Peter Martin discusses the lack of bipartisan support on whether petrol should be included in any emissions trading scheme. I have been trying to follow this debate for sometime and find myself completely confused. Indeed, my current guess is no one is being really coherent on this issue.
So let me give it a shot. 14 percent of emissions come from transport so to leave it out from any climate change strategy appears stupid. That said, the world economy is doing our work for us by doubling the petrol price anyhow. Ironically, the market has generated the best political solution thusfar. The problem is that is an illusion as it only reflects a change in the world-wide distribution of demand for petrol and hence, is not a climate change policy at all — except for the fact that an upward sloping supply curve for petrol, should it exist, means that we will have less consumption than we would otherwise have had if prices were lower. That said, this event is softening the public up for a change in relative prices.
But an emissions trading scheme need not include petrol at all. Leave aside refining, I have news for you, petrol doesn’t generate emissions, cars + driving + petrol does. If you have an emission permit, in principle, the price of petrol could be exactly the same, but the cost to the consumer of using that petrol is now the emissions trading price + the cost of petrol.
The problem is that sure, this is the way emissions permits should work but in practice how do we monitor whether someone who is observed to be emitting while driving indeed has the necessary permits? We pretty much can’t. So the idea is to say to petrol suppliers, if you want to supply petrol, you had better purchase a permit. And so what do we get, higher petrol prices at the pump.
But there is an alternative that, in my mind is potentially much better than this solution, road pricing. The other key input into driving is a road to drive upon. What we do is this. We eTag up the driving population and install monitors on all roads. Then we charge people for road travel. Now we could just set the road price or use congestion pricing and that would be a good outcome as we could internalise another externality — that caused by other drivers. But if you really wanted to you could have the road supplier purchase emissions permits based on the average emissions of drivers and allow them to set prices based not only on the emissions trading price but also on the particular emissions-rating of the car that is being driven.
There is, however, one caveat in the choice between permits for roads and permits for petrol. The road option doesn’t allow us to adjust prices to reward driving behaviour (predominantly, not speeding) that can also reduce emissions. A petrol price signal would do that. Regardless, this only highlights the challenges in adhering to an economy-wide emissions trading scheme initially. I must admit I would prefer a targetted sector-by-sector approach (which would include transport and energy first up) rather than a purist option than tries to get at it all.
[Update: Tim Dunlop links to this post and from the comments it seems I was less clear than I was hoping to be. My point is a simple one: the only thing we know from the government at the moment is that it wants emissions trading. That is a property rights scheme which means that people buy permits and get rights. The problem is that petrol doesn’t sit as neatly into that whole regime as people seem to think. If the government wants to leave petrol out and then increase taxes by 25 cents per litre to take care of carbon, that is one option. But if you want it part emissions trading, you have to decide where to do it. Legally, you can’t require petrol suppliers to hold emissions permits any more than you can require DVD makers to hold permits because you are going to use electricity. So there is a real system design issue here. My point is that we can have permits for use of petrol while driving (but I don’t know how it will be monitored) or we can permits for road use (which has a monitoring option but other issues). My preference is to either move to road pricing for all of the other reasons that would be a good idea or abandon emissions trading for transport and slap a tax on petrol. Hope that clears some matters up.]