Open Letter calling for a Carbon Price

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A letter was published today by the World Wildlife Federation calling for a price on carbon pollution. It was also advertised in The Australian. I was a signatory and the letter is reproduced over the fold.

Economists’ Open Letter Supporting a Price on Carbon Pollution 2011

We are writing this open letter on a carbon pollution price as a group of concerned economists with a broad range of personal political views, but united in the judgements that:

-a price on carbon pollution, preferably an emissions trading scheme, is the best way to reduce carbon emissions over time; and

-the design features of such a scheme will be critical to its success.

We are all of the view that the introduction of an emissions trading scheme is a necessary and desirable structural reform of the Australian economy, designed to change relative prices in a way that provides an effective incentive to consumers and producers to shift over time to more low carbon energy efficient patterns of consumption and production. As such, it should be broadly-based in its application and highly transparent in its implementation. It should not be approached in a politically opportunistic and haphazard manner. We would make the following more specific observations regarding the design of a price mechanism

Firstly, it is critical that any price mechanism apply across as many high carbon producing sectors of the economy as possible. Excluding one sector inevitably means extra pressure on other sectors. Furthermore, excluding or giving special concessions to particular polluters will dilute the relative price changes that the scheme is designed to create. That would come at a very real cost to the community in terms of lost incentives and opportunities to develop new technologies and alternative products in that sector.

Secondly, the market should set the price of a carbon permit, and any price cap should be high and non-binding. Fixing the price in the initial years according to some formula, and/or setting the price cap too low, would severely inhibit carbon trading and could raise doubts about the Government’s determination to eventually move to a market based system. A fixed price may be appropriate as a transitional arrangement but should default to an emissions trading scheme as early as possible. By fixing the price it is extremely unlikely that targeted quantity reductions can be achieved. Certainty on quantity targets can only be achieved by allowing the price to reach a level which is consistent with that target.

Thirdly, revenue raised from the price scheme should contribute to the reduction of undesirable consequences of a market scheme and improve productivity while aiming for budget neutrality in the long run. Priority should be given to compensating low income and vulnerable households for higher costs of living and to providing targeted transitional assistance for emissions-intensive industries impacted by the introduction of a carbon price, so as to reduce the risk of carbon leakage to offshore competitors and allow business to transition smoothly into a carbon–constrained economy.

Fourthly, a properly designed price mechanism will encourage the development of new technologies which, over time, will reduce the cost to the community of lowering emission levels. However, technology neutral complementary measures may be necessary in the early years to overcome existing tax, regulatory or infrastructure barriers and disincentives to the development of clean energy technology and energy efficiency.

Fifthly, the price mechanism should be administered by an independent authority, similar to the Reserve Bank of Australia. The authority would have responsibility for: selling/auctioning permits, collecting revenue, and allocating revenue in accordance with guidelines defined by legislation and by agreement with government. This would assure fairness, transparency and accountability, and a clean market price.

* The signatories to this open letter have signed in an individual capacity and the views herein are not necessarily those of, and should not be attributed to their employers.

Paul Brennan, Head of Economics, Citigroup Global Markets, Australia

Chris Caton, Chief Economist, BT Financial Group

Besa Deda, Chief Economist, St George

Saul Eslake, Director of the Productivity Growth Program, Grattan Institute, and former Chief Economist ANZ from 1995 to 2009.

Bill Evans, Chief Economist, Westpac

Joshua Gans, Professor of Management, Melbourne Business School

Richard Gibbs – Global Head of Economics and Chief Economist, Macquarie Bank Limited

Stephen Grenville, visiting fellow, Lowy Institute for International Policy

Stephen Halmarick, Chairman Australian Business Economists

John Hewson, Economist and Former Leader of the Liberal party and the Federal Opposition

Raja Junankar, Professorial Visiting Fellow, School of Economics University of New South Wales and Emeritus Professor University of Western Sydney

Geoff Weir, Director, Financial Sector Services

Glenn Withers, Chief Executive, Universities Australia

 

4 Responses to "Open Letter calling for a Carbon Price"
  1. The Age last week reported interesting research from Yale Law School (Kahan, DM), on Culture Cognition, which relates to your Open Letter advertisement. The basic idea is that risk assessment is assessed dependent on your politics. Liberals (individualistic, hierarchical) will only believe insiders about new risk, whereas Labor/Green (communitarian, egalitarian) will believe experts about new risk. On this basis, to get the Liberals to believe you, you need signatories close to the Liberal camp, like a Packer Economist, a Telstra economist, a BHP/Rio Tinto Economist, an Alcoa/Frank Lowy economist. That said, well done getting John Hewson and the Banks on board.

  2. As Judith Sloan reasonably queried at Catallaxy.

    Did the WWF pay for the ad or did you all share in the cost?

  3. I don’t follow – if the revenue is used to subsidize tax payers for increased costs and assist industry transition, what incentive is there to change? Increased production costs are passed on to the consumer who has more after tax income with which to pay – therefore the status quo remains… Is my logic flawed or is this a fundamental economic failing?

  4. DA07: Giving back revenue increases the budget set but a carbon price changes the budget line ie prices of carbon intensive goods become relatively more expensive than less carbon intensive goods. The substitution and income effects will depend on each good.

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