Pricing Carbon in Australia

Contestation, the State and Market Failure

Rebecca Pearse

• Publisher: Taylor & Francis
• Year: 2017
• Print ISBN: 9781138230583
• eBook ISBN: 9781315363431
• Edition: 1
• Topic: Economics
• Subtopic: Sustainable Development
• Index: Economics

In the mid-2000s it seemed that the global carbon market would take off and spark the worldwide transition to a profitable low carbon economy. A decade on, the experiment in carbon trading is failing. Carbon market schemes have been plagued by problems and resistance to carbon pricing has come from the political Left and Right. In the Australian case, a national emissions trading scheme (ETS) was dismantled after a long, bitter public debate. The replacement 'Direct Action Plan' is also in disrepute.

Pricing Carbon in Australia examines the rise and fall of the ETS in Australia between 2007 and 2015, exploring the underlying contradictions of marketised climate policy in detail. Through this and other international examples, the book offers a critique of the political economy of marketised climate policy, exploring why the hopes for global carbon trading have been dashed. The Australian case is interpreted in light of a broader legitimation crisis as state strategies for (temporarily) displacing the climate crisis continue to fail. Importantly, in the wake of carbon market failure, alternative agendas for state action are emerging as campaigns for the retrenchment of fossil fuel assets and for just renewable energy transition continue transforming climate politics and policy as we know it.

This book is a valuable resource for practitioners and academics in the fields of environmental policy and politics and social movement studies.

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1 Introduction

I worked on this book during one of the hottest summers on record in Australia. While a heatwave swept over the country in early 2017, the Liberal/National Party Coalition (LNP) and Australian Labor Party (ALP) politicians were in Parliament exchanging hyperbolic claims about the nation’s energy security and affordability. After electricity blackouts in the state of South Australia, the LNP and right-wing media insisted that the underlying problem was the increase of renewable energy. One Liberal minister brought a lump of coal into the Federal Parliament as a prop in his speech admonishing the Labor opposition, calling them a threat to coal-based electricity industries and communities in coal-dependent regions.

In response, the ALP blamed the Turnbull government for trebling electricity prices and criticised the conservative government’s refusal to take expert advice on an emissions intensity scheme (a type of baseline-and-credit carbon offset scheme). Meanwhile, coral bleaching swept across the Great Barrier Reef and a category 4 cyclone took the roofs from houses and flooded towns in Queensland, northeast Australia.

The ongoing tussle over changing energy markets and climate policy reflects the longer story of Australia’s failed emissions trading scheme (ETS). The ETS operated for a brief period (2012–2014) before being repealed and replaced by a voluntary competitive grants scheme, turned baseline-and-credit carbon offset scheme, called the ‘Direct Action Plan’. Both of these schemes hold little promise of substantial emissions reduction. Like much of the world, Australian society is further away than ever before from an effective, coherent and fair response to the climate crisis.

After a brief moment of bipartisan support for carbon pricing in 2007, the terms of debate in Australia became polarised along political party lines and more broadly, between advocates speaking the language of technocratic emissions management and conservative public figures using populist rhetoric about national economic risks and costs to the public. For a decade, a majority of Australian voters have retained an ongoing concern about climate change, but no major political party can lay claim to broad-based support for their climate policies. Meanwhile, Australia’s greenhouse emissions continue to rise and the intersecting issues of trebling energy prices, and the socio-economic difficulties of a changing National Electricity Market and the end of the mining boom continue.

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Cynical exchanges about climate policy between members of the political class are familiar to Australians, and also, I suspect, to the many people across the world who are interested in the directions of government responses to the climate crisis. The deep reluctance of politicians of all stripes to intervene in market activity in ways that sufficiently arrest greenhouse gas emissions is a global phenomenon with serious consequences. Since 1990, when the first international meetings were held setting up the United Nations Framework Convention on Climate Change (UNFCCC), global greenhouse emissions have increased by more than 70% (WRI 2017). The US National Aeronautics and Space Administration (NASA) currently records the global concentrations of greenhouse gases at 405ppm (parts per million), well above the pre-industrial levels did not exceed 300ppm for the previous 10 million years (Tripati, Roberts & Eagle 2009).

The threats to human and non-human life if climate change proceeds at this pace are serious. So too are the political economic implications of the global scale of emissions reduction needed to avoid this future. In the words of economist and adviser to the Rudd–Gillard governments Ross Garnaut, climate change is a ‘diabolical policy problem’ particularly given the difficulties of arriving at global agreement, the narrowing timeframe for action, and the imperative to avoid compromising development and economic growth (ABC 2008; Garnaut 2008a). The stakes are high, and securing passage of legitimate and effective climate reforms through national governments has proven immensely difficult.

