Friday, May 09, 2008

Climate change: a carbon windfall?

Over at Kiwiblog, DPF is getting exercised about Solid Energy CEO Don Elder's claim that the government will reap an $80 billion windfall from the ETS. Naturally, DPF is ignoring Elder's unrealistic assumptions - a carbon price of $200/ton which produces no reduction in emissions. Given that a few years ago during the debate over the carbon tax the right were claiming that the entire economy would stall and emitters would go out of business (and therefore cease emitting) if forced to pay a mere $10/ton, it seems that (as usual) they're trying to have their cake and eat it too. But I digress. Beneath Elder's self-interested squealing and transparent attempt to smear the ETS as a revenue-grab, he has a point: the government will be collecting revenue from the ETS, and this revenue will (once transport is part of the scheme) likely exceed the amount required to pay its obligations under the Kyoto protocol. So what do we do with the money?

The answer depends in part on what happens after 2012. If there is a comprehensive global deal setting tough targets for a further commitment period, there likely won't be any money. While the ETS is set up to make a profit, given the government's late start and its plans to continue to shield agricultural and industrial polluters, we're likely to be using the revenue to buy credits on the international market for a long time yet.

But still, it is possible that there might not be a deal, or that a repeat of our pre-Kyoto special pleading results in a generous target which would leave substantial revenue left over from the ETS. So what should we do with any money left over?

As I've said before, my preference is to invest it in further emissions reductions and reducing the costs for those adversely affected. So for example excess revenues from the Kyoto period should be invested in home insulation, in getting wave and tidal energy off the ground, in energy efficiency for the poor, and in public transport (with free or heavily subsidised access for those adversely affected). In the long run, once we know what our post 2012 goal is, we could also use it to fund other public services, thus displacing some ordinary taxation. But what we should emphatically not be doing is forgoing that revenue by allocating free permits to polluters; this effectively funnels the gains into private pockets, while locking us into a high emissions pathway. The winners of such a scheme would be polluters - and the losers would be the rest of us.