State Climate Schemes Are Still Worthwhile under a Carbon Price

In justifying their recent abandonment of state-based climate schemes, the governments of Queensland and Victoria have both claimed that the schemes will be redundant under the federal emissions trading scheme (ETS) that begins in July.¹ Yet this justification is only a smokescreen, as a carbon price can well exist with other environmental and climate schemes.

The goal of putting a price on carbon – more correctly, on greenhouse gases, but “carbon” is shorter – is to reduce the amount of carbon emissions. The flexible nature of an ETS lets the market decide whether this occurs. It reduces the activities that produce carbon or conducts those activities more efficiently.

The industries in which these reductions occur, and the people that are affected by them, can be only broadly selected by the Government. This is the point, since the idea is that the market will do the job more cheaply than if the Government prescribed everything. And the argument that state climate programs within a national ETS can make emissions reduction more expensive is correct.

However, getting the cheapest emissions abatement is not the only possible goal. Another goal might be to target particular geographic or social groups, such as rural areas or low-income households. South Australia’s Residential Energy Efficiency Scheme, for example, aims to reduce household electricity use, but requires a certain proportion of that reduction to occur in disadvantaged households. Energy costs are thus reduced where households are most struggling with them, rather than just where it’s cheapest to do so (which is usually higher-income households). Similar goals could well be pursued through state-based measures complementing a carbon price.

A goal of further policies might be to target areas that don’t respond well or rapidly to price changes, whether because of habit, socially shaped preferences, intrinsic motivation, or market problems. It’s certainly possible that carbon-price-related rises in electricity bills may cause us to go and demand more energy efficient appliances and houses, or at least appliances and houses that can be upgraded when better technology arrives. But these connections are often tenuous and it can make more sense simply to mandate minimum standards, as we already do for safety. (It is considered unacceptable to let the market decide how safe appliances and houses will be based on “price”, i.e. lawsuits.)

Yet the Victorian Government has removed support for precisely such a policy: coal power standards that would have required a certain level of emissions efficiency from new plants, and required them to be ready to install clean coal technology if it became viable.

Scrapping investments in climate-related infrastructure or research and development, as the Queensland Government is doing, only makes sense if you believe that markets always make the best choices. Research, however, is an area where markets commonly do too little, because the benefits of research tend to be shared amongst many (including competitors) rather than just the researching organisation itself.

Strategic government investment in technology can make it viable years before the market would deliver a similar result. A prime example is Germany’s highly advanced solar power industry, which it developed with subsidies despite being covered by the EU ETS. And while it’s unclear how well Germany’s bolstered solar industry will survive long-term against its rivals from China, it is inarguable that the solar industry made Germany’s power supply robust to the kind of shock that saw its nuclear reactors shut down after the disaster in Fukushima.

This robustness – the ability to maintain a minimum level of performance under a range of possible future conditions – was not delivered because of the EU ETS: it came from additional, smaller-scale policy. And while it may involve some amount of duplication, such robustness is valuable when unforeseen events occur; what if, against all expectation, the constitutional challenge to the Clean Energy Future legislation were to succeed? Achieving our environmental goals would be significantly easier if states still had their individual programs.

These are just a handful of reasons why complementary environmental and climate policies could be worth pursuing, even at a state level, under a national carbon price. There are more. And I do not claim that all policies will be worth it: complementary policies should be evaluated under frameworks such as the one recently published by Denniss, Grudnoff, & Macintosh.

If the Queensland and Victorian Governments had justified abandoning their climate programs based on such an evaluation, it would be easier to believe their faith in a “carbon tax”. And, to be fair, Victoria did conduct a review (PDF) that found no compelling case for a state-based emissions reduction target under a national carbon scheme. But the review also found other Victorian climate programs are worth keeping, and that the merits of state emissions target should be reviewed if the national scheme is altered or repealed.

The reason that state governments are backpedalling on climate policies isn’t because they believe that the “carbon tax” will solve all our environmental problems: this is a smokescreen. The reason is that they don’t share the goals that the federal legislation pursues, of reducing carbon pollution, encouraging renewable energy generation, and “future-proofing” the economy. For if they did, there are plenty of state climate schemes that would still be worthwhile.

¹ Readers may be more familiar with the incorrect, though widespread term, “carbon tax”. More on that here.

This post was first published at The Conversation. It was also published at Climate Spectator.