With this backdrop in mind, this book investigates the rise and fall of a national ETS in Australia, asking three main questions: Why has carbon pricing become a central feature of the Australian state’s response to the climate crisis? What political economic dynamics contributed to the failure to realise a legitimate and effective ETS? What does this tell us about the prospects for decarbonisation and a just energy transition?

Market mechanisms, particularly emissions trading, have been a central feature in national and international responses to the climate crisis. International emissions trading and carbon offsetting were central to the 1997 Kyoto Protocol. The 2015 Paris Agreement does not explicitly refer to emissions trading, although it is alluded to in some of the document’s language. A lot has changed in the time between these two texts. In the 2000s, with the EU market underway and legislation under debate for national compliance ETS in the US, Canada, Japan and Australia, it seemed that the global carbon market would take off and spark a worldwide transition to a profitable low-carbon economy (ABC 2009; Kanter 2007). The global carbon market was valued at over US$120 billion in 2008, up from US$63 billion in 2007 (Capoor & Ambrosi 2009: 1). Carbon market entrepreneurs were predicting that the trade in carbon had the potential to become one of the world’s largest commodities. However, this did not come to be. From 2013, the World Bank stopped producing annual reports on the global carbon market value, credit transactions and volumes because ‘current market conditions invalidate any attempt and interest to undertake such analysis’ (World Bank 2013: 3).

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Carbon market schemes have operated amidst a string of problems stemming from distributive decisions taken by state agencies, failures of governance, and problems arising from tensions between the goals of emissions reduction, social protection and market efficiency (for overviews see Ervine 2013; Karsenty 2009; Lohmann 2012; McAfee 2012a; Paton & Bryant 2012; Pearse & Böhm 2015; Spash 2010). Chief among the substantive problems associated with emissions trading is the history of public wealth transfers to emissions-intensive firms, the reinforcement of uneven development, and the negative socio-ecological effects that flow from attempts to spatially and politically displace the abatement task through carbon offsetting, carbon credit banking and borrowing rules.

There are also fundamental issues involved with legitimating new carbon tax and emissions trading legislation across the world. Carbon markets have been plagued by regulatory uncertainty amidst ongoing contestation (Kossoy & Guigon 2012). Resistance to carbon pricing has come from the political Left and Right. In affluent settler nations like Canada, the US and Australia, carbon pricing proposals have been vehemently opposed by conservatives (MacNeil 2016). In the Australian case, a right-wing populist campaign led by LNP politicians and conservative intellectuals and media figures was a striking feature of the conflict over emissions trading. The ETS was repealed in 2014 by the Abbott LNP government after a long, bitter public debate. The LNP’s replacement ‘Direct Action Plan’ is also in disrepute. There is currently an interregnum in the climate policy debate, and therefore great need to reflect on why and how the would-be Australian carbon market failed and what comes next.

Market failure, market solutions?

Emissions trading has emerged as a means to manage the contradiction between emissions-intensive capital accumulation and the imperative for decarbonisation in light of advancing climate change (Matthews & Paterson 2005; Paterson 2010). Because of the structural relationship between emissions-intensive production and growth under capitalism, major distributive issues flow from any environmental regulation, particularly those that limit capital’s access to fossil fuels, minerals and other land ecosystems. The politicisation of carbon limits by environmental movements and scientists in particular, has prompted reluctant states into action. Since the early 1990s, ‘market-based’ regulatory instruments have become political and economic common sense.

Reams of expert advice to governments across the world begin by describing climate change as a global market failure. The excess greenhouse gases in the atmosphere are referred to as an unintended ‘externality’ to otherwise efficient markets. Most economists identify climate change as a failure of polluting firms to pay the full cost of their production. This interpretation of the climate problem has circulated widely in the global debate about climate change. For instance, Sir Nicholas Stern (2008: 1), lead economic advisor to the UK Blair government, famously declared that ‘greenhouse gas emissions are externalities and represent the biggest market failure the world has seen’. The solution according to economists is to put a price on ‘carbon’ with market instruments.

