A Taxing Debate: Climate Policy Beyond Copenhagen
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61 GROWTH A Taxing Debate: Climate policy beyond Copenhagen GROWTH NO 61 AUGUST 2009 GROWTH NO 61 A Taxing Debate: Climate policy beyond Copenhagen About this publication Growth 61: A Taxing Debate – Climate Policy beyond Copenhagen © CEDA 2009 ISBN 0 85801 272 3 ISSN 0085 1280 The views expressed in this document are those of the authors, and should not be attributed to CEDA. CEDA’s objective in publishing this collection is to encourage constructive debate and discussion on matters of national economic importance. Persons who reply upon the material published do so at their own risk. Edited by Professor Ian Marsh Designed by Robyn Zwar Graphic Design Printed by Condor Print Group Photography by istock photo About CEDA For nearly 50 years, CEDA has informed, influenced and raised the standard of discussion about the issues shaping Australia’s economic and social development. We do this by: sPUBLISHINGINDEPENDENTRESEARCH sPROVIDINGAFORUMFORDEBATEANDDISCUSSION sOFFERINGAMEMBERSHIPNETWORKTOPEOPLEANDORGANISATIONSTHATVALUEKNOWLEDGE INSIGHTSANDIDEASIN Australia’s best interests. CEDA is an independent not-for-profit organisation. Our funding comes from membership fees, events, research grants and sponsorship. Contribute to CEDA Research and Policy Consistent with its founding principles, CEDA publishes objective research and analysis in the best interests of Australia’s economic development. CEDA produces well-informed, research-based publications that tap into the world’s best thinkers and are focused on deliverable change. Through our forums and publications, CEDA reaches tens of thousands of Australians each year. CEDA’s independence also provides it with the capacity to speak directly to government at a federal and state level, unhindered by vested interests. CEDA welcomes contributions from individuals and companies, which can be made to the general research fund or specific projects. CEDA is a deductible gift recipient under the Income Tax Assessment Act 1997 (Cwlth) and donations over $2 are tax deductible. You may also wish to show your support by making a bequest to CEDA in your will. To find out more, please contact us. CEDA – the Committee for Economic Development of Australia Level 13, 440 Collins Street Melbourne 3000 Australia Telephone: +61 3 9662 3544 Fax: +61 3 9663 7271 Email: [email protected] Web: ceda.com.au 2 CEDA GROWTH NO 61 Contents and contributors Foreword 4 David Byers, Chief Executive, CEDA Executive summary 8 Professor Ian Marsh, Research Fellow, CEDA Reforms in the greenhouse era: Who pays, and how? 16 Dr Michael Porter, Director, CEDA Research and Policy PART 1. POLICY PERSPECTIVES 28 1.1 Climate policy: Outlook and challenges 30 Professor Warwick McKibbin, Director, Centre for Applied Macro-economic Analysis, Australian National University, and Professorial Fellow, Lowy Institute for International Policy David Pearce, Executive Director, The Centre for International Economics (TheCIE) 1.2 Consumption-based emissions policy: A vaccine for the CPRS ‘trade flu’? 40 Geoff Carmody, Director, Geoff Carmody & Associates 1.3 Greenhouse gas emissions and the trade regime 52 Professor Gary Sampson, John Gough Chair in the Practice of International Trade, Melbourne Business School 1.4 The many advantages of carbon taxes 64 Professor William D Nordhaus, Sterling Professor of Economics, Yale University 1.5 R&D policy 72 W David Montgomery, Vice President, CRA International Lee Lane, Resident Fellow, American Enterprise Institute for Public Policy Research (AEI) Dr Anne Smith, Vice President, CRA International PART 2. TOWARDS AN INTERNATIONAL SYSTEM 86 2.1 Forging a global agreement on climate change: Realities, politics and practicalities 88 Alan Oxley, Principal, ITS Global Bill Bowen, Principal Environmental Consultant, ITS Global 2.2 Emerging US climate policy and the prospects for Copenhagen 98 Dr Adele C Morris, Fellow and Deputy Director for Climate and Energy Economics, The Brookings Institution 2.3 Fairness and justice: Two prerequisites from China for real international action on climate change 108 Yin Zhongyi, Vice President, China Institute for Reform and Development 2.4 The climate change debate: The story from India 116 Dr Prodipto Ghosh, Member of the Indian Prime Minister’s Council on Climate Change and Distinguished Fellow at The Energy & Resources Institute (TERI) 2.5 Future climate policies: A European experience 138 Dr Hubertus Bardt, Head, Research Centre for Energy and Environmental Economics and Deputy-Head, Economic Policy and Social Policy, Institut der deutschen Wirtschaft Köln A TAXING DEBATE CLIMATE POLICY BEYOND COPENHAGEN 3 David Byers is the Chief Executive of the Committee for Eco- nomic Development of Australia (CEDA), a