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What will the Australian ETS achieve? or What can a centrally planned carbon economy achieve?

Posted Nov 16 2009 10:00pm

The goal of any emissions trading scheme is to reduce carbon emissions. The idea is to provide a price on carbon which currently does not have a price so as to create a value for carbon. To achieve this; the government is creating a market out of thin air. It is restricting the use of carbon by limiting its supply. The users of carbon will then need to think and act innovatively to cut down their use of carbon or pay for the use of carbon. The cost of carbon will depend on the supply and demand of carbon on any particular day. There are far more intricacies that I do not understand but basically this is it.

However, the Rudd government is clearly incapable of managing to pass legislation that does not pander to special interest groups. Also, it has shown that politics is more important than economics.

The Australian ETS called the CPRS has put a cap on carbon price of $10 a ton till 2012. By doing this; the CPRS is not creating a market at all, it is creating a centrally planned market economy for carbon. On top of this the government decides which industries are part of the CPRS and which are not; which industries get free carbon credits and how much. In addition, it is allowing overseas carbon credits to be bought in Australia to the tune of 100%. What this means is that carbon reduced in other countries as part of their ETS can be bought by Australian companies and they do not have to innovate to reduce their carbon output.

By putting a cap on the price, by providing free credits as it seems fit, by excluding some industries and providing access to foreign carbon credits the government is acting as a central planner and distorting the idea of a carbon market. Centrally planned economies do not work. A distorted market will not provide the benefits of a free market and in this case it will not lead to reduction in carbon emissions. What else will happen is hard to fathom?

And this is the problem with public policy. It is not always clear what will happen when we distort the market.

With a low carbon price the energy companies may not have enough incentive to innovate? Or they can easily buy from overseas credits and continue business as usual. Foreign competitors who are selling their carbon credits to Australia can become more competitive in than Australian companies.

On the other hand, an Australian ETS implemented before the US or other major countries in the world leaves a small country like Australia in a position where it may be disadvantaged by the policies of the bigger and more powerful countries. This will have an adverse effect on the Australian economy.

So coming back to my original question, the Australian ETS does not seem to be in the direction of achieving its basic goal of reducing carbon emissions but it will surely be creating additional effects that are hard to understand right now and can be detrimental to the country.

As a Buddhist saying goes, “First, do no harm”. That should be the goal of public policy. However, the Australian ETS may be doing harm first. This is dangerous.

Posted in Climate Change, Green Economics
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