JUSTIFICATION for Australia’s carbon-pricing scheme assumes there will be a global carbon pricing system with our ETS a part of it. This assumption is probably wrong. It is unlikely a global carbon pricing system will be implemented, let alone sustained for the decades or even centuries that would be required. 
Without a global carbon-pricing system, national or regional carbon-pricing schemes would be prohibitively expensive if they are to achieve the projected benefits and, therefore, would not be sustainable. The high cost means that a scheme like the one Australia has legislated is not viable, and even regional carbon pricing schemes like the European ETS will not last. The ‘ball-park’ analysis presented here suggests Australia’s ETS would cost $12 for every $1 of projected benefit, to 2050.
Introduction
Australia’s carbon pricing scheme began in July 2012 and is legislated to change to an emissions trading scheme in July 2015. The government recently announced, if re-elected, it would try to change the legislation to bring the date of transition from carbon tax to emissions trading scheme (ETS) forward by one year (from 2015 to 2014). However, even if the proposed change in start date passed parliament (unlikely), it would make little difference to the total cost of the ETS. According to Treasury’s projections, the ETS will be very expensive.
Proponents of carbon pricing argue it is the least cost way to reduce greenhouse gas (GHG) emissions. Their argument is based on assumptions that are appropriate for a theoretical exercise but unlikely to be achieved in practice, let alone sustained for the time the policies would need to operate (decades or centuries). Significantly, little research has been done to investigate the probability that carbon pricing can be implemented and deliver the expected benefits in the real world.
Uncertainty about the problem (man-made climate change) is a given; but uncertainty about the chosen solution is inexcusable. This is to say, we should be confident that our solutions are going to be effective, and the more expensive the solution the more confident we should be. In short, big responses require high levels of confidence that they will work. There seems to be a lack of credible evidence to demonstrate carbon pricing passes this test.
The questions examined here is the likelihood of the Australian ETS being successful.
The following sections explain why:
• Carbon pricing cannot succeed unless it is global;
• Global carbon pricing is unlikely to be achieved;
• The Australian carbon pricing scheme, if continued, would be high cost and provide little if any benefit.
Carbon pricing cannot succeed unless it is global
Analyses by Professor William Nordhaus, a long time advocate of carbon pricing and a world authority on estimating the costs and benefits of climate change, greenhouse gas mitigation policies and the optimal carbon price, demonstrates that carbon pricing must be global or it will not succeed. Nordhaus (2008), p198, says [1]:
“Complete participation is important because the cost function for abatement appears to be highly convex. We preliminarily estimate that a participation rate of 50 percent instead of 100 percent will impose a cost penalty on abatement of 250 percent.”
What this means is, if only 50% of GHG emissions are included in the global carbon pricing scheme, the cost penalty for the participants would be 250%. The 50% participation could be achieved by, for example, 100% of countries participating in the scheme but only 50% of the emissions in total from within the countries are included, or 50% of countries participate and 100% of the emissions within those countries are included in the scheme (i.e. taxed or traded).
The explanation for the convex abatement cost penalty curve is as follows. With a high level of participation the least cost abatement options are used first. However, if there is less participation, some low cost options are not available, so higher cost options have to be used to achieve the same emissions reductions. Figure 1 shows the ratio by which the abatement cost would increase for less than full participation. For example, at 50% participation, the cost penalty would be a factor of 3.5 (i.e. 250%) higher than with full participation (ref. “A Question of Balance”, Chapter VI, pp116-122) [1].
In reality, the cost penalty for the participants would be worse than this because with less than full participation there would be leakage of emissions from the participants to the non-participants.
The abatement costs are likely to be higher than Nordhaus has estimated because the compliance cost of carbon monitoring, reporting, policing and disputation has not been included. The compliance cost would escalate as smaller and smaller emissions sources are included.
Given the above, we should consider what level of participation could realistically be achieved and what the compliance cost would be. Furthermore, given the cost penalty for the participants, we need a persuasive case that there is a high probability of a global agreement to price carbon being implemented and maintained for as long as necessary to achieve the goals?
Nordhaus explains that the assumptions used for the cost-benefit analyses, which are used to justify global carbon pricing, are academic; they are unrealistic for the real world. He says, p68 [1]:
“We should provide a word of caution about the optimal case. It is not presented in the belief that an environmental czar will suddenly appear to promulgate infallible canons of policy that will be religiously followed by all. Rather, the optimal policy is a benchmark to determine how efficient or inefficient alternative approaches may be. This is the best possible policy path for emissions reductions, given the economic, technological, and geophysical constraints that we have estimated.”
