Published by The Conversation. View original article here.
By Alan Pears AM, energy policy guru and Adjunct Professor, RMIT University.
We should not be debating a choice between direct action and carbon pricing: we need both, but with credible, well-designed mechanisms.
Why we need both
We need a carbon price based on certificate trading for several reasons.
It sends a signal to both emitters and investors that they need to cut emissions, starting today. The price rises if there is insufficient action, and declines if action is effective. And there is the potential to profit from trading. All of that makes emitters more likely to innovate and bring down the cost of reducing emissions.
The revenue from a carbon price provides funds to support additional cuts and help those affected by the price to adapt. Because a price brings in revenue, funds don’t have to be dragged from other government activities.
We need effective direct action because carbon pricing is a relatively crude and imperfect incentive. A carbon price can be undermined by non-financial barriers and market imperfections. Weak carbon caps lead to low carbon prices that do not reflect true long-term costs of climate change.
Businesses and households also tend to put more value on money they have now than money they have in the future. That means future carbon costs are not necessarily powerful motivators when compared with other factors.
In the electricity industry, profits increase with higher sales, so a carbon price will encourage action that reduces emissions per unit of electricity sold, such as renewable energy, but not actions that reduce sales. Energy companies won’t encourage energy efficiency, the most cost-effective abatement option, because it cuts their profits.
A carbon price does increase the prices consumers pay for fossil fuel sourced energy, but it is a small increase in a small part (1-5%) of most business and household costs. If we want consumers and businesses to improve their energy efficiency, or set up distributed energy generation such as solar panels, direct action can help.
Direct action can be applied to activities that cannot be included in a carbon trading scheme. We have already seen this approach under the Carbon Farming Initiative, which encourages sequestration by rewarding those who act. Continue reading “Direct action vs carbon pricing: we can have it all”