Paris will give Canberra a new policy headache

by Tony Wood

Published by Australian Financial Review, Tuesday 15 December

Paris delivered a global agreement on climate change that was better than anyone expected in terms of real progress and worse than many hoped in terms of a real solution. Australia looks to be on track to meet our current 2020 target for emissions reduction, and we now have a commitment for 2030. But we do not have a comprehensive, credible domestic policy framework to achieve this commitment. Worse, we do not have bipartisan support for even the central planks of such a framework, which is essential for such an important public policy issue.

When it came into government, the Coalition rejected Labor’s cap and trade approach. Instead, it implemented a new suite of policies to meet its target of reducing emissions by 5 per cent below 2000 levels by 2020. These will need to be re-engineered to meet the 2030 target. Labor has rejected the government’s Direct Action Plan and is consulting on a target of reducing emissions by 45 per cent below the 2005 baseline by 2030. It has also committed to a cap on emissions, an emissions trading scheme and an aspiration to generate 50 per cent of Australia’s electricity from renewables by 2030.

Nothing is more poisonous to investment in long-term solutions than continual policy flip-flop.

The challenge for policymakers across the political spectrum in 2016 is to construct an emissions reduction policy framework that satisfies multiple, sometimes conflicting, criteria. A successful policy framework must be: environmentally credible; capable of bipartisan political support; flexible in meeting future challenges; adaptable to real improvement; acceptable to the broad community; and low cost.

In a Grattan Institute working paper published on Tuesday, Post Paris: Australia’s Climate Policy Options, we assess six policy alternatives that could do the job. These are cap and trade emissions trading, carbon tax, intensity baseline emissions trading, emissions purchasing, regulation and tradeable green certificates.

Complexity a weakness

An economy-wide, market-based scheme is the most effective and efficient means of reducing Australia’s emissions. But adoption of market-based schemes, such as cap and trade schemes, has been inconsistent and politically fraught both in Australia and internationally. They are complex to explain, a weakness that can become fatal in the face of political opposition, as the Labor Party discovered between 2009 and 2013.

A carbon tax is attractively simple, but with that simplicity comes considerable political and public resistance. An intensity baseline and credit scheme was applied in the NSW electricity sector with some success, but may struggle across the wider economy. Emissions purchasing can be low cost, as the government has found, but will become a real strain on the budget if used as the only tool to meet emissions reduction targets. Regulation is direct and simple, but likely to be cumbersome and expensive, and schemes such as the Renewable Energy Target are limited in their scope.

None of the plausible policies meets all of the criteria.

The task is to find solutions to the limitations of an individual policy, or to combine policies so that collectively they satisfy the criteria. The purpose of our working paper is to give policymakers from both sides of the political divide a clear picture of the choices so we can move from our current impasse to a credible, lowest-cost emissions reduction policy framework.

The final answer is not yet clear. It is simply too early in a highly political process to make a call today. But there are promising possibilities. The Coalition could re-engineer its current policies and Labor could use them as a platform – in both cases using an absolute baseline approach as the initial principle. A phoenix may yet emerge from the ashes.

There will be a federal election in the next year. It is naive to think that we will see complete bipartisan agreement on climate change policy in the lead-up to that election. But Australians deserve better than the policy muddle of recent years. The prime minister has been known to support the principle that the perfect can be the enemy of the good, and the Paris agreement shows that 195 countries can make real progress when the art of compromise is given a chance. Maybe Australian climate change policy makers can apply this example.