Rudd’s climate change green paper won’t rock economy: Kohler

Stagflation is the worst possible economic background for a market-based plan to cut greenhouse gas emissions.

Stagflation is the worst possible economic background for a market-based plan to cut greenhouse gas emissions.

An effective emissions trading scheme will raise prices and reduce activity in some areas, while increasing it in others. With stagflation, prices are already high and activity is already weak.

Last night’s US consumer price index for June – the highest in 26 years – was an instant reminder to the Australian Government of the challenges ahead for the Carbon Pollution Reduction Scheme launched yesterday with a green paper.

Australia’s inflation rate is not 5%, as it is in the US (or so we think – we’ll find out next Wednesday). And we’re pretty sure Australian real wages did not fall by 0.9% in June as they did in the US. And we don’t think any banks will go broke.

But inflation is rising here and the economy is weakening. Unless there is a sudden reversal of the Chinese economy, the oil price will remain high; if there is a sudden reversal in China, it would be even worse – the Australian economy would collapse.

There is almost no two-year scenario that produces a good environment for an emissions trading scheme, even if every country in the world acted as one and introduced identical schemes all at once, which they won’t.

Business Spectator’s Giles Parkinson memorably wrote yesterday that if the initial Rudd/Wong proposal were a car, it would be a trundling Austin Wolseley with enough safety features to mitigate any conceivable impact.

The key safety features are: A reduction in petrol excise to match – cent for cent – any increase in price for three years; 60% of permits free to trade-exposed industries that emit more than 1500 tonnes of CO2 per million dollars of revenue; 90% of permits free to those that emit more than 2000 tonnes of CO2 per million dollars of revenue; a yet to be detailed direct assistance scheme for coal-fired power generators; oh, and agriculture is out entirely.

The average CO2 emissions of all industries, according to the green paper, is 348 tonnes per millions dollars of revenue, so to get a free kick you have to be nearly five times the average.

The National Emissions Trading Taskforce recommended that the threshold for assistance be set at 1200 tonnes of CO2 per millions dollars. Kevin Rudd and Penny Wong have rejected that and gone for 1500 tonnes, presumably to give themselves some negotiating wriggle room in the frenzied lobbying that is now underway.

The trade-exposed industries that emit more than 1500 tonnes of CO2 per million dollars of revenue would, according to the green paper, “…include (but would be unlikely to be limited to) aluminium smelting, the production of lime, the production of cement clinker, integrated steelmaking, alumina refining and silicon smelting, as well as some activities in the ceramics, basic chemicals, pulp and paper and other non-ferrous metals smelting industries”.

With agriculture out, petrol effectively out for three years, coal-fired power generators given a free kick in the goal square, and all of the above industries given free kicks at various spots inside 50 metres, the Wolseley is going to barely move for a while.

But that’s fine. We’ve got stagflation now, and no other car is likely to pass our Wolseley on the long and winding road to a reduction in greenhouse gas in the atmosphere.

This article first appeared on Business Spectator

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