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The catch-all term ‘carbon pricing’ refers to different types of policies: carbon taxes, cap-and-trade, emission reduction credits, clean energy standards or targets, and fossil fuel subsidy reform (Aldy & Stavins 2012). Carbon taxation and trading are the most common type of emissions regulation. Carbon taxes entail a government assigning a cost per tCO₂-e – the most common metric for multiple greenhouse gases designating equivalent tonnes of carbon dioxide (CO₂). Cap-and-trade schemes involve the creation of a market in tradeable emissions credits, which are often linked to baseline-and-credit carbon offset schemes in different jurisdictions, typically in developing nations, though Kazakhstan, South Korea and China are exceptions with emissions trading in place.¹

Market mechanisms have been rendered as the most efficient mode of emissions regulation in large part due to the influence of advising economists often employed as public servants or consultants to government and international organisations (Gorman & Solomon 2009; Lane 2012; Pearce 2006). Emissions trading has been constructed by economists as an opposite alternative to so-called ‘command-and-control’ regulation, through ideological exaggeration and without an adequate theory of incentives or market dynamics (Driesen 1998; Spash 2010). The unique ‘flexibility’ and cost efficiency of emissions trading is often highlighted through their economic argumentation. The tradability of carbon credits provides freedom of choice to firms, and is said to reduce overall costs, and reduce the regulator’s need for information (Baranzini et al. 2017; Tietenberg 1985, 2006). Spatial and temporal flexibility is built in through rules for carbon offsetting, banking and borrowing (Fankhauser & Hepburn 2010a, b).

The economic rationality underlying arguments for emissions trading are deployed as a means to resolve difficult distributive issues, notably any decisions to limit fossil fuel exploitation (Felli 2015; Lohmann 2011). Economists and other experts (predominantly lawyers) with government advisory roles are positioned as technicians of climate policy agreement. It is common to read claims about the political feasibility of emissions trading in their reports. Expert proponents of emissions trading have developed a series of interlinked arguments about the ways carbon markets can assist with political dilemmas, by: reconciling economic growth with decarbonisation (Garnaut 2008b; Stern 2007); securing business community support; bridging North–South divisions over burden-sharing (Bertram 1992; Chichilnisky & Sheeran 2009; Grubb 1990); and appeasing anxieties in domestic political spheres about the costs of carbon reductions for business and the public (Wirth & Stavins 1988).

These sorts of arguments circulate globally. Australian experts with the bureaucracy have also proffered international emissions trading as a solution to the diabolical problem of climate change. The first reports to the Australian Federal government canvassing an ETS were written in the early 1990s by economists in the Australian Bureau of Agricultural and Resource Economics (ABARE 1992, 1993). Through the 1990s and 2000s, there was a continuous stream of internal government advice that emissions trading provided the most flexible and cost-efficient means to meet Australia’s obligations under the UNFCCC.

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Reflecting the influence of economic orthodoxy among intellectuals in the federal bureaucracy and civil society, the climate policy debate has been constricted to shifting opinions about different market mechanisms. Beyond the expert class, there is no broad consensus for emissions trading. Australian governments have long preferred voluntary emissions programs over carbon taxation or emission trading. For a brief period only (2007–2009), both major parties had policy platforms that involved emissions trading. When public support for climate action peaked, and the Rudd government announced plans for federal climate reforms, emissions trading was the default policy response. Echoing Stern, Ross Garnaut, the chief advisor on climate change to the Rudd–Gillard governments, argued his policy advice provided a way to manage the tension between economic growth and decarbonisation:

Fortunately, the economics says that it is possible to reconcile reduction in emissions with continued economic growth in the world as a whole and in each of its parts.

(Garnaut 2008a: 3)

The influential Garnaut Reviews (2008b, 2011) outlined the case for market-based climate policy, focusing on an internationally linked ETS along with complementary measures. The Garnaut Review insisted that market-based regulation is the most efficient means to reduce emissions. In a section of the final report called ‘Pandering to pet solutions’, Garnaut dismisses any argument that ‘regulatory’, non-market based interventions are needed (Garnaut 2008b: 317). No empirical analysis was used to establish this point and ironically the report recommended a nu...

Table of contents

• Cover Page
• Pricing Carbon in Australia
• Routledge Advances in Climate Change Research
• Title Page
• Copyright
• Contents
• Acknowledgements
• Acronyms
• List of Figures and Tables
• Preface
• 1 Introduction
• 2 Contestation and the Political Economy of Carbon Pricing
• 3 Historical Dimensions of the Market Turn
• 4 Carbon Pricing in Practice
• 5 Technocracy and the Copenhagen Moment
• 6 Conservative Populism and Carbon Contradictions
• 7 Beyond Paris, Towards Energy Justice
• 8 Conclusion
• Appendix
• Index