Productivity Commission releases methodologies around comparing pollution prices & costs Media Release

Mar 25, 2011 - 12:30am

On the 23rd of March, 2011 the Productivity Commission (PC) released a methodological paper on its assessment of pollution reduction policies and prices in major emitting countries. Some have read the PC paper as saying it is not possible to compare the efforts of countries that have pollution pricing or clean energy policies but may not have economy wide pollution pricing. 

While PC’s paper acknowledges the difficulties involved, it is still intending to provide some information of comparative costs and/or subsidies in the electricity sectors of major emitting economies.

As the PC explains: “given that most emission reduction policies do not impose a ‘price’ on carbon so much as they encourage particular types of abatement through explicit or implicit subsidies, the Commission will need to measure the resource costs of the various measures and the abatement they achieve.”

The PC’s work comes on the back of a ground-breaking assessment of implicit pollution prices undertaken by Vivid Economics for The Climate Institute. Vivid Economics are also assisting the PC in data collection for their assessment. This report broke new ground in the cross-country comparison of pollution reduction policies and grappled with many of the same issues the PC has identified in their paper. TCI is pleased to see the level of interest which has been sparked by Vivid Economics analysis.

The level of action to reduce pollution and drive clean energy investments has reached unprecedented levels in recent years. The PC, for example, found over 300 policies in the USA alone and this excludes state-based measures.  

It is well recognised that there are significant practical and conceptual difficulties in attempting to compare the efforts being made to combat climate change across countries. Yet, although difficult, such comparisons are informative and important.  This is especially so as misconceptions about actions in other countries can be a roadblock to introducing sensible domestic policies to ensure Australia remains competitive as the world moves towards clean energy.

The PC will assess the implicit resource costs being imposed on the electricity sectors of some of Australia major trading partners. This will give an indication of the economic resources that government are investing in switching to clean energy and reducing pollution. Semantics aside, this is consistent with the underlying intent of Government’s request and complementary to previous work commissioned by The Climate Institute.* 

The Climate Institute also agrees with the PC that an appropriate pollution price cannot be determined by assessments of implicit prices in other countries alone. Other factors such as the level of effort that is required to drive structural change and pollution reductions in the Australian economy and other economic and social benefits that would stem from reducing our economic dependence on pollution also need to be considered.  

So while researchers and economists may have developed different methodological approaches to assessing pollution prices and costs, identifying and aggregating incentives to drive low pollution investments remains a useful contributor to the debate. 

The Climate Institute supports ongoing assessments of this kind in Australia and overseas to ensure we lift the national pollution pricing debate out of the political quagmire into the clear air of policy making in the national interest.

* There are a number of ways in which pollution prices can be measured and it depends on the question you are asking.  One way is to look at what economy-wide pollution price would generate the same level of emission reductions as this suite of policies?  Another, which was done in the Vivid Economics analysis, is to define what pollution price would induce the same level of costs as these policies? If one is concerned about economic resources being put in, then the latter question is the one you want. If one is concerned about efficient policy and wanting to replace a suite of policies with a single price to achieve the same pollution outcome, then the former is the one you want.

Another way to put it is you can express pollution prices in terms of equivalent costs or equivalent pollution reductions. From the perspective of the impact of policy on international competitiveness, the average cost or incentive is more important than the efficiency of government intervention.

For more information: 
Erwin Jackson | Deputy CEO, The Climate Institute |  03 9600 4039

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