Monday, January 26, 2009

Throne Speech and Federal Budget: stepping closer towards action on climate change?

The Speech from the Throne will occur in less than 30 minutes. No red-carpet ceremony, just a low-key speech which will essentially hint at what we Canadians should expect in tomorrow's federal budget. Many skeptics believe that environment policy, and in particular climate change issues, should be at the back burner as we are going through tough economic times. This is an opportunity for the government to make some significant progress which will enhance economic activity. An interesting article which I came across spells this out as follows:

Eliminating international competitiveness concerns in climate policy*

Countries introducing emissions trading or carbon tax policies typically ‘carve out’ large areas of economic activity, and provide ‘compensation’ particularly to trade-exposed and energy-intensive industries. This is based on concerns about international competitiveness being eroded, and the resulting assumption that there’s a ‘trade-off’ between cutting greenhouse gases and cutting jobs.

Job losses imply activity shifting to other countries not applying carbon policies. Jobs and emissions shift overseas, leading to clear economic costs and job losses for those countries applying such policies, but little or no global reduction in emissions. This is no ‘trade-off’. It’s just a really bad deal.

This so-called ‘trade-off’ arises because such policies target national production of emissions. This production model only works when all countries act together. They haven’t, and they won’t. In fact the Kyoto Protocol itself said that they won’t. History attests to this reality.

Even if the supporters of the UNFCCC and Kyoto did not see it then, we can see it clearly now. The production model has failed, both within Europe and Australia (because of major policy ‘carve-outs’ and exemptions), and more generally (because countries like the USA, China, India, etc, have not adopted similar climate policies).

This is basic economics. When nations act at different times or to different degrees, production models undermine trade competitiveness of early movers compared with others. Late movers don’t follow suit so they can milk trade gains out of early movers. This ruins chances for a global deal.

But we can do better. This ‘trade-off’ is completely avoidable. Countries can reduce greenhouse gases without any carbon or jobs leakage by targeting their consumption of embedded emissions rather than production.

By definition, global emissions production equals global emissions consumption. So we have two roads to get to the same goal: reduction in global emissions. The production road only works when all countries act together. In contrast, the consumption road works even if countries act unilaterally. Why? Because it is designed to eliminate international competitiveness concerns.

So why pursue a production-based model given its now-long history of failure? It’s even less likely to work as the world economy slides into recession. Countries won’t want to suffer more job losses.

The emissions consumption model is practical. It starts with the production information required under current policies. It can use existing value-added tax (or similar) systems to pass carbon cost signals transparently down the supply chain to consumers; exports are zero-rated; and it imposes a trade competitiveness-neutral border tax adjustment on competing imports. This system is already applied in countries with VAT or similar taxes. Like such systems, it is trade competitiveness neutral.

A consumption model gets us to the same global end-point as a production model. But basic economics tells us that it’s much more likely to get us there. Isn’t it high time for the UNFCCC to move to ‘Plan B’ – a consumption model? ‘Plan A’ isn’t working.

* This is a modified and shortened version of an article published in The Australian Financial Review on 15 January 2009.

Let's see what will happen tomorrow.

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