Predictable Climate Policy Better for Business than no Climate Policy

In July 2014, Australia repealed its carbon tax, two years after the tax originally came into effect. The political coalition behind the tax had been tenuous from the start, and the 2013 election that brought Tony Abbott to power was enough to rupture it for good. The website for the Australian Government’s Department of the Environment announces that the repeal “will lower costs for Australian businesses and ease cost of living pressures for households.”

Australia has plentiful coal, which it uses to produce a high proportion of its energy. It therefore seems self-evident that eliminating the carbon price would be a good thing for Australian businesses, and especially for energy-intensive ones. But is this really the case?

The removal of the carbon price does away with an immediate cost to Australian industry. On the other hand, pressure for action on climate change is unlikely to subside, in Australia or elsewhere. The threat that a carbon price of unknown character will come back into play in Australia in the coming years is a very real one. So what the repeal really does is remove a short-term cost by increasing medium- and long-term policy uncertainty for businesses operating in the country.

Large, energy-intensive businesses (including energy-producing businesses) make massive investments that need to pay off over a long time horizon. Companies need to have a sense of what the carbon price will be over years and decades, not tomorrow. Once they believe that a regulation will be durable (i.e., that it has durable political backing), the best companies know how to innovate in response to it and reduce costs. This is why flexible and market-based environmental policies like emissions taxes generally end up costing far less than predicted at the outset. The loudest voices of doom before such policies are implemented are usually the less competent industry players, who are more comfortable lobbying for the preservation of the status quo than innovating in response to a new regime.

In the U.S. too, politicians who think they are helping domestic industry by fighting reasonable carbon policy are in fact doing the opposite. The inability of the U.S. legislative apparatus to produce a straightforward national carbon price—for example in the form a revenue-neutral carbon tax—is going to benefit lawyers far more than businessmen. With the most rational and efficient policy avenue seemingly blocked, the Obama administration is attempting to use provisions of the Clean Air Act to regulate greenhouse gas emissions from existing sources on a state-by-state basis. But the novelty, complexity, and potential state-to-state inequities of the scheme are likely to tie it up in the courts for years. This injects massive uncertainty around climate policy and the operating environment for business, whereas certainty is what companies need to plan their investments.

The political impasse in the U.S. over climate policy creates costly uncertainty in other ways too. Environmental groups are rushing into the void left by Congress to fight climate battles in local stakeholder processes that are wholly unsuited for this purpose—for example, in local environmental reviews for proposed new ports in Oregon and Washington that would ship U.S. coal to Asia. Serious action on climate policy by the U.S. government could rob such local challenges of their legitimacy and let companies pursue their valuable economic activities within a clear and efficient regulatory framework. (Forward movement on climate policy in the U.S. is also likely to encourage other countries to act more aggressively on climate, which would ease concerns about competitiveness impacts on U.S. firms.)

What can governments do differently to avoid the policy whipsaw of Australia and policy paralysis of the United States? For one thing, they may need to be more realistic about the scope of initial policies. In hindsight, Australia’s passage of leading edge climate legislation on a razor’s edge political margin looks like a mistake. The Rudd and Gillard governments that pushed forward the legislation might have been wise to be more conciliatory in negotiations with the law’s opponents and affected stakeholders. A durable A$10 per tonne carbon tax would ultimately have been much more meaningful than the roughly A$25 per tonne (over US$23 at mid-2014 exchange rates) version that was scrapped.

What the world needs most right now in the climate arena is not for a few jurisdictions to put in place high carbon prices that lead to political blowback, but for as many jurisdictions as possible to put in some positive carbon price that is durable. Ideally this price will come in the form of a revenue-neutral carbon tax, which is more straightforward and easier to plan around than a cap-and-trade system. Modest carbon prices, cautiously and widely implemented, will start to convince everyone that well-run businesses do not shrivel up but in fact thrive under well-designed regulation. Then we may start to make real progress on a challenging global problem that, unfortunately, cannot be wished away.

Mark Thurber is Associate Director for Research at the Program on Energy and Sustainable Development at Stanford University’s Freeman Spogli Institute for International Studies.



Morning Consult