Cap and Redistribute

FROM TODAY'S WALL STREET JOURNAL ASIA July 14, 2008

The Group of Eight may be waking up to the cost of fighting global warming, but in Australia, the opposite is happening. Prime Minister Kevin Rudd has promised to implement an emissions trading scheme by 2010, claiming it would be "reckless not to act." Rhetoric aside, Mr. Rudd just wants to do what every Labor pol likes: tax industry and redistribute the proceeds, at huge cost to the economy.
The Australian public saw an outline of these plans earlier this month, when economist Ross Garnaut released a Labor-commissioned report on climate change and how to combat it. Mr. Garnaut starts with the premise that it isn't "desirable" or "feasible" to "slow living standards" to fight climate change. Yet "the solution," he argues, is in "removing the links between economic activity and greenhouse gas emissions."
If the government-directed breakdown of free-market price signals sounds like creeping socialism, it is. The Garnaut Review suggests selling artificial permits that allow companies to "pollute." Industry would either fold under the cost burden or pass those costs onto consumers. Canberra, on the other hand, would haul in huge revenues from the permit sales. Mr. Garnaut will estimate this tax take when he issues his final report in September. The Rudd government is releasing its own paper on the subject this week.
Mr. Garnaut and Mr. Rudd both acknowledge that emissions trading would be costly – especially in a country where natural resources account for around half of all exports. Agriculture and mining together represent about 9% of GDP. Taxing emissions could cripple these industries and would percolate through every corner of the economy, raising energy prices. The ultimate cost in terms of jobs and growth is unknowable.
To alleviate this government-created problem, the Garnaut Review suggests some government-directed money shuffling. Up to 30% of "sales revenues" would go to "trade-exposed, emissions-intensive export industries." In English, this means Canberra would pay companies to stay in Australia rather than move to a country that doesn't impose arbitrary costs on business.
Another 30% of this indirect tax would go to "research, development and commercialization of new, low-emissions technologies." So instead of encouraging the whole of Australian industry to invent cleaner business practices through transparent tax incentives, Mr. Garnaut wants government to give money to selected institutions to work on the problem. Australia, with one of the world's biggest supplies of uranium, already has at its disposal a cleaner form of energy that it doesn't use: nuclear power.
The bulk of the proposed handouts are reserved for "households," to relieve the "regressive income distribution effects of the emissions trading system." Translation: Poor Australians will suffer most from higher energy prices as companies pass on costs. The report doesn't specify which households would receive handouts. But it's safe to say that with the Labor Party controlling every Australian state and its federal government, it would be tempting to shovel that cash pile to Labor constituencies.
The Garnaut Review estimates that Australia accounts for only 1.5% of the world's total greenhouse gas emissions. China, the U.S. and the European Union are the biggest emitters by a long shot; what Canberra does is largely irrelevant. Mr. Rudd waves this aside, claiming that other countries will follow Australia's example. The lesson of last week's G-8 summit is that developed and developing countries alike are moving in the opposite direction.