GREEN TAX SHIFThttp://www.theaustralian.news.com.au/story/0,25197,26219911-5014047,00.html
WHEN the world was edging towards its first, imperfect treaty on climate change in the mid-1990s, the US put a proposal on the table that has set the framework for the debate on carbon reduction. Uncomfortable about taxing carbon dioxide emissions, the Clinton administration suggested letting market forces do the work through a scheme of tradeable permits now known as cap and trade.
Ironically, the US has never ratified the Kyoto Protocol, which expires in 2012, but its successor, which will be negotiated in Copenhagen in December, while not mandating cap and trade, will be highly skewed in its favour.
This is because the 37 developed countries that have set targets under the Kyoto Protocol for the quantity of greenhouse gases they can emit are already committed to trading in emissions permits. Companies within those countries have a vested interest in perpetuating the status quo.
Yet among economists and business leaders there is unease about cap and trade, a system that has already created a derivatives markets of the kind that brought the global financial system close to collapse. A scheme that looked like a stroke of genius in the 90s is falling out of fashion.
"We'll have a financial crisis in emissions at some point," Kenneth Rogoff tells Focus. "There'll be derivatives and all these unemployed investment bankers will then go work on carbon trading and come up with ... products which will lead to a crisis."
The professor of public policy and economics at Harvard and former chief economist at the International Monetary Fund claims he isn't alone in this view. "You'll find few economists who disagree," Rogoff says.
Indeed, the economists who addressed a global editors forum in Copenhagen last weekend were unanimous in their view that a cap and trade system was unlikely to reduce emissions, would be open to rent-seeking and, in many countries, corruption.
Nobel laureate and Columbia University economics professor Joseph Stiglitz told the forum the global financial crisis had reshaped the concerns of economists.
"We've seen the corruption and crony capitalism that has been evident in the advanced industrialised countries ... It makes you very worried," he said. "What we realised now is the allocation of emissions permits is a market that is a couple of trillion dollars a year. So we're giving away, allocating that amount of money, and that just attracts the worst kind of behaviour that you can imagine."
Former president of Mexico Ernesto Zedillo, who is professor of international economics at Yale University and director of the Yale Centre for the Study of Globalisation, told the forum trading in permits in developing countries would lead not just to businesses lobbying to get free permits, which amounted to receiving a lot of money, but to outright corruption.
Stiglitz also said emissions trading would not do the one thing that was needed to drive change towards a low-carbon economy: set a stable price for carbon that would make it viable for companies to invest in low-carbon power plants and infrastructure. So, despite all the money spent trading in permits, which would add to the cost of everything from petrol to beer, there would still not be the certainty business needed to drive investment.
"Once you have emissions trading, permits will become an asset class and can go from anywhere between 30 and 200 (dollars); they'll be very unstable. Then ... we'll demand a stable price so that we'll be back in this never-never land we've been in."
Economists at the forum favoured a carbon tax which, as Stiglitz said, had the virtue of being easy to implement.
The main difference between a carbon tax and emissions trading is that a tax gives certainty about the price of carbon whereas emissions trading gives certainty about the quantity of carbon dioxide being emitted.
Economists argue that while fluctuations in carbon emissions don't matter greatly to the environment as long as they decrease in the long term, fluctuations in the carbon price can cause economic disruption and make it more difficult to undertake the investment required to make the transition to a low-carbon economy.
Business representatives told the forum they would prefer a carbon tax because it would be less volatile than a price set by emissions trading with its possible speculation activity.
Ditlev Engel, chief executive of Vestas Energy, the world's leading supplier of wind power with a 20 per cent market share, said business wanted government "to tell us what the price is for carbon and then leave us alone to get on with it and not keep changing the price because this is very capital-intensive investment".
Jeremy Bentham, vice-president for Shell global business environment, agreed. "Companies like ours want to be unleashed to be able to apply technology growth to improve the quality of life of our customers and earn a reasonable return." Zedillo said there were many businesses that claimed to prefer cap and trade - if they didn't have to pay for permits.
So if a carbon tax is so much better, why are governments pressing ahead with emissions trading at Copenhagen?