Crucial for our future

• Henry Derwent
• The Age, August 20, 2008
• http://www.theage.com.au/opinion/crucial-for-our-future-20080819-3y89.html?page=-1

AUSTRALIA'S green paper on emissions trading seems to be so bipartisan that the only thing the political parties can argue over is the difference by a year or so in the date on which it all comes into force. One of the reasons for that is the comparative absence of any numbers. No modelled data yet, either from Ross Garnaut or the Government. No figures for the level of emissions cuts, just a framework that will be filled after the closing date for comments on the green paper itself. And no more than broad hints about the level of protection that will be offered to export-oriented industries. Plus statements and promises that one group or another, apparently responsible for Australia's dismal position as, per capita, the most carbon-intensive major economy in the world — drivers, households, coal — will not have to worry because they too will be looked after.

If all that's true, what's the point of the thing? If it's not, just how bad an economic effect is the Government afraid of?

There's no doubt that for an export-dependent economy with a major stake in fossil fuel production and a long history of reliance on cheap energy, pricing carbon is a serious risk. But Australia is not alone in taking this risk, and all the other routes look considerably worse.

First, remember that climate change is, over time, a killer for Australian growth. Even for those indifferent to the massive impacts on irrigated agriculture (dwarfing today's water shortages) and tourism, and indifferent to the health impacts and the sort of country that Australia's children will inherit, consider the indirect impacts of the much worse position of major export markets.

Cleaning up typhoons, depopulating inhabited coastal areas and building flood defences is going to seriously divert the growth of Indonesia, Vietnam and China on which much of Australia's recent prosperity has depended.

Second, Australia is not exactly alone in introducing trading. The 27 EU countries are committed to continuing their carbon pricing and trading system, started in 2005 and now the base for a $100 billion global business, whatever happens in the UN negotiations.

Canada and New Zealand are on the road, both presumptive US presidential candidates are committed to its introduction (with 100% auctioning of allowances too), and trading of one sort or another is proposed in Japan, Korea, Taiwan, parts of China and even India. The issue of the future is not going to be "why add costs to your exports?" but "don't expect exports without carbon pricing to get in free".

Third, there can be little doubt that making emissions reduction obligations tradeable makes sense. If you need to control the total amount of a pollutant, but it doesn't matter where the reductions happen (the global atmosphere does not care if carbon emissions are reduced in Armadale, Adelaide or Alaska, just as long as they are reduced), then why would you not allow people to trade those reductions?

Surely by now we know that the market is better than bureaucrats at distributing costs to minimise impacts on the economy.

Some economists argue that a carbon tax would be better. But politicians generally avoid new taxes like the plague, and the prospects of a world tax — because ultimately all major countries' emissions must be brought into this system — are far, far worse than the prospects of a global trading market, like other global markets. Plus we don't really know what level of emissions reductions a tax would produce, and we have left fighting climate change so late that the first thing we must be certain of is delivering an agreed total.

So Australia, having now realised that controlling emissions is an essential complement to supporting new technologies, has made the right choice in going for a carbon trading system.

The system set out in the green paper is built on knowledge about running a regulatory market that has developed across the world; not least the work done in Australia 10 years ago by the government, the Sydney Futures Exchange and other bodies, plus US sulphur and nitrogen oxide trading, which was the basis for the design of the Kyoto system. In addition, there is all the recent work by the Australian states, which is now sensibly being incorporated in the creation of a larger, more efficient market. On this foundation, the Government has put together a formidably comprehensive and considered set of design proposals, even if they are as yet not brought to life by the addition of numbers.

When those numbers come, expect a whole new edge to the debate. No one falling under this scheme will be exempt from radical re-examination of costs, strategies and product lines. Some activities just will not make sense any more. Some will require changes in existing regulation to enable costs to be shared more equitably. Some may even be shifted overseas — but beyond a few industries clearly in need of special treatment, it is very easy to exaggerate the impact of an energy cost increment far less than the recent fluctuations in basic prices.

There are an awful lot of one-off costs in moving production facilities overseas, particularly if you consider the political risks including, importantly, the likelihood that in a few years the larger developing countries will be constraining their carbon emissions for fear of the consequences if they don't.

Carbon pricing is meant to be a cold bath — a shock to the economic system.

Not such as to induce heart failure, so it must be eased in to some degree. But when the complaints really start flying, the Government — and those who can see that a low-carbon revolution offers as many opportunities as the digital revolution — must keep its nerve, because all the alternatives, including making sure the price is so low that it has no real effect for many years, are worse.

Henry Derwent is the chief executive of the International Emissions Trading Association and until recently was a senior British official dealing with international and domestic climate change policy.