We can't escape a carbon tax, which is good news, not bad

When economists are at their best, they speak truth to power. And that’s just what two of our best economists, Professor Ross Garnaut and Rod Sims, did this week. In their own polite way, they spoke out against the blatant self-interest of our (largely foreign-owned) fossil fuel industry.

They sought to counter the decade of damage done by the former federal Liberal government which, for short-sighted political gain, engaged in populist demonisation of Julia Gillard’s carbon tax.

And, by their willingness to call for a new “carbon solution levy”, they shamed the present Labor government, which dare not even mention a carbon price and isn’t game to take more than baby steps in the right direction, for fear of what Peter Dutton might say.

But the two men’s message is actually far more positive than that. In launching a new think tank, the Superpower Institute, they pursue Garnaut’s vision of how we can turn the threat of climate change into an opportunity to revitalise our economy, raising our productivity and our living standards.

Sims, former boss of the competition watchdog, says that, following a decade of stagnant production per person, real wages and living standards, Australia’s full participation in the world’s move to achieve net-zero global emissions is the only credible path to restoring productivity improvement and rising living standards.

Climate change is a threat to our climate, obviously. But it’s also a threat to our livelihood because Australia is one of the world’s largest exporters of fossil fuels. Garnaut points out that, as the rest of the world moves to renewables, two of our three largest export industries will phase out.

This will send our productivity backwards, he notes – as all the big-business people reading us lectures about productivity never do.

The good news, however, is that “putting Australia back on a path to rising productivity and living standards doesn’t mean going back to the way things were”. It’s now clear that “Australia’s advantages in the emerging zero-carbon world economy are so large that they define the most credible path to restoration of growth in Australian living standards.”

Garnaut says that “In designing policies to secure our own decarbonisation, we now have to give a large place to Australia’s opportunity to be the renewable energy superpower of the zero-carbon world economy.”

Other countries do not share our natural endowments of wind and solar energy resources, land to deploy them, as well as land to grow “biomass” – plant material – sustainably as an alternative to petroleum and coal for the manufacture of chemicals.

From a cost perspective, we are the natural location to produce a substantial proportion of the products presently made with large carbon emissions in North-East Asia and Europe.

The Superpower Institute champions a “market-based” solution to the climate challenge. We shouldn’t be following the Americans by funding the transition from budget deficits, nor become inward looking and protectionist.

Rather, everything that can be left to competitive markets should be, while everything that only governments can do – providing “public goods” and regulating natural monopolies – should be done by the government.

Sims notes a truth that, since Tony Abbott’s successful demonisation of the carbon tax, neither side of politics wants to acknowledge, that markets only work effectively if firms are required to pay the costs that their activities impose on others and, on the other hand, if firms are rewarded for the benefits their activities confer on others.

When the producers of fossil fuels don’t bear the cost of the damage their emissions of greenhouse gasses do to the climate, and the producers of renewable energy don’t enjoy the monetary benefit of not damaging the environment, these two “externalities” – one bad, the other good – constitute “market failure”.

And the way to make the market work as it should is for the government to use some kind of “price on carbon” – whether a literal tax on carbon, or its close cousin, an emissions trading scheme – to internalise those two externalities to the prices paid by fossil fuel producers and received by renewables producers.

The price on carbon that Garnaut and Sims want, their “carbon solution levy”, would be imposed on all emissions from Australian produced fossil fuel (whether those emissions occurred here or in the country that imported the fuel from us) and from any fossil fuel we imported.

Only about 100 businesses would pay the levy directly, though they would pass it on to their customers, of course. It would be levied at the rate of recent carbon emission permits in the European Union’s emissions trading scheme.

Imposing the levy on all our exports of fossil fuel, rather than just our own emissions, makes the scheme far bigger than the one Abbott scuttled in 2014. It would raise about $100 billion a year.

But it’s bigger to take account of the Europeans’ “carbon border adjustment mechanism” which, from 2026, will impose a tax on all fossil fuels imported from Australia that haven’t already been taxed.

Get it? If we don’t tax our fossil fuel exports, the Europeans or some other government will do it for us – and keep the proceeds.

What will we do with the proceeds of our levy? Most of them will go to a “superpower innovation scheme” that makes grants to support early investors in each of our new, green export industries. In this way it will lower the prices of carbon-free steel, aluminium and other products, helping them compete against the equivalent polluting products. The positive externality internalised.

