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The Prime Ministerial Task Group on Emissions Trading was asked to ‘advise on the nature and design of a workable global emissions trading system in which Australia would be able to participate’. In response to the report, the Prime Minister announced on 17 July that a ‘cap and trade’ system would be introduced in Australia. Whilst details have yet to be announced, reports suggest that the system will cover around 55 per cent of total emissions.
In advocating the policy action of establishing a carbon dioxide (CO2) emissions-trading system, the report argues that such a system will minimise the costs of achieving any given emissions-reduction target. Even if this is true, however, it does not automatically follow that emissions should be reduced in the first place, let alone by the significant amounts that are being contemplated in various policy circles.
As far as policy is concerned, what matters is not so much the costs to Australia of higher average global surface temperatures, but the costs and benefits of various policy actions which are aimed at addressing the possible undesirable effects on Australia of higher average global surface temperatures.[2] This is a subtle but important distinction. Any policy contemplated by the Australian government should be focused on the net benefits to Australia of that particular policy. Only a full economic cost-benefit analysis of emissions reductions versus alternative policies can shed light on these issues for Australia. No credible economist (or anyone else, for that matter) has demonstrated that there are significantly positive total benefits (let alone significantly positive marginal benefits) to Australia from the policy of reducing our CO2 emissions. There is a very good reason for this: since Australia’s emissions are so small, any benefits (both in total and at the margin) of emissions reductions are likely to be extremely small — almost certainly zero. The report therefore constitutes a solution in search of a problem.