if you mandate that all electricity be generated from clean sources, John D seems to think that you haven’t priced carbon!

In the particular case of encouraging investment in clean electricty putting a price on carbon is a very clumsy and costly way of putting a price on clean electricity that is high enough to drive the necessary investment. For putting a price of carbon to be effective it must jump the average price of all electricty above the price of clean electricity. It is this sudden jump in prices that increases the risk of economic instability and has industries such as the aluminium industry spooked.

If you take the converse approach, the investment in clean electricity is driven by directly putting a price on clean electricity. This means that there is no need to do anything at all about the price of dirty electricty thus the average price of electricity only rises slowly as the percentage of clean electricity rises. Important for investment programmes that will take decades. You also say that:

Some command and control mechanisms have implicit costs in terms of $ per tonne of carbon abated that are orders of magnitude higher than what would be optimal.

I would be keen to see the figures supporting this claim. The cost of running the CPRS scheme with all its complications is not going to be negligible, particularly if you take account of the profits that will be skimmed off by hedge funds and their ilk.
Peter W@23: You are right, CPRS and the EU system use free permits and compensation to avoid some of the collateral damage associated with comprehensive systems that insist on putting a price on carbon. However, these special treatments are all going to large industries supported by effective lobby groups. Any small business will struggle to get much help.
The converse approach avoids the problem of collateral damage by starting with the clean up of electricity and then adding other activities that are more cost effective at reducing emissions.
On the issue of cars, replacing steel with aluminium would make little difference so it is hardly a good example to use to defend putting a price on carbon. The point i would make is that we need to do our homework properly, consider various alternatives and then make decisions. As a matter of interest an UK study into the effect of fuel price increases on total fuel consumption suggested that increasing fuel price had little effect on fuel consumption.
Brian @25: Our aluminium industry woudl be the first victim of border taxes – Keep in mind that most of the 23 tonnes CO2/tonne Al comes from the electricity required to make it. Australian electricity is some of the dirtiest in the world so border taxes would give chinese producers a very big advantage.

The situation you describe relates to what happens if some countries have strong mitigation policies and a price on carbon and countries are not mitigating (which may not necessarily be developing countries). The situation where cars are instead imported from a non-mitigating country is sometimes known as “carbon leakage”, which is sometimes exaggerated (especially for capital intensive industries like aluminium), but is a real issue.

A much more important issue is what happens when a country does not comply or participate in an international agreement, undermining the whole framework (this is what is known as the Prisoner’s Dilemma in climate change policy). My preferred approach is to impose taxes at the border when importing emissions intensive goods or exporting fossil fuels to countries such as these — but not penalise countries which are signatories.

The government’s approach is to give free permits to emissions intensive industries (90-95% in the case of aluminium), and reduce the amount of permits if there is a loss in production. One problem with the government’s approach is that even if all other countries are complying with an international agreement and reducing emissions, the industry will still receive free permits. Another problem is that it distorts the price signal — the aluminium may be produced slightly more efficiently, but the price of carbon is no longer factored into the price of aluminium.

Where we disagree is on the question of whether carbon pricing will drive emission reductions at low cost.

Consider efficiency standards for cars as an example (which I think are a good idea, but this example is to provides an illustration). Lightweight cars are generally more efficient than heavier ones, and one way of making cars lighter is to make them from aluminum. Aluminium production requires huge amounts of electricity. To work out the best way to regulate car manufacture to reduce emissions would require what is known as a life cycle analysis, something that takes a large amount of time and work.

Under carbon pricing, things are much easier. A less efficient car would use more fuel, which attracts a carbon price. The car that is made of aluminium will be more expensive because the carbon price will increase the price of aluminium. The carbon price informs decisions about what should be manufactured. If the carbon price is sufficiently high, the cheapest option becomes the best climate option.

But markets fail, and this is why we need complementary policies, such as efficiency standards. With the aluminium car, the fuel is not paid for by the manufacturer, it is paid for by the buyer, who may not be well informed. An efficiency standard is a way to address this. Investment in public transport is also a way to address market failures. But to transform the whole economy to a low emissions economy, without having to regulate everything, we also need a carbon price.

This is why I believe that carbon pricing, and complementary policies, are the cheapest approach.

For example, if you leave the price of fuel unchanged and use regulations to drive down the average fuel consumption of new cars the producers of inefficient cars will have to develop new, efficient models or go out of business.

