Penny Wong, Australia's Climate Change MinisterThis week we will be learning more about decisions, implementation and evaluation. The emphasis will mainly be on decisions probably.
Some of the theories on these can be a bit abstract. So it will be useful to have a concrete example to refer to.
The Federal Government in Australia has recently released (in the form of a "Green Paper') its preferred approach to reducing climate change. The following articles provide insight into the process now unfolding in Australia.
- The first (easier) one is from Oxford Analytica reprinted by IHT.
- The second (more challenging) one is an OpEd from one of the academics mentioned in the first article. It was published in the Australian Financial Review in March (so it is 5 months older than the IHT article).
Let's play "spot the public policy concept" (from weeks 2, 3 and 4) with both articles!
Can you find a way to apply any of the following:
- a 'policy window' (or windows) which allowed this issue to move from 'agenda setting' to 'policy formulation' and then 'decision' stages
- influence of an 'international policy regime'?
- a policy goal?
- a set of policy alternatives (do they fit with a 'rational model' perspective?)
- a role for 'the battle of ideas' or worldviews in arguments for each alternative?
- policy 'instruments'?
- would the 'mixed scanning' model fit here perhaps?
- roles for 'rational policy analysis' (eg predictions of outcomes under each alternative) in the debate?
- political support as central not peripheral to the decision?
- relevance of broad goals, such as 'efficiency' and 'equity', and disputes over them
- pleas for the decision-making to be more rational and less political?
- they seem to be in the 'decision' stage of the stages model... but do you think they have been moving through the stages step-by-step?
FIRST ARTICLE:
International Herald Tribune
AUSTRALIA: Climate change policy momentum builds
Climate change policy was central to Prime Minister Kevin Rudd's election campaign last year. While his ratification of the Kyoto treaty in December was a symbolic reaffirmation of his commitment to reduce carbon emissions, the July 16 release of a government Green Paper on a proposed emissions trading scheme (ETS) represents a more concrete step in implementing radical change.
Political climate. The long drought in the Murray-Darling river basin, and its attribution to climate change, has increased Australian sensitivity to climate-related issues. Flows in this region -- which supports 70% of Australia's irrigated agriculture -- have deteriorated considerably.
Nevertheless, passage of legislation is likely to be challenging. The Rudd government has also committed to broad-ranging reform of the tax and welfare system over the next two years. Since this is also likely to create winners and losers, it appears to have been politically expedient to insulate households from the full effects of the ETS in the early years. Even so, the Treasury estimates that if the permit price per tonne is 20 Australian dollars (19.4 US dollars), the inflationary impact is likely to be a one percent increase in the consumer price index in the scheme's first year
Cap and trade? Debate has centred on the choice between a cap and trade scheme, as proposed by Australian National University (ANU) Professor Ross Garnaut and a hybrid scheme proposed by the ANU's Professor Warwick McKibbin.
The McKibbin scheme is a hybrid between a carbon tax in the short run, and cap and trade in the long run:
· The government would allocate, for free, tradeable long-term permits consistent with reaching a desired level of emissions in 2050.
· The government would also sell extra annual permits at a predetermined price.
· Emitters could choose their optimal adjustment path to the desired long run position.
By contrast, under cap and trade, the government sets the transition path of emissions, and it is the traded price of the emission permits that adjusts to market conditions. It is generally recognised that a carbon tax, or the hybrid scheme proposed by McKibbin, has efficiency gains relative to a cap and trade. However, Garnaut and the Rudd government appear to prefer the cap and trade so as to align it with the UN framework and to ensure earlier emission cuts.
Strategy. The government wants the ETS scheme in place as soon as possible so as to provide a longer-term framework for investment decisions and allow Australia to participate more forcefully in post-Kyoto negotiations. However, the political challenges presented by simultaneously implementing two major reforms -- the ETS and broad-ranging reform of the tax and welfare system -- are significant. While the public will generally be supportive of the former, it is likely that the latter will be deferred until after the next election, due in 2010.
SECOND ARTICLE: Climate change policy built on shaky foundation Warwick McKibbin
The Australian Financial Review
28 Mar 2008, P. 83
The Garnaut draft report on a national emissions trading scheme is a good summary of a debate that has been under way in Australia for more than a decade.
Unfortunately it is not clear that the review's proposed approach is what the country needs to tackle climate change.
Its basic premises are a matter of considerable debate. The Garnaut review starts from the same basic assumptions as the Stern review: that the science of climate change is almost completely resolved, and that there should be a global binding carbon target or - in the case of the Garnaut review - a global carbon budget that should be imposed on Australia. Given this target, the role of economics is to deliver this target at low cost.
If the premise on scientific certainty is correct, then the approach of the Garnaut review is reasonable. However, most experts in the climate change area acknowledge the science is still uncertain on what the precise target for greenhouse emissions should be. The Garnaut review also acknowledges this, but critically fails to adequately incorporate it into designing the policy response.
What matters for climate change is the concentration of carbon in the atmosphere from all sources - not the emissions in a particular period from Australia. No one knows if the concentrations should be 400, 450 or 550 parts per million. The problem is one of managing the risk associated with various outcomes over time.
The economics literature establishes that under uncertainty, the appropriate policy response is to set a clear price on carbon (through a tax or a hybrid approach such as the McKibbin-Wilcoxen Blueprint), which reduces emissions gradually at low but rising cost. A less desirable approach is to have a precise carbon target for each year with a cap-and-trade emission trading system delivering an uncertain price, since we have little idea what this cap should be and there are many target paths that can deliver the same concentration level at some future date.