In other words, the assumptions that underpin the economic analyses used to justify carbon pricing are academic; they are appropriate for an academic modelling exercise but they are unrealistic, impracticable and highly unlikely to be achieved in the real world. Some of the key assumptions that underpin the economic analyses are:
• There will be negligible leakage (of emissions between countries, between industries and between emissions sources)
• All GHG emission sources are included (all countries and all GHG emissions in each country)
• There will be negligible compliance cost and negligible fraud
• There will be an optimal carbon price and the whole world implements it in unison
• The whole world acts in unison to increase the optimal carbon price periodically and will continue to maintain the carbon price at the optimal level for all of this century (and thereafter).
If these assumptions are not met, the estimated benefits of carbon pricing would not be achieved.
Global carbon pricing unlikely to be achieved
Professor Richard Tol, a long time advocate for carbon pricing and a leading world authority on estimating the damages of global warming, discusses the probability of achieving a global agreement [2]. He said in November 2012:
“The 18th UN Conference on climate change negotiations has just started in Doha. This column suggests that the probability of success is a mere 2.3%. Recently, over $100 million per year was spent on fruitless negotiations. Having flogged, ever harder for 18 years, the dead horse of legally binding emission targets, the UN should close that chapter and try something new.”
The article (and chart) explains why a meaningful global agreement is highly unlikely to be achieved. For example he says:
“Game theory suggests that attempts to negotiate an international environmental agreement, aiming to provide a global public good such as greenhouse gas emission reduction, are bound to fail (Barrett 1991, Carraro and Siniscalco 1992, Carraro and Siniscalco 1993).”
Richard Tol’s article reveals that it was predicted back in 1991, the world would not agree to legally binding international agreements, such as targets and timetables for emissions reductions with penalties for breaches of commitments, or carbon pricing.
Australia’s ETS would be high cost for little benefit
This section provides a ‘ball park’ estimate of the benefit, the cost and the cost to benefit ratio for Australia ETS to 2050:
The benefit of a CO2 price is the climate damages avoided by having the CO2 price. Nordhaus (2012)[3] estimated the present value of climate damages that could be avoided by an optimal carbon price applied to the whole world for 50 years would be $3.5 trillion (in 2012 prices)[4]. For 40 years, the period examined by this paper, the amount is $2.7 trillion. Australia’s share would be $32 billion, assuming our share is proportional to Australia’s share of global GDP (1.17%)[5].
The figures above are, more correctly, the present value of net benefit; i.e. the benefit minus the abatement cost. In these figures the abatement cost is about 13% of the benefit. Therefore, the present value benefit is $36 billion
This estimate of the benefit assumes the whole world implements an optimal CO2 price and and maintains it at the optimal price for 40 years. Other important assumptions are listed above. If the assumptions are not achieved, the estimated benefits would not be realised.
The net cost (i.e. cost minus benefit) is the reduction in GDP. Treasury estimated the loss of GDP the ETS will cause. The cumulative loss of GDP to 2050 is $1,345 billion (undiscounted) (Chart 5:13)[6]; the present value is $390 billion (discounted at 4.34% pa, the average rate for the USA in the Nordhaus model for the period).
This is the net cost, not the cost. The cost is net cost plus benefit. I don’t have Treasury’s numbers for costs and benefits, so I’ve assumed the present value benefit is the $36 billion derived above. Therefore, the present value cost would be $390 billion + $36 billion = $426 billion. (This is rough, but sufficient for this ball park estimate).
From the above, the present value benefit for Australia of a globally optimised CO2 price (if the world implements an economically efficient CO2 pricing scheme in unison) would be $36 billion. The present value cost would be $426 billion.
Therefore, the cost of the ETS would be about twelve times the benefit. For the ETS to be justified, the benefit should exceed the cost. Clearly, this is not the case, by a wide margin.
Conclusions
Carbon pricing cannot succeed unless it is global.
Global carbon pricing is unlikely to be implemented, let alone maintained.
Australia’s ETS, if continued, would be high cost and deliver little if any benefit. Treasury projections of the net cost of Australia’s ETS and Nordhaus’ global projections of benefit scaled to Australia reveal Australia’s ETS would cost $12 for every $1 of projected benefit to 2050. However, the benefits would be lower, perhaps none, unless there is a global carbon price.
