Payments to greenhouse gas emitters more likely to go to reduction schemes that would have taken place without government funding, says economist
The government’s $2.55bn emissions reduction fund, which pays greenhouse gas emitters to pollute less, will inevitably pay for reductions that would have happened anyway, for the same reason that secondhand car markets are full of lemons, an economic analysis has concluded.
The centrepiece of the government’s Direct Action climate policy is a reverse-auction, in which polluters bid for funding to pollute less.
But the government could not know for sure whether those reductions would have happened anyway, the economist Paul Burke from the Australian National University has argued in the journal Economic Papers. And any reduction scheme that was going to go ahead anyway would be able to outbid schemes that required funding to go ahead, he wrote.
“They have a cost advantage that makes them well placed to win the auction,” Burke said.
Similar criticism of Direct Action has been raised before, but had received little attention from economists, Burke said.
“Anyway projects”, as Burke called them, were likely win the reverse auction for the same reason that buyers of secondhand cars were likely to buy a lemon. In both cases, the buyer could not know whether the product was good quality, and the seller with a bad product could undercut the rest of the market.
The government used dozens of methods to avoid paying for abatement that would have happened anyway, but it could not know what a company was planning to do, Burke said.
In his discussions with local stakeholders, he said, some recipients of emissions reduction fund money described it as “cream” and “too good to be true”.
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Burke said it was entirely possible some projects would end up, perversely, funding emissions increases. An example of that could be farmers getting a payment not to clear one piece of land, and using that money to fund the clearing of land elsewhere.
Examining some of the projects that were awarded payments in the first two rounds of the auction, Burke found farmers were often paid more than the value of their land simply not to clear parts of it. In some cases, he said, the incentive for the farmers to clear the land was low, and it would have been expensive, so might not have happened anyway.
Energy efficiency projects that upgraded lighting in supermarkets or reduced fuel use in vehicles fell into a similar category. “That’s the sort of activity that private companies are supposed to do,” Burke said. “Companies do do this sort of activity – it’s not uncommon for companies to replace their vehicles with newer or more fuel efficient ones,” he said.
“Not all the projects are like this, but it’s a pity that some projects can get into the scheme when they are not delivering true additional abatements,” he said.
“The previous policy of carbon pricing was a more effective approach than Direct Action,” he said.
Labor has promised to implement a type of emissions trading scheme if elected in July.
The environment minister, Greg Hunt, said he rejected the report “clearly, categorically, absolutely”.
“The head of the emissions reduction assurance committee is from ANU – Professor Andrew Macintosh. He takes a very different view to one of his colleagues. And what we’ve seen is 143m tonnes of emissions reduction allocated by the independent Clean Energy Regulator. These are using overwhelmingly Labor’s methods, but for new projects.”
