Professor Paul Kerin: “Global carbon credits will cut costs and prices”

Recent claims by Tony Abbott and others that allowing firms to purchase international carbon credits (CCs) to meet emissions quotas was like a tax that would raise costs and prices defy the most basic laws of
economics. They’re simply untrue.

Indeed, allowing such purchases can only reduce costs and prices. Furthermore, those advocating a continued ban on international CC purchases don’t seem to realise that they’re harming both their pro-coal
cause and Australia’s international competitiveness.

On December 19, Energy Minister Josh Frydenberg announced the government’s in-principle support for international CC purchases.

This week, Abbott said this was a “carbon tax under a different name” and it “just means that Aussie consumers end up shovelling our money to foreign carbon traders”.

Liberal MP Craig Kelly, chairman of the government’s backbench committee on climate and energy, said Australian businesses were “struggling to compete internationally without us effectively putting on a further
new green tax, forcing them to buy pieces of paper from overseas”. On Christmas Eve, Peta Credlin wrote that “Australian consumers will be the big losers as the cost of permits will impact bills and local goods”.

But Abbott and co are conflating two completely different things — emissions quotas and international CCs. Consequently, they’re misattributing cause and effect.

The thing that raises emitters’ costs (and hence prices paid by all firms and consumers) is the imposition of emissions quotas. Emitters have to incur costs to meet their quotas. However, as a society we have chosen
to impose emissions quotas for the greater good. Given that, allowing international CC purchases can only reduce the cost of meeting those quotas.

Any business knows the most basic economic fact of life: introducing a new source of supply and creating more competition in a market can only reduce prices. That’s what allowing international CC purchases would

Emitters can already use CCs to meet their emissions obligations — but only domestically produced ones. The government’s Emissions Reduction Fund (ERF) runs reverse auctions to purchase CCs generated by projects such as landfill and revegetation.

Under the “Safeguard Mechanism” introduced in mid-2016, large emitters must not exceed a net emissions baseline. They can meet their baseline by limiting gross emissions, generating CCs themselves and/or
purchasing domestically produced CCs. Frydenberg simply wants to give them a fourth option: purchasing international CCs.

If the price of international CCs is less than an emitter’s marginal cost of net emissions abatement under the present three options, it would purchase international CCs. If not, it wouldn’t. Frydenberg doesn’t want to
force firms to purchase international CCs. He just wants to give them the option.

The current price of EU carbon credits is significantly less than the average price of $13.08 a tonne in the December ERF reverse auction. In 2011, Treasury modelling showed international CCs would contribute 28 per cent of Australia’s emission-reduction obligations by 2020 and that banning them would more than double the cost of meeting those obligations.

Whether future international CC prices will be above or below the marginal cost of domestic emissions abatement is uncertain. But giving emitters the option to purchase international CCs can only reduce the
costs and prices of energy and other products.

The analogy made by acting Greens leader Rachel Siewert this week that allowing international CC purchases was like “paying someone else to go on a diet for you” is just silly. True, what matters to your
health is your weight — but what matters to world climate is total world emissions, not your emissions. Trading international CCs helps ensure that both the world’s and Australia’s net emissions are reduced at least cost.

Indeed, as eminent economists such as Warwick McKibbin have argued, if we could minimise the world’s cost of reducing emissions, maybe Australia — which has a comparative advantage in fossil fuels due to its
natural endowments — should produce more gross emissions rather than less (while achieving net emissions reductions through international CC purchases).

The Paris Agreement (reached in December 2015), which allows international CC purchases to count towards emission targets, enters into force in 2020. Frydenberg’s in-principle support is subject to the Paris
Agreement rules (in development) being satisfactory. In any case, Australia can ensure integrity by doing as other countries have done — only allow firms to count in their net emission calculations those international
CCs that are generated by nations and project types that we specify.

Many nations already allow international CC purchases. More will follow when the Paris Agreement comes into force. Kelly says he’s concerned about Australian businesses’ international competitiveness, but they’ll
struggle more if we continue to ban international CC purchases. While Abbott and co are pro-coal, banning international CC purchases makes coal-fired power plants less viable, as it raises high emitters’ costs of
achieving net emission reductions.

Allowing international CC purchases is beneficial because there are gains from trade. By the same logic, allowing Australian firms to sell domestic CCs internationally would also benefit Australia. Indeed, Frydenberg
flagged that the government may also consider this.

We could also realise further gains from trade in CCs and emissions quotas domestically — that is, by introducing an emissions trading scheme. The best way to minimise the cost of reducing emissions is to
leverage the benefits of markets, both domestically and internationally.

Paul Kerin is Adjunct Professor,
School of Economics, University of Adelaide.

This article was originally published in The Australian on 6 January 2018.

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