The Emissions Trading Dividend Policy Brief

Mar 19, 2008 - 10:30am


The introduction of emissions trading in Australia is likely to see the Commonwealth Government generating significant amounts of new revenue through the sale of emission permits. Indicatively, in Climate Institute commissioned economic modelling this “emissions trading dividend” was worth between $7-20 billion in 2020 (Figure 1) assuming auctioning of all permits.

For comparison only, $7 billion is more that the 2007-08 budget allocated to community services ($5.9 bn) and $20 billion is more than that allocated to defence ($19.88 bn) or education ($17.75 bn).

Figure 1: The emissions trading dividend

  

 

The size of the emissions trading dividend will be critically dependent on the level of Australia’s emission target or “cap”, and design issues such as the treatment of emission intensive export industries. The weaker the cap, the smaller the dividend available to government to provide adjustment assistance to support a smooth transition to a low carbon economy.

While the target or cap should be driven by the science, requiring substantial reductions by 2020, the political sustainability of emissions trading as a key plank of Australia’s policy response to climate change depends on equitable distribution of the emissions trading dividend.

Equity and structural adjustment 
Various stakeholders have suggested that this revenue could be used by governments to:

  • promote energy efficiency and offset energy price impacts on vulnerable low income communities;
  • fund one off payments to large emitters to offset the loss of asset value or operating profits;
  • fund further development and deployment of new low emission technologies; and
  • support broader macro economic reforms such as reductions in payroll and corporate taxation.

Other suggestions for use of this dividend include:

  • allocations for flexibility to assist further adjustments should targets need to be strengthened;
  • funding to assist technology transfer, pollution reduction or adaptation initiatives in developing countries.

Given that one dollar spent in any one of these areas is a dollar that can’t be spent in another, a decision around how to distribute the emissions trading dividend will need to be strongly influenced by questions of equity.

The Intergovernmental Panel on Climate Change (Gupta, Tirpak, Burger et al., 2007) note: “A regulation that is perceived as being unfair or for which the incidence is unbalanced may have a difficult time making it through the political process.”

Professor Ross Garnaut (2008) notes that emissions trading, “will disproportionately affect low income households … As a major environmental reform, an ETS is not intended incidentally to have large and arbitrary effects on the distribution of income—and in particular, not to redistribute income away from people on low incomes.”

Addressing the impact of emission trading on low income groups must be a top priority for targeting spending from the emissions trading revenues.

Such spending should focus on providing “solutions multipliers” through reducing the impact of increases in energy prices at the same time as reducing greenhouse emissions. Such programs could include subsidies and incentives for energy efficient housing and appliances, and increased support for public transport infrastructure.

Managing potential impacts on the disproportionately impacted industries and greenhouse intensive trade exposed sectors should not be ignored and managing them will be an important matter for government.

Adjustment assistance for non greenhouse intensive trade exposed industries, such as electricity generators, will need careful consideration.  How will the community perceive the fairness of transferring wealth from Government (tax payers) to the private sector should these private sector companies be able to raise energy prices to cover their greenhouse liabilities? Should assistance be contingent on ensuring all new electricity load generation come from clean energy? Is assistance warranted given investment decisions in relevant assets were made in the knowledge that governments were likely to introduce future climate change policies to reduce emissions?

Critically, any adjustment assistance decisions must be transparent, ideally on recommendations from an independent arbiter, to ensure community confidence.

Conclusions
At this stage the core decision facing Government is not how to spend this revenue but what the emission “cap” or target will be implemented under the trading scheme. Until this is known it is not possible to comprehensively assess the size of the emissions trading dividend or consider or how it might be most appropriately used.

Indicative estimates suggest that Australia’s emission trading dividend could be a multi-billion dollar revenue stream comparable in size to current expenditure on education or defence.

In distributing this revenue, high priority must be given to managing impacts on low income communities. Unless the revenues are distributed in a way that is perceived to be equitable the long-term sustainability of emissions trading, and action on climate change, will be undermined.

References

Garnaut (2008), Garnaut Climate Change Review Interim Report to the Commonwealth, State and Territory Governments of Australia.

Gupta, Tirpak, Burger et al (2007), Policies, Instruments and Co-operative Arrangements, In Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change [Metz, Davidson, Bosch, et al. (eds)], Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.

Hatfield-Dodds, Jackson, Adams, et al. (2007), Leader, follower or free rider? The economic impacts of different Australian emission targets, The Climate Institute, Sydney.

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