Academic journal article Journal of Australian Political Economy

The Cost of a Market Solution: Examining the Garnaut Proposal for Emissions Trading

Academic journal article Journal of Australian Political Economy

The Cost of a Market Solution: Examining the Garnaut Proposal for Emissions Trading

Article excerpt

There is increasing political consensus in Australia that climate change poses real threats to our economy and society, and that some form of policy action is necessary to address these risks. However, as this consensus has grown, so has confusion and disagreement over the nature of that policy response. What appeared to be growing support for an emissions trading scheme has now collapsed, with the future of even a carbon price in question. This paper examines the case for emissions trading made in the Government's Garnaut Report (2008) to better understand the case for a market response to climate change.

The Garnaut Report remains one of the most important climate policy documents in Australia. It provides a strong case for the use of Market-based approaches as the cornerstone of any successful climate policy. In doing this, it criticises a number of alternative approaches it describes as 'regulatory'. Yet, since the Report's release, support for emissions trading, the most important policy recommendation to come from the Report, appears to have waned. While both major political parties advocated an emissions trading scheme in the 2007 election (Coalition 2007: Australian Labor Party 2007), in the recent election both parties moved away from these commitments (Gillard 2010; Morton 2010). Instead, a range of other measures have either been implemented, or have gained political support, including feed-in tariffs and renewable energy targets (NSW Government 2010), direct investment in tree planting and capturing carbon in the soil (Coalition 2010), and investment in public transport (Colvin 2010).

This article examines the Garnaut Report's case for emissions trading as an exemplar of the case for a 'market-based' policy response to climate change. It begins by providing an overview of the Report itself. While the Report strongly advocates market solutions, it proposes a wide-ranging policy response that involves numerous and diverse interventions. Thus, a key argument of the article is that the distinction made between 'market' and 'regulatory' responses is largely artificial and unhelpful. Next the article focuses on the substance of the case for market-based policies, which is primarily focused on minimising costs. The article argues that for a number of reasons this approach is misguided and provides a weak justification for favouring any particular policy approach.

Attempting to minimise cost, or maximise output, suggests clear challenges for a report focused on ensuring ecological sustainability, but this also raises broader problems. Aggregate measures do not capture distribution, and this has both equity and political implications. Aggregate measures also fail to account for the uncertainty of outcomes, which can also generate political resistance. The Report deals poorly with these issues, and ironically implores high growth rates partly as a strategy to address the problems of uncertainty and distribution rather than focusing on these more important criteria directly.

Finally, the article returns to the question of distinguishing 'markets' and regulation, and the problems of complexity involved in regulating a trading market into existence. This raises political challenges within the policy process that may make emissions trading more susceptible to polluter capture. The Report's neoclassical analysis also limits a more thoughtful and potentially more fruitful examination of how different policy tools can combine elements of economic incentive and direct command and control to promote sustainability. In this sense, the conceptual tool kit of neoclassical economics prevents the Report from developing more nuanced recommendations, even given an a priori preference for decentralised, incentive-based decision making.

The Garnaut Report

The Garnaut Review was initiated in early 2007, before the federal election that saw Labor win government. Initially supported by state and territory governments, the review was a centrepiece of Federal Labor's election pitch on climate policy. …

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