Credit: iStockphoto
THE DECISION TO CREATE an emissions trading scheme in Europe, the U.S. and Australia is more about ideology than reducing carbon dioxide. A carbon tax would be simpler, fairer and cheaper.
The basic formula for a trading scheme is simple. Create a market to trade 'pollution' permits, each permit being a right to emit one tonne of carbon dioxide (CO2). Establish a cap for the number of permits issued annually, then auction them.
Brokers manage purchases and traders buy and sell them. Set a target for emissions in 2050, trim the caps each year between now and then, and presto! Emissions fall to match the targets.
This relies on the free market: as CO2 emissions become more costly, companies develop technologies and strategies to lower emissions. But in reality, markets are not always so efficient. As we have seen in the global financial crisis, markets left to operate without oversight can spin out of control and fail catastrophically.
And the challenges are too big for private enterprise alone. To use largescale solar power, for example, we need to build a robust national infrastructure of transmission lines, as the existing system would be unable to handle the vast numbers of distributed generators required.
Then there's the problem of fairness. In principle, a trading scheme can be uniformly applied to all emission sources. In practice, because buying and selling permits is expensive and complex, the schemes only target some industries: so there's inequality in how they're applied and large sectors are exempt.
Another difficulty is the pricing uncertainty created by supply and demand. If demand is 90%, the permit price will be very low and there'll be no incentive to cut emissions. If demand is 110%, producers will become desperate and prices will skyrocket. Who benefits? Mostly the traders and brokers. Faced with a stampede, governments will 'temporarily' increase the number of permits.
Then there are political realities. Governments will return much of the money raised as subsidies to the heavily targeted industries. Voters will be hit by higher electricity and petrol prices, so money will also flow back in the form of tax incentives or handouts.
Of the $23 billion expected to be raised in the first two years in Australia, every dollar will be returned in handouts, with not a cent allocated to technology research or investment in building infrastructure capacity.
Yes, safeguards are proposed to minimise these problems – but they add enormously to the scheme's complexity. Cunning traders will no doubt exploit this. Just look at how traders dealt with the complexity of mortgages and derivatives created over the past 10 years, wreaking havoc on the global financial system.
There is a better way: governments can take a decisive role and invest in solutions themselves. In the 1940s, the U.S. government tried vainly for years to interest private enterprise in building interstate highways.
Finally, in 1956, President Eisenhower committed to build a national highway system: 66,000 km of roads paid for entirely by federal and state governments, using money raised by a petrol tax. Highways became the backbone of interstate commerce and directly contributed to economic growth.
When it comes to climate change, governments need to show similar leadership: they need to create a strategic roadmap to tackle the problems of global warming. They need to make major changes, not just talk about aspirational goals.
How will they fund their efforts? A carbon tax can raise money simply and fairly. Governments already have agencies that collect taxes efficiently.
Do we really need to create a whole new market employing hundreds of highly paid lawyers, traders, brokers, analysts, bookkeepers and others just to buy and sell permits – or hoard, speculate or profiteer from them?
A carbon tax could start at a modest $10 per tonne of CO2 emitted and still be effective. First, no matter how small the price impact, it would stimulate more behavioural change than if there were no price increase at all. Second, the money raised could be used to fund immediate measures.
At a modest $10 per tonne, the annual revenue in Australia would be $6 billion. This would help pay for measures such as phasing out coal-fired electricity – replacing it with lower emissions sources such as gas-fired power, or near-zero emission options such as wind, solar and nuclear.
It could pay for research into new technologies to improve energy efficiency and behavioural change, and mitigate the coming impacts of climate change.
Yes, it would hurt consumers – especially those on low incomes. But the pain would be small and highly predictable, it would provide an appropriate price signal to encourage intelligent use of energy, and the benefits – from lower emissions to national investment in large-scale change – would occur almost immediately.
Follow Cosmos on Twitter!
twitter.com/cosmosmagazine
Alan Finkel, a neuroscientist and biotechnology entrepreneur, is the Chancellor of Monash University and one of the founders of Cosmos.