The best way to proceed is to choose a path that can be transparently adjusted over time to achieve a concentration level at lowest economic cost. An inflexible quantity target for each year is not good policy. A quantity target expressed as a carbon budget (as in the Garnaut review) is better policy but still subject to the same basic criticism.
The second major issue in the draft report is the question of permit allocation. Garnaut is correct that the allocation does not change the economics associated with a carbon price. It is a philosophical decision on wealth transfers.
Under a review set up by state Labor governments, of course the report would give all the revenue from permits to the government, which would then wisely spend this on the best programs to reduce emissions. Although theoretically a reasonable idea, I fundamentally disagree with this philosophy because of the revealed inability of governments to use this potentially large revenue wisely in practice. The permits should be bundled and allocated once off to all citizens and affected companies, as compensation for short-term economic pain and to create a political constituency in support of the policy. Once these property rights are trading in a well-designed
long-term permit market, the market will direct revenue into the areas that give most carbonreduction bang for the buck. Giving the revenue to government to be reallocated each year is a recipe for rent-seeking and mismanagement.
Transparency provided by a well-designed market trading in long-term carbon assets is, in my view, a better way to proceed, with a small volume of short-term permits auctioned to generate some government revenue over time when needed to stabilise fluctuations in the short-term carbon price.
The similarities between the Stern review, which emerged from the politics of the European Union, and the Garnaut review, which was born in the heat of a federal election campaign, are unfortunate. Under the circumstances of its creation, the Garnaut review could not endorse the more sensible approach of the Prime Minister's Task Group on Emissions Trading.
That is the basic flaw in the process that needs to be corrected. The politics of climate change is clear but the Rudd government should be careful not to expose the Australian economy to the risks of short-term economic volatility that may ensue from the proposed approach of the Garnaut review.
The review is correct that short-term carbon price volatility can be handled by industry - but this will be at a cost. Why impose a cost when the volatility can be removed in the design of the system?
Climate policy should be run like monetary policy; a clear long-term goal for policy with a central bank of carbon in control of the short-term price of carbon, just like the Reserve Bank controls the short-term price of money.
While part of this is endorsed by the Garnaut review, the core part - on managing the price of carbon in the short term - is rejected outright. This is a mistake with potentially significant consequences for the Australian economy.
It is time that politics was excised from the climate debate. Bipartisan support for a sensible climate policy is what is needed. Sensible climate policy is only partly found so far in the deliberations of the Garnaut review.
Warwick McKibbin is an international expert on climate change, a professor at the ANU College of Business and Economics and a fellow of both the Brookings Institution and the Lowy Institute.
3 comments:
After reading these two articles, I find that substantial knowledge in both natural and social science is required to initiate, draft, pass, implement, and evaluate such a policy as “Climate change”.
The Garnaut Review assumes that the science of climate change is almost completely resolved, while Warwick McKibbin cites most experts’ acknowledgement as saying that the science is still uncertain on what the precise target for greenhouse emissions should be.
These two views are contrary. And this divergence leads to different policy approaches.
Considering that various instruments, tactics, strategies, etc. might also be employed, making decisions in the polis must be a process full of complexity and difficulty.
Therefore, my point is that building a team comprising of both natural scientists and policy experts would be beneficial and necessary to a good decision-making. As for the general public, I don’t think that they would be principal actors partly due to insufficient knowledge, though they might have enthusiasm to get involved.
Having read the 2 articles, it reiterates how Rudd was elected on the climate change ticket. It thus comes as no surprise that there is great expectancy on him to do something about this in Australia.
As reflected in the IHT article, the Murray-Darling river basin drought has created the "policy window" for the climate change issue to be surfaced.
This event brings the climate change issue into central attention among most Australians, and thus provides the opportunity for the cap-and-trade policy on carbon emissions to be placed on the government agenda, and for it to be moved forward to formulation and implementation stages.
As an policy alternative to what was suggested by Rudd's Task Group on Emissions Trading, Garnaut's colleague at ANU, Warwick McKibbin, provides a "hybrid" scheme which is fundamentally an application of the mixed scanning model, utilizing both a rational-comprehensive and incremental approach.
McKibbin argues for gradual change as seen in his AFR article, primarily because of the uncertainty surrounding what the precise cap should be if the cap-and-trade emission trading system is adopted.
It follows that since the goal (carbon concentration level) is unclear, allow the matter to play out first until more information is obtained. This is consistent with the short-term carbon tax which McKibbin recommends. Once the precise goal can be determined, the rational-comprehensive model kicks in, and the government can then proceed to focus on "reaching the goal" with the cap-and-trade policy in the long-term.
Although the last word seems yet unspoken on the issue, the political support for one of the two ideas seems to be crucial. Both articles insist that McKibbin's approach is more appealing, feasible and efficient. Equal distribution, price stability and efficiency gains seem to be undisputed. And yet, in its green paper the Australian government put more priority on compliance with the UN framework - symbolic for the atmosphere of change that was created by a change in government, it is promising to generate the support of the public. This leads to the issue of political support. Immaterial whether McKibbin's solution would - at least in theory - prove more beneficial and economically viable in the long-run, the lack of government support will stifle its implementation. Unless the current administration can be convinced of the McKibbin proposal's superiority in achieving the government's more short-term interests.
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