Not all carbon pricing schemes are the same
Contrary to all the scare-mongering about carbon taxes or an Emission Trading Schemes (ETS) from political & industrial vested interests, in the electricity sector at least (responsible for about a third of Australia's greenhouse emissions), there's a simple, pragmatic way to encourage emission reductions without incurring large electricity price increases and economic disruption - you simply apply price signals at the margin, for those emissions you actually want to stop, and avoid applying a tax to the majority of emissions that you're willing to tolerate (“permit”) continuing for the time being. And these marginal price signals can be provided as subsidies, funded by very small price rises on remaining emissions (plus any revenue raised from penalties for non-compliance with permit levels).
This approach is equivalent to "recycling" carbon tax receipts as energy subsidies, but without the Government ever receiving tax revenues. Instead, the economic incentives can be efficiently applied through competitive energy retailers, so those that help their customers reduce emissions at least-cost will offer the lowest priced electricity (especially if they use solar + batteries, which is now cheaper than current tariffs in Australia anyway, as it is in most other countries).
Australia pioneered this policy approach for carbon emissions back in 2003, with the NSW Greenhouse Gas Abatement Scheme (GGAS, which I helped develop in 1996 with Chris Dunstan at the NSW Sustainable Energy Development Authority), but then abandoned it for the politically disastrous Carbon Tax! (after PM Kevin Rudd ignored Opposition Leader Malcolm Turnbull's proposal for a national version of GGAS).
Also the UK adopted a similar approach to GGAS, until the EU forced them to make the same stupid change!
See the detailed discussion & analysis in the following papers:
My first policy paper from 1997, Carbon Taxes, Tradeable Emission Permits and “Feebates”, which explained the advantage of permits over a carbon tax, challenged the hype about tradable permits, and suggested a "feebate" ETS - where a carbon price is applied as fees for energy retailers with above-average emissions, which then fund rebates for those below average (thus giving fees + rebates = feebates, with no net "tax" revenue). This would address the problem of permits not creating an incentive to reduce emissions below the permitted level.
This follow-up paper distributed at Federal Parliament on 23/8/97 calculated the price impact advantage of a permit scheme that effectively recycles carbon taxes, compared to ABARE's biased economic modelling that was used to mislead Kyoto Protocol negotiations (my critique rattled ABARE & drew pressure on my University from them, but impressed a close adviser to PM John Howard).
My subsequent refined paper in 1998 further explains the "real advantage of permits" - theoretical & practical - in terms of reducing unnecessary economic disruption. This paper was also added to my 1998 submission to a Federal Inquiry, which discussed methods of permit allocation in depth (which should ideally encourage energy efficiency measures - like more efficient air conditioning - as well as renewable energy generation, and for energy-hungry businesses could be based on their "value-add" or GST liability),
My 2007 paper, "A New Combined Cap & Credit Emissions Trading Scheme", advocated a non-linear permit price/subsidy/credit that's higher for zero emission technologies, or similarly, a hybrid ETS that combined a general ETS with a modest carbon price (applied to all energy sources), along with additional targets & premium incentives for very low to zero emissions generation technologies (like renewable energy), which may not offer the cheapest immediate emissions reductions, but which need to grow and achieve economies-of-scale in order to cost-effectively achieve long-term emission targets.
However this level of complication seems no longer necessary because the costs of renewables - especially solar PV & batteries - have now fallen so low (see side charts), and continue to fall, that in 2019, wind & solar energy were the cheapest forms of power in two-thirds of the world, even beating just the marginal operating costs of existing coal-fired and nuclear power stations (with new renewable energy capacity including battery storage expected to be cheaper than operating 60% of the world’s existing coal-fired capacity in 2022).
and finally, there's the sorry political history covering the little understood period prior to the disastrous leadership of the Liberal Party by Tony Abbott (which led to the climate policy uncertainty that discouraged new generation investment of any kind, thus, along with "gold-plating" of the grid networks, pushing up power prices).
The GGAS form of an ETS, and variants of it, represent a pragmatic and broadly-supported bipartisan policy (putting aside purely partisan party politics) that could provide some regulatory confidence for industry, the community & the planet.
