Tackling Australian policy’s ‘trauma zone’

22 June 2016

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Paul Burke is a Professor in the Arndt-Corden Department of Economics, Crawford School of Public Policy. His research interests include energy economics, environmental economics, and Asia-Pacific economies. His courses include IDEC8029 Issues in Applied Microeconomics.

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It’s been a case of one step forward, two steps back, for Australia’s climate policy in recent times. It’s up to the next parliament to get things moving, Paul Burke writes.

Australia has taken a substantial step backward on climate policy during this term of Parliament. Terminating the carbon price left us without a credible policy to achieve long-term emissions reductions. After a period of decline, emissions are on the rise again.

With a new Parliament about to be elected, the risk is that Australia drags its feet on climate action rather than taking the opportunities for policy reform that are available to us.

The brightest spot is probably that renewables have now been quite widely embraced. An important step in this process was last year’s resolution of disagreements over the renewable energy target. The major parties agreed to a revised target to ensure that more than 20 per cent of Australia’s electricity will come from renewables by 2020. Renewables are popular among the electorate.

There are also some signs of a potential for convergence in emissions policy. There is speculation that the Coalition Government’s emissions safeguard mechanism could one day be tightened to form an emissions trading scheme, although no commitments have been given as yet. The Labor Opposition is promising not one but two emissions trading schemes.

It is clear that the Government’s Direct Action scheme – subsidy payments to induce emissions reductions – is not up to the job of decarbonising Australia’s economy. A key problem is that some of the funding is flowing to projects that would have happened even without a subsidy. Another problem is that the scheme has to date not been able to incentivise many types of emissions reductions, including from electricity generators. The scheme also creates a fiscal burden at a time when we are trying to get our budget deficit under control.

Economists typically recommend a carbon price as the best approach to reducing emissions. In the words of William Nordhaus of Yale University, “Whether someone is serious about tackling the global warming problem can be readily gauged by listening to what he or she says about the carbon price”.

The Greens score highest on this front, promising a “strong, effective price on carbon”. On this issue, they are in the same camp as the World Bank, International Monetary Fund, and International Energy Agency.

Labor is notably more ambitious than the Coalition on climate, proposing emissions reductions of 45 per cent from the 2005 level by 2030. The Coalition’s commitment is a 26–28 per cent reduction. Labor also has targets of reaching 50 per cent renewables by 2030, and net zero emissions by 2050. Labor’s proposed return to emissions trading is, however, rather light-touch – with large roles for obligation-free baselines and cheap international permits.

How the Coalition intends to achieve long-term emissions reductions is yet to be fully explained, with the important decisions likely to be left until after a climate policy review slated for 2017. Australia has already had many reviews on climate policy, and there are costs associated with policy delay. The Coalition has yet to signal any change to its position on carbon pricing.

Regardless of who wins the 2016 election, Australia has much to gain from a change of gear on climate policy. The policy flips and arguments of recent years have introduced substantial uncertainty for investors. An area that offers so much opportunity has become the trauma zone of Australian policy.

At the global level, innovation in clean-energy technologies is proceeding quickly, from solar panels to electric vehicles. If our policy settings are right, Australia could achieve substantial emission reductions in a way that delivers exciting benefits for the Australian economy. The task awaiting the next Parliament is an important one.

This piece was first published on Policy Forum.net.

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