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Climate Change Loses Policy Traction

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John Robertson

Economists might have to shoulder some of the blame for climate change being shoved off the local policy agenda. By focusing too much on what gets them excited, they neglected how to lead opinion.

Many around the world are still manfully pressing the case for action but, suddenly, more pressing threats are pushing climate change aside. Strategically, ISIS has loomed large and, economically, the threat of indefinitely weak global growth is taking up more leadership time. Climate change will have to fight hard for a share of policymakers' minds.

In Australia, the high point of community engagement seems to have passed. Ironically, if electors had voted for John Howard as Prime Minister in 2007, there would now be a fully fledged carbon trading scheme in place. Most likely, it would be having no discernible effect since low global growth and a surfeit of permits has rendered the price largely impotent as a constraint on carbon emissions but, for what it is worth, the policy framework would have been implemented.

Australia's policy response has been marred by an array of tactical missteps resulting in the currently unfilled void in which no-one has their preferred position.

The Rudd-Gillard governments were fond of referring to a market based scheme to deal with climate change. No doubt, they figured, a market based scheme would stand more chance of electoral support in much the same way as 'natural' is preferred to 'artificial'.

Opting for a market based model delighted economists proud of the elegance and proven policy success of their preferred approach. Officials in Treasury and influential economists outside government endorsed it enthusiastically.

As an environmental policy tool, the 'cap and trade' model had been deployed to help reduce acid rain in North America. Amendments to the Clean Air Act in 1990 aimed to halve emissions of sulphur dioxide by 2000.

There is an irony in the way attitudes to trading environmental permits have evolved. In the late 1980s, a cap and trade policy response was championed by conservative members of the US Congress as a market friendly approach but opposed by those on the left politically as a licence to pollute. By 2010, in the USA, the system was being referred to by the conservative side as "cap and tax" in a debate with echoes in Australia while its strongest advocates were on the left.

The changing attitude to the model arose because the role of the market was less important for the achievement of policy goals than the threat of a penalty if targets were not met.

For most policies where market based schemes could operate, direct action is preferred. Urination in public, for example, has been largely eradicated by a combination of social pressure defining what is right behaviour, publicly accessible toilets and the risk of arrest. The economists' solution, of course, would have been to give everyone the right to urinate in the street. Those who preferred not to could have sold their right to those who wanted to retain the option.

Most people would probably characterise giving anyone such a right as an absurd example but it makes the point. If we want to get rid of anti social activity, the most direct route is to simply legislate against it by making the legal threat sufficiently real to scare perpetrators into changing their behaviour.

The urination model helps to illustrate another shortcoming of the cap and trade approach. If everyone starts with a right to misbehave, there is no reduction in the quantity of bad behaviour. The market itself offers no solution. Without a direct intervention to cut back on the incidence of the activity, the cap and trade model fails.

At the heart of the cap and trade model is a decision about how much is going to be tolerated. Cap and trade allows some bad behaviour just not as much as would otherwise have occurred. If no amount of bad behaviour is deemed acceptable, cap and trade probably has no role.

The 'cap' is more important than the 'trade'. Without direct intervention involving some form of dictated behaviour reinforced by a state-threatened punishment, the policy would be largely ineffective.

Australia's climate change policy discussion was sidetracked into the niceties of how carbon should be priced. The argument was dominated by the influence of an economic model which proved to be a distraction and a misadventure for all involved.

In Europe, where the model was adopted more than a decade ago, weak economic activity led to low demand for pollution credits. Issuing more of them added to the market weakness. Actual carbon prices and the resulting economic incentives will depend on an array of influences in much the same way as prices are set in any other commodity market.

A carbon pricing regime applying to power plants will be no different to the effect of iron ore prices on steel producers. There can be no guarantee, if steel industry profitability is the goal, of that being achieved. Nor, as we are seeing presently, can there be any guarantee that iron ore producers can sustain their businesses. The market mechanism allows outrageously high and unsustainable prices while, at other times, excess supply.

North America's acid rain problem was solved by mandating controls. The role of the market was a clever overlay to gain acceptability for the policy and, in some cases, ease the pain of compliance.

Bill Shorten has promised to return climate change to the Australian political agenda. He would be advised to keep the economists in the background so opinion can be mobilised by once again focusing on the costs, the ultimate goal of the policy and, if he dares, what punishments he intends imposing.


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