Carbon tax or cap-and-trade? The debate we never had

Guest Post by Tim Kelly. Tim is works as a Principal Climate Change Advisor in the Water Industry.

The Federal Government has now released its Carbon Pollution Reduction Scheme White Paper and as expected the mechanism it has chosen is that of a pollution permit and trade system (cap and trade). The cap and trade approach has been widely accepted by many businesses, green groups and Australia’s major political parties including the Australian Greens, and yet I am continuously witnessing surprise by individuals and groups when they learn more about the impact of such an approach on eliminating the economy wide benefits of voluntary behaviour.

At the outset, when State and Federal Governments were considering which approach would best deliver National emissions reductions, they should have explained the basic advantages and disadvantages of the two likely contenders, being a carbon emissions tax (carbon tax) or the cap and trade approach, in an open and transparent manner. At the end of this post I provide a ‘pros and cons’ table comparing these two alternatives. In particular, I note that in the disadvantages column of a cap and trade scheme, stakeholders should have been advised of the following critical points:

1. A cap and trade scheme, by its nature, extinguishes the impact of voluntary efforts from reducing aggregated economy wide emissions as any greenhouse reduction or avoided emission by an individual or entity, because it merely results in freeing up permits to pollute in another part of the economy (i.e., it makes no difference whether I ride my bicycle to work or buy the biggest worst performing V8 petrol vehicle — national emissions will be the same!).

2. A cap and trade system, by its nature, does not drive innovation in voluntary markets, and greatly reduces diversity in voluntary markets.

3. A cap and trade scheme that uses the voluntary surrender of permits as a greenhouse reduction mechanism, ties the cost of voluntary abatement with the cost of pollution, thereby diminishing prospects of continued voluntary action.

This is not to suggest that the cap and trade approach might not drive actions to reduce emissions by permit holders. But it leaves out vast numbers of individuals and small to medium businesses in the economy from being able to contribute to reduce national emissions in a meaningful way. A cap and trade approach largely alienates non-permit holding businesses and individuals from taking a meaningful role in reducing the nation’s emissions. So there is a question as to whether there is any value in the Department of Climate Change slogan “Think climate. Think change. We can’t afford not to”.

Anyway, below is a comparison of the two main approaches focussing on the mechanisms, their effectiveness and flexibility to reduce emissions for a given target. Naturally, this appears superficial in the table, so if you don’t agree, please consider my full discussion and reasoning (PDF document) which led to my conclusions.

[Barry Brook: This post from Tim is particularly timely, because the Federal Government has just announced an inquiry into the merits of their cap-and-trape model. For instance, a Canberra Times article says: