Evaluating and selecting climate change policy options for Australia

1. Evaluating and selecting climate change policy options for Australia Evgeny Guglyuvatyy PhD candidate at the Australian School of Taxation (Atax), Faculty of Law, UNSW Supervisors Associate Professor Binh Tran-Nam Professor Natalie Stoianoff

2. Introduction • Presently, most developed nations acknowledge the need to deal with climate change. • The question is how to accomplish this task best. • A range of policy options have been considered by various countries around the world to mitigate greenhouse gas (GHG) emissions. • Some of the most important include: • regulatory standards, • voluntary actions, • subsidies • taxing emissions, • emissions trading schemes (ETS). • Emissions trading and carbon taxes have emerged as most promising instrument to reduce GHG emissions. For example, ETS was introduced in the European Union, while some other countries such as Australia, the US, Canada and New Zealand are considering its implementation. Also, several European Union member countries, particularly Scandinavian nations, have implemented carbon taxes to control GHG emissions.

3. Introduction • There is a debate on which instrument is better suited to address the climate change issue: carbon tax or emissions trading. • Policy-makers often prefer an ETS • Economists argue that carbon tax is a better approach to climate change mitigation • The Australian Government has opted to propose an ETS rather than a carbon tax. • There is an argument that the Australian Government must consider a tax as a more even-handed and more rational option for GHG reduction. • This study is concerned with determining the most appropriate policy for dealing with climate change problem in Australia. • Particularly, this study investigates which policy instrument (an emission trading, carbon tax or mix of these tools) is the most appropriate option for reducing GHG emissions in Australia.

4. Strategy In order to address the primary research question the following broad strategy is proposed: • Investigate what policy approaches could be applied to the climate change mitigation problem and identify the criteria needed for the selection of climate change mitigation instruments; • Identify a methodological concept appropriate for the evaluation of climate change policy options on a multi-criteria basis. • Evaluate policy options considering all the imperative criteria and thus identify which of the options would be the most appropriate climate change mitigation policy for Australia.

5. Multi criteria analysis • A climate change policy evaluation procedure needs to consider many environmental, economic and equity related criteria. An efficient and effective policy might still be defective if, for instance, it dangerously compromises equity. • MCA methods - enable policy options to be assessed against a range of evaluation criteria. • Unlike Cost Benefit Analysis (CBA) approach, MCA is able to overcome the complexities in monetising intrinsically non-monetary elements. • The MCA method, is capable of incorporating a range of criteria including monetary and non-monetary criteria. • MCA could serve as an analytical method that considers multiple political, economic, environmental and social dimensions, reduces conflicts, and integrates these realities into an optimised policy framework. • MCA would not provide plain results as in CBA, but present a set of individual rankings of policy options. • The main challenge is to identify evaluation criteria and weigh relative importance of those criteria

6. The Delphi method • The Delphi method is utilised in this study with the aim to assess the list of criteria produced in the course of the MCA process. • The Delphi method is a structured process for accumulating knowledge from a pre-selected group of experts via a series of questionnaires combined with controlled opinion feedback. • The major characteristic of Delphi are anonymity, controlled feedback, and statistical response. • This study adopts the Delphi technique in order to update the list of criteria required for the MCA evaluation procedure and to obtain reliable weights attributed to those criteria. • The individuals selected for this study are experts in the fields related to climate change policy. The participants are chosen on the basis of their perceived ability to make a significant contribution. • Different types of panellists would provide unique perspectives of interdisciplinary specialised opinions. • The Delphi study provides an opportunity to reach a consensus on a set of evaluation criteria and weights attributed to these criteria

7. Evaluation criteria • This study preselects critical criteria for climate policy evaluations on the basis of the previous evaluations and contemporary literature.Sixteen criteria were identified and adopted for this study as necessary for climate change policy evaluation. • The Delphi study commenced on October 22, 2009 and closed on January 31, 2010. Nominations for the Delphi experts were acquired through a search of key publications in the fields of environmental and climate change policy issues.  • The results of the Delphi demonstrate that the environmental effectiveness is a principal criterion for a climate change policy. This is followed by transparency and minimise rent-seeking criteria that is unforeseen finding of this study. These areas emphasise the non-economic aspects of a climate change policy. • The identified criteria represent the key climate change policy evaluation criteria as judged by the experts in the Australian context.The findings in the Delphi study provide a foundation for the MCA decision-making process aimed to evaluate climate change policy options for Australia.