Garnaut says we need to have the new levy introduced by 2031 at the latest. But the earlier it can be done, the more of the levy’s proceeds can be used to provide cost-of-living relief of, say $300 a year, to every household and business, as well as fully compensating for the levy’s effect on electricity prices.

Thank heavens some of our economists are working on smart ways to fix our problems while our politicians play political games.

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Cheapest, easiest way to reach net zero is to put a price on carbon

If Scott Morrison fails to front for the Glasgow climate conference at the end of the month, his preference to stay home while we’re dismantling the lockdown will be only one reason. The other’s that the conference isn’t looking like it’ll be a roaring success.

You wouldn’t know it from all Morrison’s agonising over signing up to net zero carbon emissions by 2050, but it’s the easy bit. The hard part about Glasgow is the expectation you’ll make an improved commitment on how much you’ll have done to reduce carbon emissions by 2030.

Unlike us, most of the big players have already put their revised commitments on the table. That’s the problem with Glasgow. So far, those commitments add up to much less than needed to hold the global average temperature rise to the “well under 2 degrees” agreed on at Paris in 2015, let alone the 1.5 degrees the poorer countries demand.

As many of us now realise, we wouldn’t be trembling in our boots over the enormity of getting our emissions down to net zero by 2050 – and making big strides long before then – had we not abolished after only two years the perfectly good carbon pricing scheme the Gillard government introduced in 2012.

By 2014, people had realised the carbon tax accounted for only a little of the huge increase in electricity prices we experienced, and that the Coalition’s talk of $100 legs of lamb was just a fairy story.

Of course, the carbon price would be higher by now, and we’d have had to extend it beyond electricity and gas to all other sources of emissions.

The series of studies the Grattan Institute’s Tony Wood is doing on how we can reduce emissions in other parts of the economy – transport, manufacturing, agriculture – shows that without the help of a carbon price it’s much harder going.

And it strikes me that insufficient reliance on a carbon price may explain much of the trouble the other parties to the Paris Agreement are having in making adequate progress. Indeed, it could be we won’t make it to net zero without the biggest emitters making greater use of emissions pricing.

In a recent paper, Ian Parry, of the International Monetary Fund, says more than 60 carbon tax or emissions trading schemes have been introduced at sub-national, national or multi-country levels. In recent months, China and Germany have launched major initiatives, the carbon price in the European Union has risen above €50 ($80) a tonne of carbon dioxide, and Canada announced its price would rise to the equivalent of $185 a tonne by 2030.

Even so, only about a fifth of all global emissions are covered by pricing schemes, and the global average price is only about $4 a tonne. Parry says that’s a far cry from the global price of about $US75 (more than $100) a tonne needed to reduce emissions sufficiently to keep global warming below 2 degrees.

Does $100 a tonne sound expensive? It is in the sense that the price increase built into the prices of emissions-intensive goods and services needs to be big enough to produce sufficient change in the behaviour of consumers and businesses.

But it’s cheap when you realise that the purpose of a carbon tax (or, equivalently, the proceeds from the government auctioning emissions permits to businesses who need them) is not to raise additional revenue but to change behaviour.

So the proceeds can be used to make equivalent reductions in other taxes, especially income tax. Thus people pay more for some of the goods and services they buy, but pay less income tax. People on welfare benefits have them indexed to cover their higher living costs.

As we discovered in 2012, introducing a carbon tax or emissions trading scheme (ours was the former that, after a few years, would become the latter) is a relatively simple business. You don’t tax emissions directly, but use scientific estimates of the average amount of carbon dioxide the production and use of that class of product emits.

But almost all economists recommend using a carbon price to decarbonise the economy also because they think it’s the policy instrument likely to achieve the objective with the least disruption to the economy and least loss of growth in the production of goods and services.

That’s what economists really mean when they say a carbon price is the cheapest way to get to net zero. They know that sufficiently large changes in relative prices will change people’s use of fossil fuels.

Get this: a carbon tax is a tax the government actually wants people to find ways to avoid having to pay. It’s intended to discourage people from using fossil fuels. How? By using electricity, gas and petrol less wastefully.

By switching to renewable energy (which is untaxed) because it’s relatively cheaper. By making sure that the next car or appliance or production machine people buy is more energy-efficient than the last. By increasing the monetary incentive for businesses to come up with less-polluting ways of doing things and inventing less-polluting machines.

To save face, Morrison has set his face against using the price mechanism to save the planet. But economic reality – or pressure from other, more sensible countries, or even voters – may yet change his tune.

