In considering the analysis of options presented by the Task Group, it is necessary to take as given the assumptions and political constraints discussed above. The most important of these assumptions is that the Kyoto process, including the negotiations scheduled for 2009, will fail to produce an agreement encompassing the major non-ratifying state, the United States, and the most important developing countries, China and India. Associated with this is the political constraint that Australia’s strategy should not involve ratification of Kyoto or participation in the associated Clean Development Mechanism.

The first question to be addressed is whether, as was claimed when the AP6 group was established, it would be sufficient to rely on technological progress to achieve reductions in carbon emissions. Not surprisingly, this view, already undermined by the Switkowski report on nuclear power (Commonwealth of Australia 2006), was given short shrift. While the Group noted the benefits that could be gained from well-designed and targeted technology policies, it concluded: ‘Given the magnitude of the abatement task facing Australia, it will be critical to rely on broader-based measures that are driven by the market.’ (p.41)

Given a primary reliance on market-based measures, the main choice is between carbon taxes, tradeable quota schemes and hybrids, such as those proposed by McKibbin and Wilcoxen (2002). This choice involves trade-offs regarding risk, efficiency and equity, as well as some complex political issues. The Task Group report discusses risk trade-offs associated with price and quantity targets and proposes a hybrid scheme in which a price cap for emissions would be set somewhat above the expected market-clearing price, given the goal for the period in question.

The crucial advantage of a tradeable quota scheme, relative to carbon taxes or price-capped schemes is that it allows for international trade in emissions. Conversely, the main appeal of price-capped hybrid schemes is that they address the concerns of interest groups averse to the risk associated with imposing a substantial price on carbon in the absence of a comprehensive international agreement. The Task Group’s advocacy of a hybrid scheme is, therefore, a natural corollary of the assumptions and political constraints already discussed.

Assessment of the risk benefits of a hybrid scheme is difficult in the absence of any quantitative analysis or illustrative targets and quantities. In particular, it is important to distinguish between the technical risk that mitigating emissions will prove more costly than expected, and risk associated with variations in economic growth. In the latter case, a fixed emissions target serves as a countercyclical policy instrument, since the lower the growth in output, the lower the cost of meeting any given target.