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Trading on your own

February 10, 2010

In this annoying debate about climate science and emissions trading on ABC’s insiders program last Sunday, Australian journalist and climate sceptic Andrew Bolt made a number of claims that were distortions of the truth at best, biased ideological nonsense at worst.

First, he said the Copenhagen Accord showed the world was not ready to act and so passing an emissions trading system (ETS) would strategicaly not be in Australia’s interests. For a less slanted interpretation of Copenhagen and who’s pledged what, see my previous post.

Second, he claimed, and the panel knowlingly agreed, that if Australia passed an ETS but then the US and the rest of the world doesn’t move to an internationalised system of trading, then an ETS would be proven to have been the wrong domestic policy choice. Umm what? Why?!

The logic seems to be  that Australia needs, in the long run, to be able to trade emissions permits with other countries in an international ETS.

Let’s just clarify the thinking here.

The idea behind internationally linked ETSs is this: Since different countries probably have varying marginal abatement costs for reducing emissions, it makes global economic sense to have everyone under the one trading scheme, so that the global carbon price is,

a) the same for every country and therefore there are no adverse competitiveness effects, and

b) because international trading allows cheap abatement to be exploited in low abatement cost countries. The permits freed up by doing so can then be sold to higher abatement cost countries, so that global reductions are achieved at least global cost. The logic is therefore exactly the same as the rationale for having a domestic ETS: to exploit the lowest cost options to reduce emissions and thereby ease the economic transition to a low carbon economy.

Now, if the emissions trading is the least costly way to reduce emissions domestically, then it is the least cost way to reduce emissions domestically! Thus, the availability of international carbon offsets notwithstanding, I don’t care if there is no international emissions market. I can still use a domestic ETS to reduce my national emissions at least cost!

As for trade and competitiveness, if there is no carbon price in the form of an ETS then there will almost certainly be a carbon price in the form of a carbon tax in the longer term since, as I have argued previously, they are the only two credible kinds of carbon price that can really drive emissions down in line with the global objectives.  Thus, firms in competition with Australia internationally would still face a carbon price.

Depending on relative currency exchange rates and the relative stringency of the policies, others having a fixed carbon price in the form of a tax could theoretically be at a relative competitive advantage or disadvantage to Australia. But in practice, of course, that’s just academic. As Governments do already with carbon pricing policy, they will propose rules that protect trade-exposed industries from international carbon pricing differentials. 

Thus, the real question is: whether a tax or an ETS achieves the domestic environmental aim at least economic cost in the long run?

The jury, I’m afraid, is still out on that one. For reasons I will explain in another post, I lean towards an ETS if the public can get over their vague fear of markets after the GFC.  But what’s more certain is that a cap-and-trade system and thus some form of credible and domestic carbon pricing now is clearly more reasonable from an inernational negotiating perspective than playing the catch-22 game of wait and see what others do.

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