as high and would fully reflect welfare gains (which it does not, since a large part are foregone, or shifted arround within one company for that matter profits), that would barely make a dent. Makes sense, 30cent – 3 or 6 cent does not change much.
(pdf) http://www.eeg-kwk.net/de/file/EEG-Kontostand_2013-07-03.pdf
Grid build up costs, new capacity and cogeneration feed in tarifs come on top of those numbers, so id say my 18 billion estimate is quite conservative.

20

Pete 07.22.13 at 10:58 am

The more I think about this, the more a “basic energy income” based on carbon taxes makes sense.

There are quite a lot of countries which have subsidies on basic fuel and energy costs, such as India. It’s a means of distributing a benefit to a population that don’t have bank accounts or bureaucratic identities. However, it’s causing the country more and more difficulties in maintaining a low energy price as the external cost rises.

In the UK, there is a lot of drum-banging trying to rally low or fixed income voters, especially pensioners, against wind turbines or green energy of any kind by claiming that it’s responsible for increased energy bills.

So my proposal would be to give everyone free energy credits for a certain amount per day, every day, accumulating. Including people with prepayment meters, for whom this would make a huge difference. Set the free amount at somewhere a bit below median energy usage, based on number of people in the household. Energy past the free level can then be billed at a higher rate than the current rate, and we can probably abolish the winter fuel payments as well if the basic energy income is made seasonal.

Applying it daily to prepayment meters would almost eliminate the hardship of people sitting in the cold and dark waiting for their benefit or wages to come in so they can feed the meter again.

* Obviously you can’t ever call it this, the name is politically toxic, despite people being comfortable with the “market” rationing people out of their ability to afford the basics

21

James Wimberley 07.22.13 at 5:39 pm

Linking to the ETS may be Rudd’s best exit tactically from Gillard’s screw-up, but it’s buying a pig in a poke facing the Heath Robinson Brussels sausage machine. First the EU sets up a scheme with far too generous initial allocations and easy targets, to buy approval. Then business finds it much easier than they’d claimed to meet the targets, and the permit price crashes to zero. The Commission devises a gobbledygook fix to make the ETS bite once again, by “backloading” the next tranche of permits. First the European Parliament votes the contraption down, then it votes it back in again. Stay tuned for next month’s exciting installment. My guess is that European electorates do want some action on greenhouse gases, so the ETS will over its life have a mildly significant mean price around peculiar gyrations, but it won’t be a stable long-term rational policy. Surely Abbott can make some hay with this mortgage?

22

iolanthe 07.23.13 at 1:47 am

John

One thing you may be able to shed some light on is why the Australian and EU prices should be the same? I get that there will be under full linking post 2018 as permits from either scheme can be used to meet liabilities so prices should be the same. But in the interim, at least 50% of Australian liabilities need to come from Australia. It seems to me that this creates in effect two separate markets for those liable under the Australian scheme, with prices determined by supply and demand in those markets. So if the cap in Australia was relatively tighter than in the EU, Australian prices will be higher. Of course a looser cap would mean lower prices but still no guarantee that prices would be the same or even similar to the EU. But the Government is strongly implying that bringing forward flexible prices will immediately see EU prices here and I can’t see how they can be certain. Am I missing something here?

23

John Quiggin 07.23.13 at 8:00 pm

The assumption is that Australian emitters will buy some permits from the EU, but that the 50 per cent cap won’t be reached. So, emitters can choose between EU and Australian credits, which means that the two will trade at the same price.

I’m not convinced that we will necessarily be an importer, but that’s the assumption most people are working on.

24

Omega Centauri 07.23.13 at 8:21 pm

J.Q.
So does that mean there is essentially a single market and a single cap, which is the summation of the EU and Austrailia?

25

Tim Worstall 07.23.13 at 9:03 pm

“Actually, $20 per week, $1000 per year, doesn’t sound like chump change to me, (though your beer sounds a bit expensive). But my point wasn’t that carbon pricing alone could form the basis of a citizens’ dividend. Rather the point is to raise the relative price of carbon-based resources, while cushioning the impact on ordinary people and thereby maintaining popular support. But once people have become accustomed to the rebate, further extensions of the citizens’ dividend become more acceptable”

I’m fully with the cbi…….although, as here with JQ’s post on it, it’s the “b” that is important, the “basic”. And agreed, carbon (and other externalities taxes plus a land value tax) taxes might have a role. But, in the sense of an already highly taxed EU country, it just isn’t true that a carbon tax is going to provide much extra revenue. Emissions are already being taxed.

26

John Quiggin 07.24.13 at 9:36 am

@OC 24. Yes

27

Alex 07.24.13 at 10:34 am

What do we think of upstream carbon tax, i.e. levying the tax at the mine-head, or the port of entry in the case of imports from a country not participating? This seems to me to bear on people who have control over decisions whether to burn coal, natural gas, or to use something else entirely, i.e. energy industry managers, rather than on consumers.

An end-user carbon tax is a bit of a diffuse conception of God – the idea is that it will permeate the economy and gently influence billions of micro-decisions. The problem with this is that energy doesn’t make up a very big proportion of the cost of a pack of cornflakes, and this influence might not be perceptible or if perceived, correctly identified. (So the carbon tax makes the price of widgets go up a little. It’s possible that Widgets Pty might decide to absorb the hit to margin, to reduce some other cost, or even to brazen it out and do a marketing campaign promoting its widgets as a premium product. Or Widgets Pty managers might think something else was affecting their sales – inflation, the weather, randomness.)

Obviously the percentage of the price of energy that is made up of energy is very high:-) From the consumer point of view, though, the question is how much of your energy consumption is disposable, by analogy to disposable income, and how quickly and how expensively it is disposable. (I can bother about turning off lights more, now, free, but does it matter a damn? No, I already fitted CFLs everywhere. I can get a new roof, and it matters, but it costs a fortune and takes months.)

For the power company, though, the cost of their primary fuels is clearly an absolutely critical factor. It will make up one of the three biggest cost line items next to capital costs and wages. And “how you generate electricity” is evidently a decision that is in their power to take.

28

Alex 07.24.13 at 10:35 am

Shorter me: controls with fewer intermediary steps are to be preferred.

29

Tim Worstall 07.24.13 at 7:52 pm

“What do we think of upstream carbon tax, i.e. levying the tax at the mine-head, or the port of entry in the case of imports from a country not participating?”

Fine by me. For fossil fuels that is: it’s just that fossil fuels aren’t the only form of carbon emissions that need taxing. So do emissions from land use changes, as one exmple. Or of methane emissions. Or HFCs. But as a partial solution, sure, minehead taxation is just fine.

30

Alex 07.24.13 at 10:59 pm

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