The Productivity Commission’s report [url=http://www.pc.gov.au/speeches/comparing-carbon-internationally/]’Comparing carbon policies internationally: the challenges'[/url]
Methodological issues
Comparing apples and oranges (and sticks and carrots)
The nitty gritty of measuring abatement costs
Minding your P’s and Q’s
Measuring abatement
Additionality and energy efficiency measures
A snapshot versus a policy lifetime
What does it all mean?
A carbon price equivalent: a step too far?
Comparing ‘effort’
Competitiveness impacts
The terms of reference suggest that the study look at eight countries in addition to Australia: namely the UK USA Germany New Zealand China India Japan and South Korea. The Commission is attempting to cover relevant policies in each of these countries although accessing data is proving difficult for some and governmental cooperation varies. Some commentators have expressed concern that Australia’s main competitors in some markets are not included. This is true but the world’s largest emitters are included as are our most important trading partners. And we simply could not have done more in the time available.
In addition to the electricity sector the terms of reference suggest that effective carbon prices be estimated for selected industries drawn from the manufacturing and transport sectors where relevant and data permitting (important provisos).
Emissions associated with electricity generation and transport account for around half of Australia’s emissions while manufacturing industries are both users of emissions-intensive inputs particularly electricity and generators of emissions themselves. So by assessing policies targeting electricity generation our study would also be covering a significant proportion of abatement policies relevant to manufacturing. This is particularly so for emission-intensive trade-exposed industries that have a high reliance on electricity such as aluminium production.
Our report will accordingly focus on electricity generation and road transport.
One troublesome scoping issue relates to policies that encourage the production and consumption of high-emissions products or which are specifically designed to counter the impacts of emissions reduction policies. Gross estimates of measures to reduce emissions may materially overstate abatement effort to the extent they are offset by interventions pulling in the opposite direction.
The terms of reference embody the presumption that there are both explicit and implicit prices that can be derived and added together to get an overall effective carbon ‘price’ for each sector in each country which can then be compared with those estimated for other countries.
We have thus found it helpful to think of emission-reduction policies as falling into two camps: • policies that penalise consumption of high emissions products • policies that encourage production of low emissions ones.
Policies that effectively tax one commodity implicitly subsidise others. And effective subsidisation of one commodity implicitly taxes others.
A carbon tax for example raises the price of products generating carbon emissions (thus reducing demand for them) and at the same time it effectively subsidises production of low-emission substitutes by increasing the price they can charge in the market. (Indeed the way a carbon tax works is conceptually identical to an import tariff — the only difference is that an import tariff subsidises local production at the expense of foreign goods whereas the carbon tax encourages higher cost low-emission domestic production at the expense of lower-cost high emission domestic production. In both cases domestic consumers pay the explicit ‘tax’ and implicit subsidy.)
Given the disparate nature and limited application of the many policies in place what we are endeavouring to measure is the total economic (welfare) cost of individual policies and their associated abatement effects. (Indeed this the only metric we can sensibly attempt to measure absent comparable economy-wide carbon pricing mechanisms.) These costs can then be related to the abatement achieved — that is the average cost of abatement — which is an indicator of the cost-effectiveness of the policies being analysed.
Essentially this means estimating the costs of inducing substitution on the supply side (the additional costs of production) plus the costs of reduced consumption where product prices have been pushed up.