Why Hunt doesn't make sense

In an email to my local member and cc’ed to Greg Hunt, shadow minister for climate action, environment and heritage, I argued that the Hunt/Abbott Direct Action policy didn’t meet key policy requirements such as:

-- Minimal cost;

-- Consistent and long-term policy, needing a bipartisan approach;

-- Providing an indicator of carbon prices into the future;

-- Ability for greater abatement than just the 5 per cent reduction target; and

-- Ability to meet future fair-share targets for Australia, based on IPCC and UNFCCC outcomes.

I was pleased and most surprised to receive a response directly from Greg Hunt about two hours after I’d sent my email. He briefly noted that they would meet their reduction target and they would abolish the carbon tax. His office then sent me his talk to the Sydney Institute (Greg Hunt; ‘Choosing the right market mechanisms for addressing environmental problems’) which sets out the Direct Action policy in more detail.

The exchange continued between myself and Greg Hunt. 

Here are some of the key points:

[ME] Thanks for your constructive engagement, Greg.

I have re-read your talk at the Sydney Institute (SI) and am pleased to say there is much in it which is sound and which I support.  

However, a less kind summary is that the sensible aspects have been so heavily mixed up with political rhetoric, cherry picking and non sequiturs as to make it seem like an obfuscation rather than a balanced and reasonable attempt to deal with a most difficult problem.  The Coalition’s lack of responsible Parliamentary engagement supports this adverse view.

Comparative costs – Labor’s current policy v Liberals’ Direct Action

[GREG HUNT] Given that our approach will cost $300 m a year and the Government's is a $9 bn tax, please explain on what basis you draw your costings conclusions.  

[ME] I don’t believe you are using comparable measures for the two policies. Can you provide the costing of your $300M a year? And what is the abatement achieved at this cost, ie, $/t CO2? Is this a net cost to the country in terms of GDP impact?  

Your policy is more cumbersome and administratively demanding than Labor’s existing program. Direct Action commonly uses unverifiable, hypothetical baseline assumptions. On this basis alone, it has to be less efficient per tonne of carbon reduced.

It is misleading when you quote a gross figure for Labor’s carbon tax of $9 billion. The government was aiming to make this revenue neutral: ie, the tax alone does not impose any net cost to the economy because the revenue is fully returned in various ways – to compensate households for higher costs and to promote carbon abatement programs.  

The real costs to the economy come from the changes which the carbon price initiates. For example, in my former company we spent millions of dollars on capital so our carbon emissions and energy costs were cut, eg, major air conditioning changes to reduce electricity consumption. Your talk of electricity being ‘highly inelastic’ is not supported by my observations.  

From memory, early estimates of an Australian ETS indicated a revenue neutral carbon income to government of around $9 billion/year with full redistribution; plus structural adjustment costs of around $3 billion dollars / year within the economy. So while the gross costs across the economy totalled around $12 billion, the net cost to GDP was about $3 billion/year (ie, around 0.3 per cent of GDP). It appears, when the carbon price is revenue neutral, its cost has little direct detriment to GDP.

Models of carbon abatement and accounting methods

[HUNT] The ALP actually proposed an identical carbon purchasing fund.  The entire CDM international mechanism is based on the same principle.  As is the CFI [Carbon Farming Initiative], as is the Norwegian Fund, the Indian Fund and the Japanese approach.

[ME]  Hang on - there are several distinct models here. The critical difference is whether carbon is measured directly as an emission or whether carbon abatement is measured against a hypothetical baseline of business as usual (BAU).  

Measuring and accounting for the specific emissions from fossil fuels and cement manufacturing is easy and reliable. Mechanisms and protocols are in place (NGERS) and it is most likely this method has the lowest transaction (implementation) costs. Buying and selling these carbon measures can be done with confidence.  

In contrast, the CDM (Clean Development Mechanism) normally imputes a carbon credit as the difference of the new, lower emissions with the Clean Development against hypothetical forecasts of the baseline emissions under BAU, with the old, dirty mechanism, that is being replaced. The BAU baseline is always hypothetical and immeasurable and is clearly fraught with uncertainty. Much of the calculations use variable or arbitrary values.  

This process, called ‘additionality’ in UNFCCC parlance, is accepted as second best. To be used when nothing else works. Though it’s used under the UNFCCC, this doesn’t mean it is a suitable core model for Australia – far from it. CDM was introduced to gain carbon abatement in developing countries that weren’t committed to quantitative national reductions under Kyoto. CDM is a useful, but far from perfect, means of reducing carbon.  CDM credits (CERs, Certified Emission Reductions) have a consistently lower value than Europe’s EUAs, European Union Allowance).This reflects their doubtful value.  

Yet Direct Action proposes to pay for the difference between the hypothetical, rubbery baseline and the actual emissions measured later. The government will pay real dollars from taxpayers’ money against a hypothetical base. Because it is hypothetical, this BAU baseline cannot be estimated with certainty.   Credibility will be low. It seems extraordinary to propose to pay for this poor measure of abatement, whose accuracy is poor, when the current policy uses direct measurement of emissions and avoids this avoidable flaw. ‘Additionality’ is a discredited core element in Direct Action.

