Some carbon is more equal than others.

It’s a funny world aint it?

One of the fundamental points of having something like a carbon market is to let carbon (or more particularly, carbon emissions resulting from the production of some good or service) to flow to their highest value use.

Those producing higher value goods and services can afford to pay more for the carbon emissions their products create. If all energy inputs were based on their production costs and we wanted to reduce emissions, we’d simply increase the price of carbon permits and let the market sort out the details of which energy source to use for what, in order to provide a good or service that the public demanded. Innovation works best when all things are equal. We’d truly have a system where our goods and services were anchored to the costs of our carbon emissions.

But we don’t have such a system – we have one where some carbon is more equal than others.

Coal is more equal than petrol for instance.

Petrol has a great big excise whacked on it whereas coal has nothing of the sort. If we were really serious about reducing our emission levels, we’d treat all carbon equally and encourage innovation, we’d encourage carbon emissions to flow to their highest value use and we’d have a really easy lever at our disposal to push the market – the price of a carbon emissions permit.

But we don’t live in an ideal world.

It’s a pity we don’t, as the intertubes would have been pretty funny today.

In that ideal world, the Green Paper on the ETS wouldn’t have stated that petrol excise would merely be cut cent for cent to match the increase in costs caused by carbon emissions permits – nope. In an ideal world, the Green Paper would have stated that excise would be abolished.

Imagine the headlines in the newspapers this morning:

“Rudd to slash petrol by 30 cents a litre!”

Imagine the cheering in the streets.

Then imagine the wrist slashing and outrage by the carbon emissions hardliners on the intertubes – they had conniptions over the matching cent for cent excise reduction, the complete removal of excise would have been quite the spectacle!

It might seem a bit counter-intuitive – how would reducing the price of petrol reduce emissions I hear you ask?

It would create a level platform on which all energy sources compete equally, controlled only by the price of carbon that we set through our emissions permits. As we move through time and increase the carbon price by reducing permit numbers (or increasing their price), the best energy source – which would be the most efficient energy source for any given job – would prevail. The more efficiency we allow, the higher the cost of our carbon permits can be, the lower our total emissions would be, and the smaller our (meaning you and me) total costs to reach those reduced emissions would be.

Markets work, especially when they’re allowed to.

We’d pay more for electricity, we’d pay less for petrol – but only as a result of carbon costs being equalised. Once that happened, once that equalisation washed through the system we’d then be in a position to do carbon emissions reduction properly.

But we don’t live in an ideal world.

We live in one where politics matter – and politics matters on petrol.

It matters for governments because excise provides a big chunk of their revenue, and it matters to consumers because everywhere you drive and everytime you fill up the tank of your Tarago (with obligatory wheelchair and five kids in the back in need be), all you can see are these great big signs pointing our exactly how much the stuff went up compared to last week.

It’s the price visibility of petrol that makes it so sensitive to consumers, and the slush fund it gives to Treasury that makes it so sensitive for governments.

The matching excise cuts for petrol work on the politics – it’s a relatively small cost, it removes petrol from being the bugbear of the system when it comes to public support and it strengthens the possibility of Labor actually getting a system through the Senate because it opens up two possible routes for the legislation to be passed.

The Coalition has their petrol populism taken out from under them and brings them, nay forces them to the table if they want to look like a credible alternative government, Xenophon and Fielding have their own version of the same petrol populism addressed bringing them into the game – and that leaves the Greens. They will be forced to either accept it for the greater good of actually having an emissions trading system, or refuse to accept it and look like a bunch of isolated extremists.

Which should serve as a warning for the Greens; if they play politics in the Senate and try to block any eventual ETS on the basis of the excise cut, a measure that will be popularly supported across the country, they will be massacred by the press and by the electorate. The Greens will, for the first time in a long time, have to start owning the responsibility of their actions.

The overall document is pretty much an acceptable starting gun for a major long term reform – there’s nothing in it to really scare the horses now that petrol has been dealt with, there’s little in it that can be used as a political beat up by the Opposition parties, it’s pretty timid in what it sets out to achieve – meaning change is incremental, something usually necessary to bring the public on the journey. It also seems flexible enough to be easily modified to fit into any broader international carbon architecture should it eventually be developed.

I couldn’t actually find any seriously problematic issues here for the ALP on the politics of it – anyone else have a view?

There are a few stranger bits in it – the direct assistance to the shareholders of coal powered generators on the basis that the policy change will affect their asset values looks a bit of a sop. Actually, it looks quite pathetic. I’m sure the NSW government being a major owner of generators and caught in a shitfight trying to flog them off had nothing to do with it.

[I’ve had my mind changed on this – see Labor Outsider’s at comment number 6 ]

But what really stood out for me was the absence of focus on creating offsets to carbon emissions. Wouldn’t an ideal system of carbon trading have at least some focus on the capability to create carbon permits through initiatives that lock carbon up? I understand this is done through Kyoto, but I’m surprised it wasn’t treated more solidly in the Green Paper.

Humanity’s greatest material capability is figuring out how to produce more stuff cheaper while making a buck out of it – I would have liked to see a little more focus on facilitating that regarding carbon storage, and not just the usual geosequestration and forest sinks, but an actual set of proposed benchmarks that would tell the market what needs to be achieved in order to bring a carbon abatement product to the market, what that market is (if there is one) and how those products would interact more directly with emissions trading. I thought the carbon capture and storage coverage suffered a bit too much tunnel vision – or have I just read that part of the report wrong?

Focusing a little more on net emissions rather than mostly on gross emissions would have been a more fruitful approach I would have thought, particularly for the early transition years.

UPDATE:

For those folks that dont read the comments, it’s probably worth doing here – as is often the case, the comments are far more interesting than the article.

UPDATE 2:

Peter Hartcher over at the SMH makes the same, dreadful mistake that too many people are making on “The Big Question”.

He says:

“The trick to easing the strains on Earth’s natural systems is to develop ways of allowing economies to grow in a way that does not generate ever-increasing resource intensity. Countries have to be able to get richer without sucking in ever-greater volumes of energy and water and food. And without pumping out ever-growing amounts of carbon and pollution. The human race needs to work out how to break the link between economic growth and resource-intensity.”

No no no NO! Being half right is still being entirely wrong!

Energy drives standards of living, period. Conserving energy solves nothing, absolutely nothing at all – it merely delays the need (and not very well at that) to substitute those energy sources that have large externalities with other, better energy sources that have smaller externalities.

We don’t want less energy.We want, nay we need MORE energy, lots more energy and we need it cheaper over the longer term than it is today once the costs of externalities (like carbon emissions) are accounted for in the per unit costs of energy produced.

The biggest danger for climate change policy in western nations (and it really is only western nations – China, for instance, wont have a bar of this silliness) is that we fall for the line that less energy (or less food for that matter) is “better”.

It’s the wrong answer to the wrong question that if taken seriously will put us a decade behind where we should, and will inevitably end up in policy terms.