Australian carbon trading

The Australian carbon trading system is supposed to be unveiled tomorrow. I fear that it will be a symbolic system, designed to give the appearance of progress while protecting core labor constituencies like coal and manufacturing. But since I’m an optimist, I’ll discuss my hopes instead.

As a major coal, ore, and natural gas exporter, Australia actually sends a sizable chunk of the emissions from its economic activity offshore. Obviously, manufacturing groups are sensibly concerned that putting a cost on manufacturing emissions will simply drive even more heavy industry offshore. So there has been talk of exempting such industries from carbon costs, thus creating a giant loophole that protects industry at the expense of the planet.

But there is a better way. Instead of giving vulnerable industries a free pass to pollute, the trading system could instead impose a carbon cost on exported raw materials, equal to the carbon cost needed to refine those products. Overseas manufacturers could then get this fee refunded if they use less than the assumed quantity of carbon to process Australian raw materials.

Of course, this would make Australian exports less competitive. But that is not necessarily a bad thing. The Australian economy is currently overheating, due almost entirely to the increased revenues from coal and iron ore export. The fiscal measures that have been imposed to slow the economy have had the effect of penalizing struggling workers in non-resource parts of the economy. So an export tariff would slow the economy without bankrupting the outer suburbs.

Additionally, allowing foreigners to reclaim the cost with low carbon technologies would give developing countries which import Australian raw materials an incentive to buy into the Australian trading system. Since these countries are generally exempt from Kyoto limits, allowing them to use the Australian system would give them an incentive to reduce emissions which international agreement do not currently provide.