Garnaut warns of political fixers

Australian
Friday 28/3/2008 Page: 1

AUSTRALIA'S risk in combating climate change lies in a revival of rent-seekers, political lobbyists and sectional manipulators who hurt our economy for most of the past century, government adviser Ross Garnaut warned last night. He said reducing greenhouse gas emissions was the next battle between economic reformers, who relied upon transparency and competition, and the old Australian impulse to political fixes.

In his dinner speech to The Australian - Melbourne Institute economic and social conference, Professor Garnaut took aim at critics of his proposed Emissions Trading Scheme, particularly those who want emissions permits issued for free. That approach would have government deciding which firms and which activities should be given permits to emit greenhouse gases," he said. We once handed out foreign exchange in this way firm by firm, activity by activity.

"If this course were to be followed, managers would find it more rewarding to put pressure on government to secure emissions rights than to find and to apply low-emissions ways of going about their business. "We wouldn't find enough new ways to reduce emissions at low cost." Professor Garnaut warned that some people saw climate change as the chance to "invite back into the centre of policy-making all of the rent-seeking interests that blighted our economic performance from the time of Federation to the 1980s."

His message was that nations could get their Emissions Trading Schemes right or wrong with grave consequences. An ETS was "a new market established by government decree" that relied upon government coercive powers. As a result, "the rich possibilities for corruption of an ETS" had led many economists to favour a direct carbon tax that was transparent and "much less amenable to manipulation by private interests." But Professor Garnaut said there was merit in a good ETS. Properly designed, it would minimise the costs of reducing greenhouse gas emissions.

But he warned of the "stark" contrast between his own market based model and other proposals designed to "shelter some interests from the adjustment that must occur if the abatement goal is to be met." Professor Garnaut said the turning point for the ETS would be when people saw the returns were higher from investing in new markets than lobbying to get the best political fix from government.

He said he would be optimistic once a proper ETS were established. "Well-designed markets can unleash the ingenuity of Australians in reducing emissions at minimum cost to the standard of living," he said. He predicted this could be done without a noticeable effect on rising living standards. The Garnaut speech fused the two ideas of economic reform and climate change abatement. His theme was that Australia must bring an economic reform mindset to the ETS design and deny the old impulse for rent-seeking and political deals.

In a report issued last week, Professor Garnaut identified four pillars essential for an effective ETS: the auctioning of permits, firm long-term trajectories that define emission reduction paths, a mechanism to move between trajectories and careful linkage of an Australian ETS to international schemes.

Reviewing the challenge, Professor Garnaut said: "There are two things that could go wrong. We could dissipate resources in seeking to influence discretionary government decisions rather than get on with the job of efficiently reducing emissions. And if we get this wrong, then the resulting instability can itself require costly economic policy resources."