The Carbon Farming Initiative (CFI)

[ME] This too relies on imputation against a baseline – though the greatest uncertainty probably lies in estimates of soil uptake. The carbon credits earned will necessarily suffer from the uncertainties in this accounting method.  

Putting inorganic carbon into the soil (charcoal or carbonates) seems a reasonable way to remove carbon from the atmosphere. Assessment of the quantities is necessarily subject to accounting weaknesses. But with no other way, it is useful. Given the likely small part this will play in Australia’s emission reductions, it is less critical, so it seems acceptable to use this mechanism here.

Comparable structure of Liberal carbon policy & government water policy?

Greg Hunt’s talk on “Market mechanisms . . .” says,

“This system [Liberal, reverse-auction purchase of carbon abatement] is also the structure by which the government buys back water in the water market.”

[ME] No, it is not the same, in one critical aspect - the precision of measurement.

When buying water rights there is an exact and verifiable measure. It is written on the irrigator’s licence. And water used can be accurately measured by a gauge – like my domestic water use. This is not comparable with Direct Action where people are paid for imputed, hypothetical carbon reductions – rubbery values imputed with rubbery assumptions.

Greg Hunt’s talk on 'market mechanisms' mentions abatement by energy efficiency, cleaning up coal mine gas, power stations and landfills. Presumably all of these abatements will be imputed against a BAU baseline? As already noted, this is unreliable and in all these instances, unnecessary.  

A sound scheme is already operating, which measures emissions and prices them directly with minimal transaction costs. Why dismantle an efficient system the players are now comfortable with?  

When Australia has to stiffen its reductions (probably by around 90 per cent by 2050) the Liberals’ Direct Action policy would be unimaginably cumbersome. Imagine the argy bargy over resetting sequential BAU baselines? How do you do this? The whole field is complex enough without introducing further complexity and arbitrariness.

Ross Garnaut’s Climate Change Reviews (2008, 2011) clearly analyse the various policy options, especially market mechanisms, to reduce emissions. He comments on the undesirability of using an emissions baseline to measure emission abatements: “The choice of algorithm [to estimate the baseline emissions] introduces a high and unavoidable degree of arbitrariness . . .”  And; “this would raise transaction costs and encourage rent-seeking behaviour . . .” (p310, 2008).  

Economic basis for Liberal Policy

[ME] In response to my questions to Greg Hunt;

1. “Where else is there a model like Direct Action that serves as an example?

2. Where does this kind of scheme appear in respected writing on environmental economics?”

[HUNT]  “Would be grateful for your response to the Nobel Economic Laureates Kydland, Schelling and Smith, all of whom are strong believers in climate change but have rated the carbon tax the least efficient system to reduce emissions.”

[ME] I attended Lomborg’s talk covering these studies at the Lowy Institute in 2011. I also read other reports critical of the team’s conclusion.  

Notwithstanding these views of notable economists there are many, many more who support the traditional economic approach to carbon already operating here in Australia. I was far from convinced by some of Lomborg’s claims. I think he may be making broad generalisations [‘tax and caps are less efficient’] based on a few basic applications or models, not a broader or comprehensive view of how to use these measures most efficiently. 

Yes, like Lomborg’s team, I do think the solutions will come largely from technology. I also feel that the threatening clouds of a rising carbon price under our current policy will drive efficient investment in all low carbon possibilities. This provides the greatest degrees of freedom to let the market discover the best solutions.  

It avoids trying to ‘pick winners’. Silly me, I thought this was core Liberal philosophy!  

No, Greg and Tony look like political turncoats. In their red coats they plan to tax the people to hand out fat dollars based on rubbery values. What an extraordinary turnaround!

Abbott finally confirmed the death of emissions trading as well as the tax. On July 8 on ABC’s  730 he said,

“The Coalition will get rid of the carbon tax, whether it’s called a carbon tax or an emissions trading scheme.”

Until now, many had gullibly hoped Abbott was playing political games by saying he’d axe the tax but bring forward the ETS. But no, the ETS is out too.

Lomborg said that we should invest 0.2 per cent of GDP in promoting low carbon technologies. Is that part of the Coalition policy? It is highly doubtful that a prescribed investment in abatement would be more efficient than the efforts of inventors, entrepreneurs, investors and consumers to seek least cost abatement to avoid carbon costs under cap and trade or a tax.

Need for carbon prices in future years

How can Direct Action provide clear carbon prices in future years?  

This is clearly essential for responsible and rational planning – for billion dollar investments in energy and many industrial processes and the myriad of smaller consumer purchases. Future carbon pricing and policy stability can be provided with a cap and trade model. 

Stability and credibility are needed when the government creates new financial instruments with carbon permits, whose gross value covering 10 years might approach $100 billion, though may be only a third of this would be active in the secondary market at any time. The financial market is already poised for involvement. Businesses wish to plan for the future high carbon-price environment. A market in emissions permits provides this responsible financial planning and signalling.

What carbon values can Direct Action provide for the next 10 to 20 years – and how?

Conclusion

I plead to the Coalition to come to its senses and deal with this serious issue seriously. Stop playing political games with our descendants’ future. A return to a responsible, bipartisan approach would be welcomed, possibly respected, all-round. 

Dr Harley Wright is Principal at Climate Sense.