This week, the Australian Prime Minister, John Howard, released the “Prime Ministerial Task Group on Emissions Trading”. The report is available here. The purported goal of this report is to outline a carbon trading system that will minimize the economic impact anthropogenic global warming. However, the proposed plan will do nothing of the sort.
The report correctly states:
Environmental damage from greenhouse gas emissions represents a case of market failure – a negative externality – associated with the production of goods and services. This means that while emissions impose a cost on society through environmental degradation, this cost is not currently reflected in the price of production.
However, the report then tries to calculate a way of regulating carbon emissions that imposes the lowest possible regulatory cost, without considering any other costs. By only addressing the regulatory cost, it completely fails to take the economic cost of climate change itself into account. The result is therefore ludicrous.
For example, look at electricity generation, a greenhouse gas generating activity. The report claims that a carbon trading system could increase the price of electricity by 5-25% over the next 13 years, due to the cost of buying the credits needed to produce electricity. However, the wholesale price of electricity has doubled in the last 5 months. This is not due to regulation; rather, it is caused by the drought, which has left coal-burning stations with insufficient water to operate their cooling towers and threatened the snowy mountain hydro scheme. While we can argue about the relative contributions of natural cycles and global warming to the current water shortage, it is obvious that compared to the price volatility caused by actual physical effects of extreme climate events (90% in 5 months), the price increase from regulation (5-25% in 13 years) is one or two orders of magnitude lower.
The Prime Minister claims that his main goal is to minimize economic hardship caused by climate change. But if Snowy Hydro runs out of water, Australia will not be able to meet peak summer demand, and rolling blackouts will be necessary. Because peak air conditioner loads in Sydney and Melbourne occur when hot north-westerlies suppress the sea breeze, causing inner city temperatures to rise, wind power in the NSW and Victorian highlands is an ideal way to meet peak demand at relatively low cost.
In the early part of this decade, there were numerous wind farms planned. If those generators had been built then, they would be economically profitable now, even without green subsidies, due to the spike in wholesale prices. But the lack of forward planning five years ago means that now only a strong La Nina can save us from exactly the sort of economic disruptions the prime minister was hoping to avoid- disruptions that, in the absence of snow, will begin 2-6 months after the next election.
The PM had a chance to use this report as an opportunity to slash local council and NIMBY opposition to energy diversification, thus driving a wedge between hard green activists and climactic pragmatists. By issuing a report that addresses only the cost of regulation, and not the actual cost of climate change, he has missed this opportunity.
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