Why the Australian Government's Economic Modelling of Greenhouse Abatement is Flawed
- the Advantages of Emission Permits
School of Electrical Engineering
David Thorp
Abstract
The Federal Australian Government has used the results of computer
modelling by ABARE, which predict supposedly major
economic costs from reducing greenhouse gas emissions, to justify its
international stance arguing for the right for Australia
to continue increasing emissions. Attempts to challenge this
modelling have been hampered by the lack of detail given over
the assumptions within the model. However, one crucial assumption
made in this modelling is that the policy tool for
emission reductions is a non-recycled carbon tax - i.e. the tax
receipts are only used to reduce government debt, rather than
to provide subsidies for further emission reductions. This paper
discusses the assumptions and results of the ABARE
modelling, and suggests that at least some of the apparently absurd
results may actually be realistic given their chosen policy
tool. It is then argued that emission permits on competing energy
retail companies would be a far more effective way of
encouraging emission reductions. By applying incentives for emission
reductions without necessarily increasing the price of
energy, and by effectively exploiting the advantages of carbon tax
recycling, it is argued that the price rises required to
reduce emissions to 10% below 1992 levels by 2020 would be at least
10 times less than suggested by ABARE when using a
carbon tax. Thus real prices would rise by no more than 0.34% per
year, and economic growth would be reduced by no more
than 0.01% absolute. A politically expedient way of setting emission
permits would be to set them at the industry-average
emissions-per-customer, thus allowing competition for over-permit
fees and under-permit rebates to drive down the permit
level. These advantages of permits do not, however, justify calls for
international tradeable permits.
The full paper is available from:
http://www.pv.unsw.edu.au/miscpapers/abareflaw.html
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