I set readers of this blog a challenge – tell me the objective of the Gillard government’s carbon tax. From the many responses I think that there are seven broadly claimed objectives:
- The carbon tax is driven by the politics of minority government (the objective is political);
- We need to carbon tax because it is morally the right thing to do (the objective is moral);
- We need the carbon tax to reduce domestic carbon emissions (the objective is domestic emissions reduction);
- We need the carbon tax to prepare us for when the rest of the world acts on carbon emissions (the objective is to ease transition in the future);
- The carbon tax is a solution (or part of a solution) to global climate change and its terrible consequences (the objective is reducing global emissions);
- We need the carbon tax to be an example to other developed nations or to avoid claims of hypocrisy by developing countries when global solutions to carbon pollution are being mooted (the objective is reducing global emissions by setting a global example); and
- We need a carbon tax to help maintain a (Pareto superior) solution to the repeated n-player international prisoners’ dilemma of carbon pollution (the objective is reducing global emissions through strategic behaviour).
A number of readers each thought that specific but different objectives were obviously correct – which might help explain the government’s problems in ‘selling’ its policy. But let me examine each of these claimed objectives in turn, asking in each case whether, from an economic perspective, the carbon tax is a ‘good policy’ to achieve the objective.
First, if the objective is political (i.e. an attempt to placate the Greens) or moral (i.e. an attempt to placate a higher being or meet a non-economic imperative) then fine. Time will tell whether or not the policy is successful politics. And future generations will judge the morality of our behaviour. But there is no economic basis for me to determine whether the carbon tax is good or bad policy as these objectives are not economic.
If the objective is the reduction of domestic carbon emissions, regardless of the rest of the world, then the policy is pretty bad from an economic perspective. It leaves out the transport and agricultural sectors that are two of our highest emitting areas. As it is not comprehensive, it will not lower domestic emissions at minimum cost.
If the objective is to ease our transition to a low carbon future (which will occur when the rest of the world acts), then the tax may be good or bad economic policy, but there is far too little evidence to justify a definitive conclusion. It is far from clear when the rest of the world will act and it is not obvious that the cost of transition is lower if we act today rather than wait until the future is ‘clearer’. So, at best, the policy gets a big question mark under this objective. If in hindsight it appears to be good economic policy, this will probably reflect luck more than anything else.
The final three objectives are all essentially variants of a theme – the objective is global emissions reduction. If this is the objective, then I think the carbon tax is bad economic policy.
If the policy is meant to achieve its objective by somehow influencing the rest of the world, then, at best, its mechanism is unclear. The idea that the world will somehow ‘follow our lead’ is Australian-centric egoism. Joshua has discussed this before. His key argument still stands. There is little if any evidence that a unilateral action, such as the carbon tax, by Australia will influence world decision making. While we actually managed to get a lead article in the Economist and mentions in other international media outlets, a quick look at the international media shows that our carbon tax ranks well below Murdoch, Greece and US debt in terms of coverage.
As to the n-player (repeated) prisoners’ dilemma, if someone can show that our playing a ‘dominated’ strategy today will uniquely lead to a Pareto superior equilibrium tomorrow, then they have a top publication ready to go. (Please note I want uniqueness – it is easy to show that this could be an outcome – but so could the rest of the world continuing to do nothing.) Again the problem is that the mechanism by which the policy will achieve its global objective is completely unclear.
But I don’t want to be negative. Let’s take the objective of reducing global emissions as reasonable and ask what Australia could do to achieve this objective. Given that we are small and internationally politically impotent, the best way to achieve a global solution is to join up with a large country (or group of countries) that may actually have an influence. But on this basis, there is only one working policy at a global level – the European emissions trading scheme. Yes – it has many flaws. But it is the only global grouping at present that is making a difference.
So, if you want to pursue the objective of globally reducing carbon emissions, here is my suggestion: lobby the government to change its policy from a carbon tax to one where it enters negotiations with the EU in order to join its emissions trading scheme. That might, at least, be a mechanism to achieve the objective.