Australia’s ETS is economically damaging and, therefore, unlikely to survive.
References
1. W. D. Nordhaus (2008). ‘A Question of Balance’ http://www.econ.yale.edu/~nordhaus/homepage/Balance_2nd_proofs.pdf
2. R. S. J. Tol (2012) ‘Global climate talks: If at the 17th you don’t succeed’ http://www.voxeu.org/article/global-climate-talks-if-17th-you-don-t-succeed
3. W. D. Nordhaus (2012) ’In the Climate Casino; An Exchange’. The New York Review of Books http://www.nybooks.com/articles/archives/2012/apr/26/climate-casino-exchange/
4. W. D. Nordhaus (2012). ’RICE climate-economic model available for NYRB readers’ http://www.econ.yale.edu/~nordhaus/homepage/NYRB_RICE.htm
5. Wikipedia, List of countries by GDP (PPP), ‘International Monetary Fund (2012)’. http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)
6. The Treasury, (2011) ‘Strong Growth Low Pollution’, Chart 5:13 http://archive.treasury.gov.au/carbonpricemodelling/content/chart_table_data/chapter5.asp
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Peter Lang is a retired geologist and engineer with 40 years experience on a wide range of energy projects throughout the world, including managing energy R&D and providing policy advice for government and opposition. His experience includes: hydro, geothermal, nuclear, coal, oil, and gas plants and a wide range of energy end use management projects.
A pdf of this article can be downloaded here:
https://climatelab.com.au/wp-content/uploads/2013/08/Why-the-ETS-will-not-succeed-v0-1.26.pdf
Senator Ron Boswell explains some of the real issues of linking Australia’s ETS to the EU ETS. The article is behind a paywall so I’ll copy it in full.
http://www.theaustralian.com.au/national-affairs/opinion/ets-link-can-only-hurt-us/
ETS link can only hurt us
by RON BOSWELL
From:The Australian
August 12, 2013
IN early June, the winds in the state of Denmark were still. The turbines on the nation's wind farms were turning slowly. In the suburbs of Copenhagen and other major towns and cities, the price of Denmark's reliance on renewable energy was exacting a heavy toll on the householders.
The Scandinavian press reported that on certain days Danish energy costs were up to 10 times those of neighbouring Sweden. The energy cost of a single load of laundry was 88 Danish kronor, or about $17. This is the high price of misguided climate and energy policies.
That $17 load of washing is an exemplar of a failed policy experiment. It is a stark warning to avoid the costly and failed energy and climate policy approaches of the EU.
But instead, the Rudd government wants not simply to imitate Europe, but to put Australia's economic destiny in the hands of the designers of the European energy and climate policy disaster.
The Rudd government's decision to switch to emissions trading a year early will also bring forward the so-called link to the European trading scheme.
The really amazing thing about the link is that Australian industry is much more exposed to the carbon price than are its European counterparts. That means that rises in the European carbon price will have a much bigger impact on Australian industry than on its European competitors.
The Australian coal sector will be paying the European carbon price, but the European coal sector will not. That's because methane - the gas generated during the mining of coal - is exempt from the EU ETS, but not from Australia's scheme.
The Australian gold industry will be paying the effective European carbon price, but the European gold industry will not. Why is that? The European gold industry is considered trade-exposed by EU bureaucrats, but the Australian government has decided that the local gold industry is not.
Similarly, the European wine industry is considered trade-exposed, but the same Australian sector is not.
European sugar producers and dairy processors are considered trade-exposed, but their Australian counterparts are not.
Why are the jobs in these and 120 other European industry sectors worthy of protection while the jobs in the same Australian sectors are not?
Why are European manufacturers of watches, ships, pleasure craft, sporting goods, brooms, brushes, chemicals and fertilisers trade-exposed when manufacturers of these goods in Australia are not?
Why are European manufacturers of workwear, outerwear and underwear deserving of free permits under the European scheme while their competitors in Australia are not?
The small number of EU industrial firms that do not receive trade-exposed treatment will face a far lower cost burden than do their Australian counterparts.
Non-trade-exposed industrial firms in the EU will receive 80 per cent of permits free this year, 30 per cent of permits free in 2020, and only be required to buy all their permits in 2027.