position he took up in February 2007. Before heading CEDA, David worked in a variety of roles in Australian compa- nies BHP, Evans Deakin Industries and Wood- side Petroleum before joining law firm Morris Fletcher and Cross. Most recently he worked at Mobil Oil Australia and then ExxonMobil in a number of senior public policy roles in Singa- pore, Dallas (Texas) and Melbourne (Australia). As the Australian Parliament considers the fate of the Government’s Carbon Pollution Reduction Scheme, and the world looks to the forthcoming Copenhagen round of negotiations over an international agreement on climate change, CEDA is pleased to present Growth 61: A Taxing Debate – Climate policy beyond Copenhagen. foreword 4 The report examines some of the major climate policy change. Cap-and-trade is more politically acceptable issues with which the world continues to grapple. As than taxes. As authors in this volume argue, the political Warwick McKibbin and David Pearce argue in this appeal of cap-and-trade emissions trading schemes is volume, we have still not come to grips with the time that they hide the true costs to consumers. scales involved in climate change and what this means In addition, the ‘trade’ will not in fact be in green- for policy action. While there is general agreement house gas emissions; there can be no such market. among economists that market-based responses that What will be exchanged are derivatives of carbon raise the market price of carbon are more desirable credits and debits – financial commitments that need than regulations and subsidies, there has been insuf- to be audited. These trades will sometimes be with ficient debate as to the best market-based mechanism. jurisdictions that are not always financially reputable. Should we raise the price of carbon through a quantity- Having suffered a global financial crisis – in large part type approach (such as a cap-and-trade emissions because of poorly managed, excessive credits and trading scheme [ETS]) or through a price-type approach swaps originating from excess housing finance – some (such as a carbon tax)? authors in this volume worry about the integrity of the carbon credits trading down the track. Will there be a ETS or carbon tax? carbon bubble of the wrong kind? The Australian Government has settled on a form of Moreover recent data from the European cap-and-trade scheme as its primary policy response. Environmental Agency (EEA) suggests that the best Yet several papers in this report ask whether this is known ETS – the European ETS – is failing to adequately really the best and most durable approach. How did reduce actual emissions. The policies and measures in cap-and-trade become the policy of choice in the place today are unlikely to be sufficient for the EU-15 to debate over how to reduce greenhouse gas emissions? meet its Kyoto target of an 8 per cent reduction in emis- Should it supplant the simpler idea of imposing a tax on sions from 1990. The history of European trading prices energy consumption? The answer is not to be found for CO2 has also illustrated the extreme price volatility in economics or science, but in the politics of climate induced by cap-and-trade quantity-based systems. A TAXING DEBATE CLIMATE POLICY BEYOND COPENHAGEN 5 This volatility has led influential market participants to rely on assumptions about future emission levels and express concern that it is undermining incentives to the impact of emissions on future CO2 concentra- channel long-term investment towards large-scale tions. How these concentrations affect the timing and (often very capital-intensive) greenhouse gas reduction extent of temperature change, climate variability, differ- projects and technologies. ences across regions, and the impacts of temperature By contrast, several papers in this report argue that changes on ecological systems are not fully understood carbon taxes, by raising the price of carbon-based – although knowledge is accumulating. energy directly, predictably and in a constant manner, Secondly, greenhouse gas emissions arise from a better enable firms to plan for investments in capital large number of sources, yet a tonne of emissions from equipment and new emissions-reductions technolo- any point on the globe at any given time has the same gies. They are less vulnerable to manipulation and effect on the atmospheric concentration of CO2. Many evasion. Carbon taxes would create greater certainty individual countries have responsibility for a relatively about prices, stronger and clearer signals to consum- small contribution to the flow of global greenhouse gas ers and investors, and introduce some much needed emissions (Australia’s is about 1.5 per cent). Actions simplicity and directness to climate policy. taken by individual countries to reduce emissions will only ever be a small proportion