8. Established evaluation criteria Average weight Importance value in per cent Environmental effectiveness 4.63 92.6 Transparency 4.27 85.4 Minimise rent-seeking 4.09 81.8 Correct price signal 4.00 80 Flexibility of the policy 3.90 78 Minimise GHG emissions leakage 3.81 76.2 Public acceptability 3.54 70.8 Political acceptability/ feasibility 3.45 69 Predictability/regulatory certainty 3.45 69 Polluter pays principle 3.45 69 Effect on technology development 3.36 67.2 Cost-effectiveness 3.27 65.4 Distribution of benefits and costs across generations 3.27 65.4 Compliance costs 3.09 61.8 Distribution of benefits and costs across income groups 3.00 60 Competitiveness issues 2.45 49 Administrative costs 2.45 49 International harmonisation 2.36 47.2

9. Frameworks of carbon tax and ETS • Carbon tax and emissions trading are selected as alternative policies to reduce GHG emissions in Australia. However, an abstract tax and ETS as GHG reduction instruments are very problematic to assess and evaluate in real terms of performance against exact criteria. Therefore, both of these instruments must first of all be discussed in terms of core design characteristics. • This study builded its own policy analysis on the basis of existing studies and the results of the Delphi analysis. The designed carbon tax and ETS models represent the policy options developed for addressing climate change in Australia. • The framed policy models are aimed to address GHG emissions externalities along with embracing other key considerations. These models do not represent a novel policies; rather, they reflect major principals of an effective GHG reduction policy. • The reduction target of 25 per cent below 1990 levels by 2020 is adopted for the purpose of this study. Australia should commit to reduce net GHG emissions to at least 25 per cent below 1990 levels by 2020.

10. Ranking performance of the carbon tax and ETS models • Since the alternatives and criteria have been defined, a qualitative analysis of the impact of each alternative, in terms of evaluation criteria, needs to be produced. Thus, this study ranks the policy options based on the dominance relationships of each of the criterion. In other words, the policy options are qualitatively analysed and compared with respect to each criterion. • In order to rationalise ranking of the arguable criteria, this study identifies the principal factors for these criteria. Once these factors are identified, the policy options are assessed based on dominance relationships on each of these factors in order to arrive at the conclusion on the policy ranks. • The assessment of each policy option against each criterion resulted in identification of the numerical values expressing qualitative ranks. This assessment provides the ranking of potential performance of the carbon tax and ETS frameworks which is considered to be adequate for systematic and robust evaluation analysis.

11. MCA results • The concluding stage of the MCA methodology involved incorporating two inputs – established criteria and its importance weights along with the numerical performance ranks of policies regarding each criterion – into one decision-making matrix providing final scoring of the alternatives. • The final matrix, obtained from the application of the MCA method demonstrates that the carbon tax outscores ETS on seven criteria while an ETS is better only on four. The difference between total scores of tax and ETS – 0.1117 or 11 per cent. Thus, carbon tax is identified as an optimal option. • Total Scores: Carbon tax - 0.8187 ETS - 0.7070

12. MCA results • The evaluation of the alternative policy options in terms of their potential performance and criteria weights involves value judgements which unavoidably bring about the element of uncertainty. To deal with this type of uncertainty, the sensitivity of result for possible variations in criteria weights and/or performance ranks was tested. • This study analysed performance ranks of the policies with reference to the criteria often prioritised by decision makers in the practice of climate change policy-making. These are: Minimise GHG emissions leakage, Political acceptability/ feasibility, Cost-effectiveness, Distribution of benefits and costs across income groups, Competitiveness issues and International harmonisation. • This sensitivity analysis demonstrated the stability of the carbon tax as the optimal option under the condition of ranks and criteria deviations.The sensitivity analysis strongly confirms the initial conclusion derived: the designed carbon tax is the optimal policy option for GHG reduction in Australia.

13. Conclusion • There is alot of general guidance on how to select among GHG reduction instruments but these guidelines are neither uniform nor concrete. The conceptual and empirical challenges are exacerbated by the absence of well-defined criteria and an objective procedure for attributing weights to the competing criteria. • This study offers a synthesis of the decision process for choosing among different policy instruments. The proposed methodology of evaluating and selecting GHG reduction policies using the MCA, the Delphi and qualitative ranking approaches serves as a foundation to create information support for the problem of multi-criteria choice. • Overall, this study found that the designed carbon tax model is stable and a practical solution that is optimal for GHG reduction in Australia.This finding contradicts the conclusions of the Australian Government on climate change policy that have introduced an ETS rather than carbon tax. • The conclusion of this study is considered to be robustly rational and justified. It is hoped that the findings will alert and inform policy makers about different approaches and solutions which can be more coherent and significantly more appropriate for the climate change problem.

14. The End • Thank you for your attention! • Questions?