The Coalition this morning released modelling revealing a lower-cost, more effective emissions trading scheme based on full compensation for all major polluters and lower electricity prices, which it claimed could drive an unconditional 10% cut in Australia’s carbon emissions.

The modelling by Frontier Economics, commissioned by the Coalition and independent senator Nick Xenophon, centres on providing all major polluters — both groups currently above the “low” threshold for compensation, and “high” threshold polluters, will receive 100% of the cost of carbon permits, compared to 66% for “low” major polluters and 94.5% for “high” major polluters. Electricity generators will also only be required to purchase permits for emissions above a best-practice “baseline” of emissions intensity, and coal mines will be included in compensation arrangements.

The greater generosity to polluters leads, under the Frontier Economics model, to lower GDP impacts and a slightly smaller employment impact, but with relatively higher regional employment. Smaller electricity price rises also requires lower compensation

The Frontier Economics modelling is not Coalition policy (or the policy of Nick Xenophon) but Malcolm Turnbull this morning used the modelling to attack the Government for failing to consult on improving the design of the scheme. Turnbull and Xenophon committed to opposing the legislation in the Senate this week and urged the Government to meet with them to develop amendments to improve the design of the scheme.

The key feature of the “greener” Frontier Economics model, the higher 10% emissions reduction target, is driven primarily by greater imports of permits from overseas than under the Government’s CPRS, meaning Australia’s actual emissions will continue to rise.

Turnbull and Frontier Economics head Danny Price rejected criticism that the modelled scheme simply relied on greater imports of permits, arguing that the CPRS similarly relied on importation of permits from foreign — most likely less developed — countries. “This is a great opportunity for developing countries to become involved in a carbon market,” Price said.

Key features of the Frontier proposal:

  • 10% emission reduction target
  • 100% compensation for all polluters
  • Electricity generators only required to buy permits above a “best practice” threshold
  • Agricultural sector excluded from scheme but allowed to generate and sell permits through offsets.
  • Modelling shows a $49b higher GDP over 20 years and 10,000 fewer job losses, including more jobs in regional areas.
  • Low electricity process rises of 5% compared to 40-50% increases under CPRS
  • Coal mines to be given compensation on the same basis as other industries

Comment:

There’s no magic pudding, to use the Government’s term of abuse, in the Frontier Economics modelling. You really can go for cuts twice as deep while seeing a smaller economic impact.

You just assume you can buy lots more permits from overseas to do so.

The Government’s CPRS assumes the purchase of overseas-produced carbon permits. This will enable Australia to continue increasing its greenhouse emissions while still meeting its stated emissions reductions targets. You can complain about developed countries relying on developing countries to do the hard work of emission abatement but given climate change is a global problem, a global solution makes sense.

But the Frontier Economics model significantly increases Australia’s reliance on overseas permits, assuming a big increase in the number of permits bought overseas.

That would in effect be funded by the savings to businesses and households of electricity prices that are lower than they would be under the CPRS, which will significantly increase them. This reduces the need for compensation to low and middle-income households, whose electricity bills will go up by only around 5% initially, rather than 40%.

In essence, households and businesses won’t be paying as much for electricity, but the money saved will be needed to fund the purchase by businesses of permits overseas, the cost of which will be passed through to consumers through higher prices.

Because we’ll be doing less of the work of reducing greenhouse emissions ourselves, the costs to the economy will be lower.

It’s not quite, as one journalist suggested in today’s press conference, an accounting sleight of hand. But it does rely on diffusing the costs borne by electricity producers/retailers and their customers through the rest of the economy, which will have to rely more heavily on buying foreign permits.

There’s no free lunch in reducing carbon emissions. Someone has to pay. The question is whether Australia will do anything to reduce its own emissions, or simply pay poorer countries to do our work for us.