In contrast, non-trade-exposed industrial firms in Australia will buy permits covering 100 per cent of their liability from the first day of the scheme. Not a single European company will be required to buy 100 per cent of its carbon liability until 2027.
Some argue that the link to the European scheme will mean a lower price for Australian firms. Don't be so sure.
There are powerful interests in Europe pushing for a higher carbon price. They want it much higher and for longer.
Just last month the EU intervened in the carbon market to push the price up.
That followed pressure from environment ministers from 12 EU member states.
The ministers said that although "market interference" should be kept to a "minimum", a "one-off and targeted intervention" was necessary to "minimise market uncertainty and distortions" and promote investment in low carbon technologies.
This move underlined the indisputable fact that the EU ETS is no market at all.
And that means that Australian industry is at the mercy of vested interests in Europe. We will be collateral damage.
In effect, Australia has put its export interests into the hands of the trading bloc that has corrupted global agricultural markets for decades.
That is a rare act of political incompetence that can only be reversed by scrapping the Gillard-Rudd carbon pricing scheme in all its various forms.
Ron Boswell is a Queensland Nationals senator.
What elevates the carbon trading costs to astronomic heights is the fantastic overstatement of costs of CO2 rise. There is a dearth of evidence that they will exceed zero.
Actually it's much worse because the ets trades a valueless good. It's valueless because CO2 abatement can be done at a profit, so the ETS is actually a limitless subsidy a simple wealth transfer from the poor to the rich. I could crash an ETS pretty much single-handedly. A single conomic sector is capable of doing it. An ETS is a disaster waiting to happen
Thank you for the many comments. Jo Nova has posted a follow up article by me on the per person cost of the ETS and other government policies to control Australia's GHG emissions:
"In the next 37 years, Labor will spend $60,000 per Australian to change the weather"
http://joannenova.com.au/2013/08/in-the-next-37-years-labor-will-spend-60000-per-australian-to-change-the-weather/
“Probably it is true enough that the great majority are rarely capable of thinking independently, that on most questions they accept views which they find ready-made, and that they will be equally content if born or coaxed into one set of beliefs or another. In any society freedom of thought will probably be of direct significance only for a small minority. But this does not mean that anyone is competent, or ought to have power, to select those to whom this freedom is to be reserved. It certainly does not justify the presumption of any group of people to claim the right to determine what people ought to think or believe.”
― Friedrich A. von Hayek, The Road to Serfdom
A view also equally well espoused by the late Neville Kennard in his own words.
The people currently in charge are far less worried about CO2 than they are about control. Expanding and enhancing the powers of Government to force their views on everyone is the stock and trade of both Greens and Labour.
As Hayek correctly observes, socialism, no matter how well intentioned must by its very nature lead to totalitarianism. There is no other way to ensure the serfs follow the script. Combine that philosophy with a green agenda that puts the welfare of weeds and shrubs above the welfare of human beings, particularly those who they see as completely disposable in the third world and you have a recipe for brutal and murderous dictatorship. Worse yet dictatorship which reigns smugly from a perceived position of moral superiority.
Christine Milne is omniscient and would happily doom the 3rd world to certain death now, on the "just in case" they might be harmed by apocalyptic maybes in the future. At the same time as we have the World Bank shutting up shop on funding 3rd world coal power, we also have record numbers of people dying from the effects of dung fueled indoor cooking fires.
Green politics are simply eugenics by any other name and they are proud of that fact.
Peter
This is the kind of substantive analysis which needs to be understood by the next Australian Federal Government, should it be open to learning. This reasoning you present here should form an important part of a public information program, a gradual awakening about the enormous delays we can achieve in holding back those dreadful tides of global warming. As I think about it, what a great way to start such a program. Let the argument over your analysis roll, for undoubtedly many would be asking as they emerge, "so what are we doing all this for anyway?" Then they can more readily move to the next questions.
In my schooling, we absorbed the prejudices of our parents' generation, about important things such as "Rule Britannia" and "For King and Country", vestiges of the "brilliance" of Clive of India, and nothing of Mahatma Ghandi, of course. And where did I start to learn about apartheid? Not from history or any current affairs at school - from a current affairs periodical to which by chance I subscribed or that I purloined. It took some time to shuck those ingrained prejudices, that myopic ignorance. It is a similar myopia to which two generations have fallen victim, a conviction that humans do more harm than good. To change that view is our challenge, and our opportunity.