And then in 2016 - after 20 years of dysfunctional debate - it seemed we were about to secretly come back full circle to some form of similar Emissions Intensity Scheme (EIS) applied to energy retailers, well, after yet another review.
As Churchill said about the Americans (& perhaps democracies in general), "government will always do the right thing, after exhausting all other options"!
But wait, no - mass confusion again as the government denies any confusion after commissioning yet another complex model and study to prove and then ignore the bleedin' obvious!
It really is pathetic.
So round we go again, first with the "Low Emissions Target" (LET) or "Clean Energy Target" (CET), and then - after the Coalition's climate-change deniers wouldn't let the LET go ahead - the similar, technology-neutral "Emissions Guarantee" (as a critical half of the National Energy Guarantee, or "NEG").
But despite initial support, opposition to climate action from the lunatic right-wing once again claimed another Prime Minister (Malcolm Turnbull) and the NEG got killed by the next idiotic coal-loving PM (as he ignorantly ridiculed the renewables-charged battery technology that is actually solving his grid reliability concerns), despite Australia then suffering one of the most severe heatwaves ever, even before the catastrophic bushfires of 2020 that were most-likely worsened by climate change (& already raging in November 2019 before the habitually-dishonest PM flew off to a holiday in Hawaii, which his office lied about and he excused because he doesn't "hold a hose", after having failed to prepare the nation for fire-fighting despite repeated warnings of the risks).
Yet still the Australian Government blatantly stacks "advisory committees" to support their vested interests in fossil-fuel industries, and continues its shameful approach to wrecking global action on climate change that it has followed for three decades.
And so we still fiddle and ignore these simple and cheap solutions, while the planet literally burns.
But if we could elect politicians with some sense and integrity , then with the right parameters/reduction targets and a reasonable method of allocating permits, I think the "CET" or "Emissions Guarantee" would do what's required, although a "feebate" version could be better than a fixed emission reduction target, as it would have a fixed +/- marginal price of emissions providing greater confidence for business investment decisions. It thus has a definite price incentive giving an uncertain emission reduction, which may be politically easier than adopting a fixed emission reduction target with an uncertain price impact (which can result in a pathetically weak target). As for what the price should be, in principle it could be calculated from the avoided cost of future global warming damage, adjusted for the probability of various future scenarios (see my letter in the newspaper on climate change risk), although in practice I think it would just be set politically based on what the community is currently willing to pay.
Note also that a well-designed retailer-based emissions- trading scheme could transform the industry from one selling a commodity product & competing primarily on price (a mug's game that results in very low margins), to a higher value-add customer-service model - which the industry competition reforms of the last few decades were supposed to deliver, but haven't done so very well because despite all the political hype, most customers can't be bothered changing retailer to save only a few dollars! The ramifications therefore go well beyond just emissions reductions as they could address the sort of unethical practices I've experienced from AGL, who charged me $1,200 for gas caused by a leak, then fobbed me off for a year to 3rd parties (like Jemena, who they contracted to fix the leak but then claimed they couldn't contact to resolve my problem!).
Ideally regulation should hold the retailer accountable for all aspects of the service, but I suspect it doesn't because politicians are captured by the votes of the many small-business plumbers who want customers to be allowed to contract with them for repairs, and not just the big retailers. But if AGL had any ethics and commercial sense, it would step up to customers and say, "Hey, we guarantee to be accountable for all aspects of service delivery, as long as you only use us or our licensed partners for all gas systems connected to our service." - then they could transform their business into a genuinely customer-focussed, comprehensive, value-adding energy service!
Then if we could finally settle carbon policy in the stationary energy sector, maybe we could then turn to transport - to encourage the adoption of low-emission & electric vehicles, as the likes of BMW urge, which needs a similarly pragmatic approach such as a new-car "feebate" that varies with fuel efficiency to replace existing taxes & "stamp duties" (as I discussed at the end of this paper), accompanied by a more rational and imaginative approach to pricing the use of transport systems.
It's not that hard!