Similarly, if we leave the price of dirty electricity unchanged, insist that the use of clean electicity takes precedence and negotiate contracts for the supply of clean electricity, the suppliers of dirty electricity will suffer the disadvantage of going out of business. In the meantime, we will get the necessary investment in clean electricity without the need to jump the average price of electricty above the price of clean electricity.

Peter @ 18: You say that

This brings us to the question of what can be done to reduce emissions as quickly as possible, as cheaply as possible? I would argue that one of the things necessary is a strong and steadily increasing price on carbon.

My argument is that “putting a price on carbon” is not the cheapest approach. There is simply too much collateral damage to people and industries that are not in a position to do much to much to reduce their emissions.

Electricty and transport account for over 60% of Australia’s emissions. It doesn’t make sense to use second rate methods to drive down these emissions just to gratify a desire to punish polluters or to indulge politician’s desire for a silver bullet. I have nothing against the idea of merging a carbon tax into the GST. However, it is important to understand that the real gains will come from more direct action.

Arguments about the extent to which we can reduce our dependence on fossil carbon are academeic at this stage. We have along way to go before we have to deal with emissions that fit into the very hard basket. The important thing is to get on with rapid reduction of the emissions it is easy to do something about.

Oh, spare me!

IT

If I was PM and wanted a group to look at the issue of ETS you’d be on it.

Your third paragraph is important. Certainly there are activities that are necessary in any realistic future scenario that will involve carbon emissions.

Right now I’m with John D in that there is low hanging fruit that can be harvested without the impost and complication of a carbon price across the whole economy. In my strategy (not necessarily the same as John’s) one of the first things I’d do is legislate (if necessary) to prevent building new or expanding old coal-fired power stations. I’d also start a process to establish a future energy strategy that included a plan for retiring coal-fired power stations. I’m not sure whether forward defence equipment planning is a proper analogy, it may be. But the idea would be to establish a framework that the industry, and markets where appropriate, could operate within. And one that properly compensates those who invested in good faith in what at the time was a brilliant solution to cheap energy needs.

I think at some stage we might be well-served with a global carbon market, but it would have to be a market we could trust. We are a long way away from that.

It’s probably too big an issue to go into here, but I’d have a mix of command and control along with markets right through the process but the emphasis would change along the way. Command and control, within an accountable and transparent democratic framework.

I’d suggest we need to peak emissions in the advanced economies by 2015 and in the developing countries by 2020. I know that you want to limit the offshore trading with developing countries, but as things stand I’m worried that there are evil people out there developing plans to do things for the sole purpose of getting someone to pay them not to do it, and then corruptly accepting money from someone else who will do it anyway.

And elites that will pay for the right to do things that most of us would find frivolous in a carbon constrained world.

I’d better stop before I demonstrate my ignorance any further.

The bottom line is that both the Australian and the US approaches lack sufficient ambition in terms of 2020 and there is insufficient certainty that either will achieve even those distressingly modest targets.

There is an argument why any finite valuation of the social cost of carbon could be too low. Even expected utility cost-benefit analysis shows this (via Weitzman’s work). For any cost on greenhouse pollution, there is always the possibility that someone will value greenhouse pollution higher, because they value human life more, ecosystems more, have more risk aversion, care more about future generations, or whatever reason.

But banning greenhouse pollution outright (effectively putting an infinite cost on greenhouse pollution) makes even less sense. To do so implies that we would shut down all electricity generation that is not generated without emissions, which will make it impossible to power hospitals, transportation infrastructure, as well as households and workplaces. You would have to stop all sheep and cattle farming (which might make sense in Australia, but not in the rest of the world), and not make any more cement. To be effective you would need to stop greenhouse pollution in the rest of the world, including in China, Bangladesh, India and Africa. Not only would this be totally unethical, it would also be impossible.

Political economy leads to limits on the amount of greenhouse gas emissions that can be achieved, and this limit is based on cost. This brings us to the question of what can be done to reduce emissions as quickly as possible, as cheaply as possible? I would argue that one of the things necessary is a strong and steadily increasing price on carbon. We also need strong regulations of vehicles and buildings; we need public investment in infrastructure such as a better energy grid and public transport; we need policies that enable us to sequester carbon in ecosystems and protect them from the effects of climate change.

But without a carbon price, we end up with a bunch of ad-hoc measures that reduces any target to an aspirational goal. The best mechanism is up for debate (I’m in favour of an ETS with a price floor), what matters more is whether the policymaker is serious about addressing the problem.