That US exporters are given transitional exemptions through to 2025 is consistent with the destination principal of accounting for such emissions.  It is a standard sort of policy akin to the proposal to force importers to purchase carbon quotas at the market value of such quotas under the US cap-and-trade bill.  Proposed border tax adjustments internalize the externalities of exported outputs from other countries.

The decision to exempt local electricity producers from such charges makes less sense since they provide a non-traded good. Of course local electricity used to produce alumina exports will result in a rebate to alumina producers that is part of the WMB.

Of course the first obligation of any environmental charge is environmental improvement so Mankiw is offering Obama an extreme form of advice.

Joshua Gans makes further comments today of the same type in relation to the Turnbull proposals for an improved ETS in Australia.  There are quite a few parts to this suggestion  but on the proposal of Turnbull to effectively reduce electricity costs to customers by assigning a base level of emission permits to generators I think Turnbull makes the same errors as the Rudd government.  There should be no compensation to suppliers of non-traded goods at all.  The compensation should be paid to the consumers of these goods who bear the higher prices but as income not as reduced prices.

In some respects the Turnbull proposals worsen things by reducing – or at least postponing – the price effects of an ETS.

With full auctioning of Australian carbon emission permits from 2012/13 at an estimated price of $29/tCO2 the Rudd Government estimate revenues that year of $12b. Currently more than half of these are returned to households via tax relief and as fuel excise offsets (around $7.2b).  The rest disappear as the cost of rebates to trade-exposed firms ($3.6b) with a relative trickle to electricity generators of around $0.8b.

I’d prefer to leave things this way even if customers cop a 25-30% boost in their electricity bills because they get reasonably good tax relief that should leave them not so disadvantaged. Consumers are being encouraged to cut their electricity consumption in response to climate change which is what is sought.  Leaving them with lower electricity prices by compensating suppliers means that the climate change mitigation effort will be that much less effective.

If  I can use some jargon. Turnbull’s attempt to give them more to ease electricity prices is not good economics. It is preferable to make consumers bear the higher prices and give them generalised tax relief. Capture the sought after substitution effects but offset the impoverishing income effects.   There is a PR job to sell this policy but it would be more effective and cost electricity consumers no more.

To say that electricity prices will rise more steeply in the future is unconvincing to me when the primary political pressure should be to avoid postponing things but to get them moving now.

Malcolm’s proposals are close to endorsing Labor’s ETS and I have sympathy for his attempt to support the government on this one.

I have already indicated to Malcolm that he faces another constraint in relation to the ETS. Some Coalition supporters (e.g. me) will cease their support and help to consign the party to historical irrelevancy if it does not support a comprehensive and effective ETS. It would have been better if the Liberal Party had devoted its efforts to strengthening the ETS rather than as has sometimes seen to be the case – to sabotage it. Perhaps this message should be communicated to the real fruitcakes of Australian politics – Barnaby Joyce, John Williams and Wilson Tuckey.

This is how I respond to Malcolm’s arguments. I mainly ignore the political issues. These can be clearly seen in Turnbull’s attempts to diffuse ‘carbon leakage’ concerns that are the basis for opposition within his own party to the ETS.

1. An ETS should offer no less protection for local industry than a US ETS as in the Waxman Markey Bill (WMB), approved by the House of Representatives but yet to pass the Senate. The final legislation may be different from WMB.

Response: The WMB may be different. Malcolm is partially reviving the anti-unilateralist position – we won’t do anything until others do. This is what stopped George Bush and John Howard from ratifying Kyoto. One can argue that Australia’s position should reflect the seriousness of climate change impacts irrespective of what the US does. Exporters should be exempt from carbon charges on a temporary basis as in the current WMB but should eventually be charged.

BTW Malcolm hasn’t said anything about imports or, for example, border tax adjustments. The issues of importer competitiveness here are also important.

2. There must be a regular review by an expert independent body, to ensure that the Australian ETS does not materially disadvantage Australian relative to American industries. The legislation must bind the Government to correct any disadvantage identified by the review process.

Response:  In the medium term industry should feel pressure and move from   carbon-based fuels. The idea is to apply pricing pressure to induce behavioural change. The difficulty with Malcolm’s proposal is that it leaves open  possibilities for endless interest group bargaining that already seems to have captured the Rudd Government.  Better to exempt carbon-intensive exports now and fade out exemptions through time in a set, non-negotiable, way.

3. To limit carbon leakages exporters should be on a level playing field with the US and other economies and should therefore receive full compensation for higher energy costs until the bulk of their competitors face a similar carbon cost.

Response: Exports should be exempt not industry generally and (as above) these exemptions should fade over time. There are only a few industries with significant carbon leakage issues. Protection of these few industries should be specific – exemptions should not be broad-based.

4. Fugitive methane emissions from coal mining should be treated in the same way as they are in the US and Europe.

Response: These emissions should be taxed in relation to their share of home consumption.

5. As in the WM agricultural emissions should be excluded from the ETS and agricultural offsets included. Australia’s greatest near term potential of reducing its CO2 emissions are to be found in the better management of its landscape.

Response: A complex issue. Eventually agricultural emissions related to Australian consumption of emissions from agriculture should be brought into the ETS if they can be. Agree there are cheap, efficient sequestration options in agriculture.

6. The scheme must ensure that general increases in electricity prices are no greater than comparable countries to minimise the impact on all trade exposed industries.

Response: Domestically consumed electricity that is carbon-based should be charged.  Households should be compensated if charges deliver revenue to governments in terms of lower income or other taxes. We should build up human and skill capabilities for nuclear and renewable technologies (both!) that will move the economy away from carbon-based electricity.

7. Electricity generators should be fairly and adequately compensated for loss of asset value to ensure capacity to invest in new abatement technology and to fund maintenance of existing facilities for energy security purposes.

Response. Disagree, compensation is unnecessary. Exporters using carbon-based electricity can receive temporary compensation but there is no need to compensate producers who pass most costs onto local consumers and producers who supply primarily the local market.

8. Effective incentives and/or credits must be established to capture the substantial abatement opportunities offered by energy efficiency, especially in buildings.

Response: Agree – technical improvements should be encouraged with subsidies as should relevant R&D.

9. There must be adequate incentives for voluntary action which can be added to Australia’s 2020 target.

Response: Agree, answered in 8.