Cash for clunkers

Frank Jotzo, Deputy Director of the ANU Climate Change Institute, and a participant in the Joint forum on climate change convened at the ANU on 12 July 2010 by Australia 21, Universities Australia and the National Business Leaders’ Forum on Sustainable Development, contributed the following analysis of the Government’s “cash for clunkers” scheme to the Monday 9 August edition of the online political newsletter Crikey:

A carbon price beats throwing cash at new car owners

Frank Jotzo, deputy director of the ANU Climate Change Institute, writes:

Populism and procrastination reign in Australian climate policy, and what new policy proposals there are, on both sides of politics, consist largely of spending taxpayer dollars for little gain.

Labor’s "cleaner car rebate" is a particularly striking example. A year after the US and European countries finished up their cash-for-clunkers programs, Labor proposes that Australia start one. The European and American cash-for-clunkers schemes were squarely aimed at helping the car industry through the recession, but in Australia it is dressed up as climate policy.

The proposal boils down to this. Government would spend $400 million of taxpayers’ money to buy older cars from people who are well enough off to afford new cars. Any car better than the existing fleet-wide average qualifies, so the great majority of new cars would be eligible, not just the most efficient ones. Many of the older cars that attract the subsidy would probably be scrapped soon anyway. The money would be diverted from other climate programs, in particular advanced solar power.

By Labor’s reckoning, the car program would cut carbon dioxide emissions by one million tonnes, presumably stretched over several years. Australia’s total emissions in just one year are 500 times that. The fiscal cost per tonne avoided would be $400. By comparison, a carbon price of just $20 per tonne would drive widespread change in the power and industry sectors. Even relatively high cost renewable energy options, such as the ones supported by government programs that are to be cut back to pay for cars, are estimated to come in at about $50. So the car subsidy policy would backfire in terms of emissions, because money is drawn away from options that would have delivered a much bigger and long-lasting effect.

The tendency with policies such as this is to lead to a maze of expensive subsidies and cumbersome regulation, with plenty of bureaucratic churn and political interference. It will be expensive, and fall short of even the lower end of the 5%-25% reduction range that both parties have signed on to.

The Coalition, meanwhile, promises to pay emitters for reducing carbon, rather than imposing a price on emissions. By necessity, it would need to use highly uncertain estimations of the reductions achieved, compared to some hypothetical baseline. The Kyoto Protocol’s clean development mechanism relies on this principle. It has managed to draw money into clean investments, but in a very patchy fashion, with huge bureaucratic overheads, and with uncertain environmental benefit.

What is more, the Coalition claims as an advantage that prices of energy and goods will not rise. But as always the money will have to come from somewhere, in this case from taxpayers. And if power prices do not go up, then extra incentives need to be created for end users to save energy, through extra government interventions and more subsidies. Achieving any kind of meaningful reduction would rack up an enormous tax bill.

The underlying problem is that neither of the main parties can summon up the courage to go with the policy that is so obviously the key to an effective and efficient climate policy: putting a price on carbon, through emissions trading or a carbon tax. Business is calling for it to put an end to crippling investment uncertainty. The Howard government prepared for emissions trading already in 1999 and made it its policy in 2006. And Australia would by no means be out in front: Europe has had emissions trading for five years, and despite setbacks in the US Senate, schemes for carbon pricing are in place in many American states. Even China is set to introduce emissions trading of the next five years.

Julia Gillard has stated that she is committed to carbon pricing, but not just yet. Her citizens’ assembly seems little more than an excuse for further delay. It would not bring new insight on an issue that has been so well researched and so widely debated as climate change. The science of climate change is crystal clear, the case for action has been made convincingly, and consensus among the expert community in economics and business is that carbon pricing is the right policy choice. Climate change has been in the centre of public debate for years now, and attitudes among the Australian public have been surveyed and re-surveyed dozens of times.