No. 66

Who gets to cook the magic carbon pudding?

STONE the crows! A magic carbon pudding is on the policy menu! But what the crows want to know is who will do the cooking.

Ross Garnaut released the new episode of his climate change version of Blue Hills last week.[i] The sixth in the series, it suggests Australia should cut carbon emissions.

Why? Because greenhouse gasses are warming up the planet and even developing nations, especially China, are doing their bit by embracing alternative energy. How? By introducing an emissions tax for a couple of years until a trading scheme kicks in.

The market-based model makes more sense than the idea that we have to keep up with the rest of the world. Professor Garnaut says, “China’s doing a lot to reduce emissions. Two years ago it wasn’t.”[ii] The PM also emphasises how green Beijing’s valleys are getting. “China (is) closing down a dirty coal-fired power generation facility at the rate of one every one to two weeks.” [iii]

To which the crows go “caw”!

Certainly the Chinese are reducing their reliance on coal, but only as a proportion of their energy mix. While the share of China’s total energy supply generated by coal will drop by 9 per cent over the next five years, electricity plants producing 260 GW from coal will come on line in the next five years, compared to 183 GW produced by alternative energy. [iv]

The crows were more impressed by the way Professor Garnaut expanded the debate from the environment to economics – suggesting that revenue raised from big polluters will pay for tax cuts to compensate consumers for increased power bills, plus a range of reforms to expand the workforce, as recommended in the Henry Review (Henry? Ken Henry. Oh come on, he only left a couple of weeks ago, used to run Treasury, wrote a report on tax reform which the Treasurer appears to have mislaid.)

As the Professor puts it:

… a large amount of revenue could be used to reduce personal income tax rates and social security withdrawal tapers at the lower end of the income distribution. … Such an adjustment would increase incentives to participate in the labour force at a time when Australia faces shortage of labour and inflationary pressures. [v]

What a winner! We can help the environment and increase productivity while cutting taxes.

Of course, like all magic puddings it’s best not to ask where the ingredients come from – it must be because the crows are birds of little brain that they can’t see how a diminishing revenue source (if the ETS works over time then business will have less pollution to pay for) can pay for continuing cuts to Canberra’s coffers.

Or, how giving people extra money to pay their increased power bills will encourage us to reduce our energy consumption.

But what the Crows really want to know is, who gets to cook the pudding?

For an ETS to work, it requires an agency to decide how many tradeable carbon permits are issued, much as central banks control the money supply. Professor Garnaut wants “an independent carbon ban … because good governance is the only antidote against the many pressures that would be applied to the political system by special interests.” [vi]

Quite right. The outcome of emission totals being set by parliament or public servants advising ministers is too horrible to contemplate – instead of pork barrels, carbon cartons would be the rent seekers’ resource of choice.

The inept European carbon trading system, worth E90 billion per annum and run by EU officials, demonstrates what happens without an independent agency.[vii] It is too easily rorted, shutting down earlier in the year when a whack of emissions certificates was pinched online.[viii]

Michelle Chan makes another important point: that somebody has to stop the financial engineers who brought us the US mortgage crisis creating products that effectively allow speculators to gamble on carbon markets. Carbon trading markets “must not only be well-regulated, they should also be designed to be simpler, smaller and more stable,” she argues. [ix]

Reserve Bank board member Professor Warwick McKibbin has a plan to do all this. He argues the regulatory function is the equivalent of monetary policy – setting long-term emissions targets and deciding how to reach them at lowest economic cost. [x] His model involves government issuing tradeable annual pollution permits in 50-year lots plus selling 12 month licences at a fixed price and intervening in the market, “to keep the price within bounds. … This is similar to the open market operations of the Federal Reserve in short term money markets.” [xi]

As Professor McKibbin describes it this sounds like a job for a reserve bank:

This system should be run by an independent central bank of carbon not by a climate change department or an Australian Treasury. An independent central bank of carbon should run a policy in a very similar way to the way the Reserve Bank runs monetary policy, where government sets the long-term goals and independent experts implement the policy. [xii]

Makes sense to the crows, with a couple of caveats. A carbon bank must be as independent of government as it is indifferent to special interest pleading. It must be managed by economists, preferably ones who think the Productivity Commission is staffed by softies when it comes to dealing with rent seekers and anybody who has even worn a green tie or scarf must be barred from the board.

And, to ensure it’s independence, the government must set an objective for the carbon bank and then get out of the way for good on implementation, using the precedent of bipartisan support for the RBA’s responsibility to contain inflation and its legislated obligation to maintain full employment.[xiii]

The Green extreme will argue such requirements might reduce the rate of emissions reduction, but emissions trading is now about more than the environment.

Professor Garnaut has seen to that.

[i] Ross Garnaut, Climate change review update 2011: carbon pricing and reducing Australia’s emissions @ recovered on March 19

[ii] ABC TV, Lateline, March 17 @ recovered on March 19

[iii] ABC TV, Q&A, March 14 @

[iv] Graham Lloyd and Stephen Matchett, “China still in thrall to king coal,” The Australian, March 16

[v] Garnaut, op cit 25

[vi] Garnaut, op cit 11

[vii] Simon Wilson, “Is Europe’s carbon emissions trading system working?” Moneyweek, January 28

[viii] Terry Macalister and Tim Webb, “Carbon fraud may force longer closure on EU emissions trading,” The Guardian, January 23

[ix] Michelle Chan, “Lessons designed from the financial crisis: designing carbon markets for environmental effectiveness and financial stability,” Carbon and Climate Law Review, 2, (2009) 152-160, 160

[x] Warwick McKibbin, “Climate change policy post 2012: The 2008 Giblin Lecture” October 28 2008, @ recovered on March 20

[xi] Warwick McKibbin, Adele Morris and Peter Wilcoxen, “A Copenhagen collar: achieving comparable effort through carbon price agreements,” Brookings Institution, August 2009, recovered on August 20, Senate Economics Committee, “Inquiry on the regulation to implement the CPRS,” 11.22 @ recovered on March 20

[xii] Senate Economics Committee, op cit 11.26

[xiii] Reserve Bank of Australia, “RBA: a brief history,” @ recovered on March 20, RBA, “Our role,” recovered on March 20