Jury is in, carbon pricing beats subsidies: OECD

Cutting a tonne of carbon in the electricity sector through capital subsidies is 17 times more expensive than through emissions trading, says a new OECD study. It is uncomfortable reading for the Coalition.
Jury is in, carbon pricing beats subsidies: OECD Jury is in, carbon pricing beats subsidies: OECD Jury is in, carbon pricing beats subsidies: OECD Jury is in, carbon pricing beats subsidies: OECD Jury is in, carbon pricing beats subsidies: OECD


Richard Collins

Meanwhile, China is considering a carbon tax, reports the Australian Financial Review (paywall). The government has been signaling new environmental taxes for several months and the AFR says expectations are high that details of a carbon tax will emerge at the Communist Party economic meeting starting on Saturday.

The OECD's Effective Carbon Prices report shows taxes and trading systems are preferable to other policies, such as feed-in tariffs, subsidies and other regulatory instruments.

It draws lessons from climate change policies in 15 countries in some of the sectors that generate the most emissions: electricity generation, road transport, pulp & paper and cement, as well as household energy use.

It underlines that while the cost of carbon taxes is clear – which is why they are easy targets for political opposition – other policy instruments entail higher costs to society per tonne of CO2 abated, in many cases, substantially higher.

That sounds almost like a direct swipe at the federal government's Direct Action plan, which Environment Minister Greg Hunt attempts to portray as a market-based instrument, just like water trading in the Murray-Darling.

Former treasury secretary Ken Henry yesterday challenged that concept on two grounds. Water trading is based on a licence to extract, yet there is no suggestion the government plans to create a permit to emit. Also, under Direct Action the government is the only buyer, muting the power of a private market.

The OECD found capital subsidies in the electricity sector would cost 176 euro ($250) per tonne of CO2 abated; feed-in-tariffs cost 169 euro per tonne; and trading systems 10 euro per tonne of CO2 on average.

The average cost of reducing a tonne of carbon emissions in the road transport sector can be up to eight times higher when instruments other than fuel taxes are used.

“Countries are pricing carbon in a multitude of ways, not always the most effective,” said OECD Secretary-General Angel Gurría.

"There has been a huge amount of taxing and regulating around carbon, with prices established too high or too low, and the outcome has been far from optimal. This is a chaotic landscape that sends no clear signal, and must be addressed.”

During a lecture hosted by the London School of Economics earlier in October, Gurría said governments must adopt a coherent approach to carbon pricing if they are to meet international commitments to gradually phase out fossil fuel emissions and limit climate change to a 2 degrees C temperature increase from pre-industrial levels.

“There is only one way forward: governments need to put in place the optimal policy mix to eliminate emissions from fossil fuels in the second half of the century. Cherry-picking a few easy measures will not do the trick," he said.