Australia voted last week to scrap their carbon tax and replace it with a much less economically efficient cap-and-trade scheme. The pro-business Reuters article acknowledges the only “positive” that results from this decision: businesses will save money. Well, hallelujah. I’m sure today’s children will be immensely grateful when they’re adults with all the resultant climate change effects that Australian businesses were able to avoid paying for their actions and saved a few billion dollars in the 2010s. That’s one way to look at this news. Let’s flesh the landscape out before throwing Australia under the bus too quickly.
To be fair, Australia simply moved up the date when they joined … the European carbon “market”. You remember, that’s the market that severely over-supplied carbon credits at its outset and refused earlier this year to remove some of those excess credits for a mere two years. In essence, the European carbon market doesn’t work. How can you tell? Carbon costs €4.2/tCO2 today. When the European market started, the cost was €31/tCO2. At one-tenth the original price, the market signal is clear: there are far too many allowances in the European market. Have greenhouse gas emissions (note: CO2 isn’t the only GHG!) fallen in the EU since the market’s inception? Yes, but this is a result of the continued economic malaise the Europeans inflict on themselves, as described by the European Environment Agency’s most recent report.
The temporary benefit to the earlier Australian move to the EU’s ETS is this: the flow of carbon credits is one way: from Europe to Australia. Australia can’t export credits until July 2018. So in the short-term, Australia could help relieve the over-supply of EU carbon credits. This might help in raising the carbon price back to more realistic levels, but this won’t happen until 2016 at the earliest because of lower emissions and demand for permits in Australia.
There are two big negative effects of moving from a fixed tax to a floating market. The first is that carbon will become much cheaper in Australia: from A$25.40 per tonne to A$6 per tonne. Is carbon really only worth A$6? In an over-supplied market, perhaps it is. The fact that not all industries are involved in the carbon market means that we manipulate the true carbon price. Of course, as much as folks like to talk about “free markets”, most markets are heavily manipulated by vested interests. The second negative effect remains local: the move removes A$3.8 billion from the Australian federal budget over four years. Australia’s Prime Minister Kevin Rudd proposed to make up this budget shortfall by “removing a tax concession on the personal use of salary-sacrificed or employer-provided cars.” Good luck with that, Mr. Rudd. Everybody is loath to give up a financial benefit once they receive it. Look – more market manipulation!
Australian coal companies were more than happy to propagate misinformation to Australian energy consumers: electricity price increases were due exclusively to the carbon tax! This highlights a common problem with any carbon-pricing scheme: special interests can more easily spread misinformation and disinformation (and are often happy to do so!) than market proponents can spread true information. The reason is often quite simple: the truth is complex and consumers don’t want to invest the time to understand why they pay the prices they pay. How many consumers demanded energy utilities stop raising prices before carbon market inception? Then who was responsible for price increases? “Market forces” is the lame excuse dished out to the masses. How about the relentless, unquenchable hunger for ever-rising profits? Somehow, that’s alright, but accurately pricing a commodity is heresy.
An additional piece of context: Australia suffered from record heat waves, droughts, and floods in the past ten years. The Australian public’s acceptance of climate change related to these disasters is widespread, as is their desire to “take action”. Well, the government took action and that same public cried uncle with slightly higher utility bills. This proves the common refrain: people support climate policies … so long as they are absolutely free. That smacks into reality awfully quick. It also demonstrates that there is no such thing as a “Climate Pearl Harbor” that leads to unequivocal support for a given climate policy. The slow-acting nature of climate works strongly against widespread, effective climate policy.