One worry about putting a price on carbon is whether it would put our exporters at a disadvantage. A new and opposite worry is whether countries that have one when we don’t will protect their industries by slapping a “carbon tariff” on our exporters.

But the International Monetary Fund has come up with a solution to these worries that would also allow every country to use carbon pricing to make greater progress towards net zero. It proposes that the G20 countries (including us) phase in a uniform carbon minimum or “floor price” of $US75 a tonne of CO2 by 2030. Smart idea.

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Farmers have most to lose - or gain - from climate change

Doesn’t it strike you as strange that the born-again Scott Morrison – by now, presumably, deeply ashamed of his public fondling of a lump of coal during his unregenerate days – is being held back from signing up to the target of net zero carbon emissions by that fierce defender of farmers and rural Australia, the National Party?

Farmers are, if you’ll forgive the expression, at the coal face of the damage climate change is doing and will keep doing to Australia. They’ll also be among the chief beneficiaries of successful international action to stop further increase in global warming.

By now there’d be few farmers who didn’t understand that. Certainly, all the main farming lobby groups, from the National Farmers Federation down, have endorsed the net zero target and want to get on with it.

So what’s the National Party’s problem? Just that it sees itself as champion of two regional industries, agriculture and mining. Trouble is, the miners have always seen their interests as lying in fending off action to reduce the use of fossil fuels for as long as possible.

The Nats’ allegiance to mining gets stronger as you move north, and reaches its peak in Queensland. And it’s not hard to guess which of the two industries has the deeper pockets when it comes to generous support for the party cause.

But not to worry. The Nats’ method of operation within the Coalition has long been to blackmail the Libs into shifting more money from the city to the bush. It doesn’t have to be well spent as long as there’s more of it. And all the nudging and winking coming from the chief national Nat, Barnaby Joyce, suggest the Nats (or most of them) will surrender their principled position as long as the price is right.

One part of the price could be to exempt agriculture from any effort to reduce its own emissions. But a recent report from the Grattan Institute says that would be a mistake for two reasons. Agriculture accounts for 15 per cent of our total emissions, so we won’t make it to net zero if it isn’t pulling its weight like other industries.

But also, now the big countries are serious about climate change and are requiring their own industries to shape up, they’ll be using a carbon tariff to punish exporters from those countries that aren’t doing likewise. Any excuse to protect their own farmers from our more-efficient operators would not go unused.

So let’s start at the beginning. Farmers are disproportionately affected by climate change, including by higher temperatures, changing rainfall patterns and increasing drought, bushfires and floods.

As Grattan’s James Ha reminds us, federal government research says changes in rainfall have cut farm profits by 23 per cent compared to what could have been achieved in pre-2000 conditions.

Cropping farmers have done worst, but if global warming reaches 3 degrees, livestock in northern Australia are expected to suffer heat stress almost daily. As the climate continues to change, the value of some farming land may fall considerably and some properties may become increasingly expensive to insure.

Agriculture’s emissions of greenhouse gases have fallen somewhat in recent years, but this is a result of the drought. As herd size is rebuilt, emissions will increase – until the next big drought.

About three-quarters of agriculture’s emissions come from cattle and sheep. Most of this is our 24 million cattle and 64 million sheep burping methane (which causes a lot more warming than carbon dioxide), and then the nitrous oxide (also worse than CO2) that comes from their poo.

Then come emissions from the use of diesel to fuel most farm equipment, emissions from the use of chemical fertilisers and lime, and emissions from plant matter left after harvest.

All this makes farm emissions difficult to reduce. There are vaccines and dietary supplements to reduce methane belching, but they are not yet well developed and are hard to use on wide-ranging animals.

Farm equipment has not yet been adapted to use electric motors. Even so, there are practices that could be changed to manage farms more efficiently and with fewer emissions.

State agriculture departments have spent much over many years teaching farmers how to bring their practices up to date, and they need to spend a lot more teaching farmers how to adapt to climate change and reduce emissions.

Similarly, the CSIRO has spent taxpayers’ money on advancing farm technology over many decades. We should be investing in technological solutions to limit methane emissions. Where farmers need to buy expensive new equipment, the government could help them with “income-contingent” loans similar to HECS loans to uni students.

Farmers will gain directly from emission-reducing practices that also increase their productivity. They’ll be enormously better off from whatever the global effort does to limit further warming.

And, remembering the “net” in net zero, they’ll benefit greatly from doing things that allow them to sell “carbon credits” to firms in other industries – so long as it’s not just another National Party boondoggle.

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