With our usual flair for lobbing grenades back and forth between well dug trenches, lots of energy in the greenhouse debate goes into grenade lobbing between supporters of Kyoto and greenhouse denialism of various kinds.
I’m pretty cynical about Kyoto, and particularly cynical about the presentation of the US and Australia as the baddies with the Europeans and the developing countries the goodies. They’re all pretty suss if you ask me and I’ve tried to say why before. I support Kyoto reluctantly because we should be doing something and this is the dog’s breakfast that has been served up by the UN to start the ball rolling.
It will need to change very dramatically to be successful with the minimum change involving bringing in the major developing countries most obviously China and India. Though I despair of the denialists, I doubt that the Kyoto targets will stick. So without wishing to associate myself with those gloating over the stresses coming on Kyoto, it seems appropriate for us to be thinking about what Australia should be doing now given its absence from Kyoto and more generally what might be done by those who think that Kyoto will fall over, or after it has.
The Asia-Pacific Partnership on Clean Development and Climate can’t do any harm but for the same reason it can’t do much good. It’s devoted to the proposition that one deals with a large and pervasive externality with ‘international co-operation’ (without any specification of what exactly is preventing cooperation right now). Oh and asking nicely for technologies to be developed and carbon to be abated rather than by internalising the costs of carbon emission.
To me the problems to be considered seem two fold.
1. What’s the desirable form of a future global regime and
2. What kind of actions make best sense both in terms of meeting individual countries’ interests in the context of the first question and in terms of assisting the world move towards a worthwhile global solution.
Regarding the first point, as aficionados of the debate know, Australia’s Warwick McKibbin and his University of Texas colleague Peter Wilcoxen have proposed a very clever system (pdf warning) that seeks to price marginal emissions of carbon without imposing targets. Instead of targets countries agree to impose domestic marginal carbon taxes that is taxes on emissions of carbon over some figure which ensures that the last ton of carbon emission must meet the marginal tax imposed.
If all countries did this the incentive to abate carbon is equalised around the world. This is a condition of allocative efficiency in the abatement of carbon.
McKibbin and Wilcoxen are eloquent about why it makes a lot more sense to try to price carbon rather than to set targets to hit. We’re mired in uncertainty in any event, but at least deliberately pricing carbon emissions does substantially reduce the uncertainty involved in knowing the cost of policy action.
I expect that if we get anywhere, we’ll end up with something like a carbon pricing model rather than volumetric targeting as Kyoto involves. And one can see how the former could evolve from the latter. When the US agrees to come in, it won’t be practicable to punish them for coming in late, so carbon pricing looks like a good way out of a political dilemma as well as well as being good policy.
I think there are some quite important problems with McKibbin’s and Wilcoxen’s model which I’ve argued here (pdf).
A. Perhaps least importantly McKibbin and Wilcoxen overstate the hazards of targets for instance the extent to which carbon trading might destabilise capital flows.
B. The proposal for ‘marginal carbon taxation’ is inefficient. If we want to raise the cost of carbon emissions, government taxation of all carbon emissions has no substantial efficiency cost and so we should tax all emissions and recycle the revenue as lower taxation where tax has a higher efficiency cost.
C. More importantly the model is gratuitously restrictive. It involves reducing the number of gases targeted. As I argued in the paper I’ve just linked to, this is unnecessary and indeed goes in precisely the opposite direction to the direction that economists should be taking the design of instruments.
D. A third problem, though it’s not really a criticism of McKibbin and Wilcoxen is that it is a ‘grand plan’. Like Kyoto it envisages a global agreement. It may be that the best chance we have is to think of what national actions might coalesce towards a sensible global outcome after a period of time rather than go for the next ‘grand plan’.
So if we’re standing outside of Kyoto, what kinds of actions could Australia take that would be worthwhile in their own right, at the same time as being influential in the evolution of the global carbon abatement system?
How about doing this?
A carbon tax
We could announce that Australia believes that there should be some policy action to internalise carbon emissions. It would then unilaterally impose a (modest) carbon tax on itself which, in the spirit of McKibbin and Wilcoxen is a piece of internal financing it does not directly involve carbon trading offshore. It might then announce its preparedness to match other countries’ higher carbon taxes with its own carbon taxes.
This would flag Australia’s and Australian citizens preparedness to (marginally) reduce their own standard of living in order to no longer free ride on other countries’ abatement efforts.
But we still live in a world of intransigent third world countries who won’t agree to increase the marginal cost of carbon abatement. It is ridiculous to constrain carbon emissions where:
a) Those facilities lower global emissions which is very likely the case for North West Shelf gas which can be expected to displace coal fired power in the region and/or
b) Those facilities will just migrate to less carbon constrained third world countries.
Apart from being fair and sensible from our own perspective, this lowers the rewards to third world countries from avoiding abatement commitments (which for the purposes of this discussion includes imposing carbon taxation even without volumetric emission reduction targets.
Being bold about comprehensiveness
Further the way Australia set up its carbon tax would deliberately seek to be as comprehensive as possible. On the gases within the system, rather than, as McKibbin and Wilcoxen suggest, constrain the Kyoto three gas regime to one, we should go the other way and extend our own carbon tax to any gas that can be included without compromising the integrity of the system.
The same goes for abatement activities. We would encourage the growth and regrowth of forests and woodlands whether or not they fitted with the Kyoto definition of forests. And our carbon tax (with a matching subsidy or credit regime for abatement) would be used to encourage all sorts of innovative agricultural abatement strategies.
As I put it in the paper I cited above.
[I]t is not clear that there needs to be all that much certainty in measurement of outcomes. What is necessary is that if an estimation procedure is used it does not produce a biased estimation and that the procedure has integrity that is it does not increase the scope to cheat. Thus for instance, if we could only be certain within a tolerance of 20% of how much carbon (measured in GWPs) a particular project would abate, it would increase the comprehensiveness of the abatement effort to include it in the trading system secure in the knowledge that:
1. It was making a beneficial contribution to abatement;
2. Given the unbiased nature of any estimation, any error could just as easily produce better rather than worse environmental outcomes and that;
3. Over time and over a large number of projects such errors would tend to cancel each other out.
If such reasoning were not accepted it would be far better to discount the project by the extent of any uncertainty rather than see its abatement potential go unfunded because it fell out of the carbon abatement market.
However widely or narrowly we draw the trading net at the outset, an in principle commitment to extend it at the earliest practicable opportunity and institutions capable of so doing should be an important design element of the system.
There is a sound case for such an in principle commitment to ‘pragmatic comprehensiveness’ in any circumstances. But the issue takes on much greater relevance when one considers the importance of technological change in meeting our objectives.
It seems to me that such an approach meets all the rhetorical (and legitimate) concerns of the current government. )I’d like to offer it as a really good model in other areas as well. We have very little sway in the current circumstances, being essentially in the shadow of the US.
Anyway, I’d be interested in others’ views though go easy on the ‘it can’t happen’ comments. I’m just trying to get some thinking going. Let’s talk about political possibilities a little further down the track.