How Tony Abbott killed Australia’s carbon trading scheme

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In the end, Australian prime minister Tony Abbott didn’t have to call a special, massive ‘double dissolution’ election to roll back Australia’s carbon pricing scheme, the signature policy accomplishment of the six-year Labor government that preceded him.australia new

All it took was some deft maneuvering to cobble together a working majority in the 76-member Senate, where Abbott’s Liberal/National Party holds 33 seats, just short of a majority.

Nevertheless, Abbott (pictured above) won a narrow 39 to 32 victory last month in the upper house of Australia’s parliament, on the strength of six additional non-Coalition votes to repeal the carbon trading market. Having been one of the first countries to adopt a carbon trading market, Australia on July 17 became the first country to repeal a carbon trading market.

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That included the support of a mercurial former mining magnate named Clive Palmer (pictured above), whose maverick conservative Palmer United Party (PUP) became the swing vote in determining whether Abbott’s repeal push would succeed or fail.

The Labor Party’s new leader, Bill Shorten, led an unsuccessful push in alliance with the Australian Green Party, to oppose the repeal. Labor holds 25 seats in the Senate, while the Greens hold another 10. 

Abbott’s resulting victory is primarily a triumphant tactical and policy victory for the Australian right, giving Abbott an easy talking point on reducing the price of electricity for the average Australian voter (though the real long-term impact of the repeal of a carbon scheme that had reduced emissions by less than 10 percent nationally is yet to be determined).

It’s also a narrative about the fragmentation of the country’s two-party system, as far as Australian senatorial elections go, with voters placing increasingly greater power in the hands of independent third-party candidates.

On the global scale, it marks a symbolic victory for opponents of similar climate change legislation worldwide, though the battle over carbon emissions was never going to be won or lost in Australia, a country of less than 23 million. Arguably, China’s decision in June, for the first time, to limit carbon emissions at the national level, will have a much wider impact on global climate change policy.

While British prime minister David Cameron continues to promote a progressive stand on climate change as an issue to pull his Conservative Party to the middle in the United Kingdom, there’s no indication that the UK is set to introduce any major climate change legislation on the scale of Australia’s experiment with carbon pricing beyond the EU’s own carbon trading scheme. Though there was a brief window in 2008 and 2009 when a carbon-based exchange system might have been enacted in the United States with bipartisan support, those days seem long gone. Nevertheless, the administration of US president Barack Obama and the US Environmental Protection Agency, however, introduced executive actions this summer that aim to reduce US carbon emissions by 30% by the year 2030.

Australia’s carbon scheme has its origins as one of the major promises of former prime minister Kevin Rudd’s widely successful 2007 campaign that brought the Labor Party back to government after more than a decade in opposition. It was, in part, Rudd’s decision to back away from climate change legislation that caused his Labor colleagues to dump him in 2010 in favor of then-deputy prime minister Julia Gillard.

After Gillard won a narrow reelection campaign of her own later that year, she enacted a comprehensive climate change bill in 2012, as well as a broader tax on mining profits (that hasn’t raised nearly as much revenue as expected). 

The problem, both in Australia and beyond, is that the global financial crisis of 2008-09 left many national electorates wary of climate change legislation that, almost overnight, suddenly seemed much too costly to introduce at a time when so many developed countries were struggling with the highest unemployment and lowest GDP growth in decades.

That made Abbott’s pledge to repeal what’s popularly become known in Australia as the ‘carbon tax’ one of the most popular aspects of his agenda, which won wide support the parliamentary elections last September that brought Abbott’s Coalition into government. His recent victory in winning Senate support to repeal the carbon scheme will almost certainly rank among the chief legislative successes of his first year as prime minister.

Ironically, even as Australia pulls away from a carbon emissions trading markets, other countries are increasingly turning to similar policies to control pollution. As Australia and other Western democracies retreat from aggressive climate change policy, some surprising leaders are instead emerging — including South Korea and, more implausibly, Kazakhstan and China.

Though climate change policy is now more associated with the political left in Australia, the United States and elsewhere, the idea of creating markets for carbon emissions originated decades ago among freshwater, Chicago-school economists like Ronald Coase that have traditionally been associated with liberal market conservatism.

Economists like Coase noted that pollution and its resulting adverse effects, including climate change, amount to a ‘negative externality,’ in the jargon of economists.

In other words, carbon emissions generally cause harm to the world that’s not otherwise accounted for by the market — it’s a harm that economic producers impose on third parties, not unlike the related concept of the ‘tragedy of the commons.’ In simple terms, Coase and other like-minded economists realized that private firms could pollute as much as they want because, basically, no one owns property rights in, say, the atmosphere, which we all share, as human beings, because we all breathe the same oxygen. Without property rights, however, economic actors lack an incentive to ensure that the atmosphere isn’t polluted. The market doesn’t impose costs for the harms that pollution causes.

One solution to this problem is for the government, on the basis of risk assessment and scientific data, to set a limit on the amount of carbon, in aggregate, that it will allow private firms to emit. But once it’s set that limit, it can allow a market to develop among private firms to compete for ‘permits’ to, in essence, create pollution.

The idea is that the market will much more efficiently allocate the ‘right’ to pollute than the random decree of a government regulator. Once the Australian (or US or British or French) government determines the aggregate limit of acceptable carbon emissions, market forces will sort out the rest.

It’s a classic example of the Coase theorem at work in real-life policy. Suppose that the government randomly assigns carbon permits to private-sector firms, and that the government gives one permit to a nuclear power plant in Pennsylvania and one permit to a coal power plant in Kentucky. The nuclear plant may decide, however, that it’s a better business move to find new technologies to limit its own emissions and sell its carbon permit to the coal plant. The nuclear plant, by limiting its emissions, can make money from  selling its own ‘right’ to pollute to the coal plant, which now has double ‘rights’ to pollute — at a significant cost. These transactions, which would occur again and again and again, would ultimately establish a market price for carbon permits. California and the European Union were among the few places that were working to develop such carbon markets.

That’s also what the Australian carbon scheme set out to accomplish, though in the Australian example, the government set the price for carbon permits during he first few years of the program, which was set to switch to a fully market-based system in July 2015 that cross-linked with the EU-based carbon trading market, had the Abbott government not repealed it. Of course, the Australian government’s arbitrary price-setting for carbon permits made it much easier to denounce the whole thing as a ‘carbon tax.’ It must leave Gillard and other Labor architects of the carbon trading scheme wondering whether the might have succeeded with a slightly different formula or a more aggressive campaign three years ago — or even earlier — to education Australian voters about the mechanism of the carbon trading scheme.

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