This nation's a bit player in game theory of climate change policy

Opinion Article

2013 April, 20

This week's collapse in the European carbon price vindicates Tony Abbott's opposition to the carbon tax introduced by Labor and the Greens. 

The Gillard government is now in a bind. Having committed Australian industry to a tax of $23 a tonne, rising to $24.15 on July 1, our country will pay while the rest of the world will not, and there is still no sign other countries will join us. 

Kyoto targets are nevertheless likely to be met in Europe due to the economic slump, and in the US due to the surge in domestic fracked gas. It is hard to see any early mover advantage accruing to Australia, and harder to see what influence we are having on world momentum on carbon reduction. 

This week the European carbon price collapsed to $3.20 a tonne. It was $7 earlier this year and nearly $50 when their scheme started in 2008. 

Greens leader Christine Milne buoyantly welcomed last August's decision to hitch Australia's price with Europe in 2015-16, expecting the price to be "as high as $50", but clearly a massive budget hole is now in prospect and Australian industry is paying a tax for no good environmental effect. 

While Labor politicians, starting with the minister responsible, Greg Combet, will be ruing their naive optimism about how the artificial carbon market would pan out, the Greens will have no such regrets. 

If Australian industry and the Australian people suffer, Milne will doubtless see such self-flagellation as proper expiation of our collective guilt for our carbon sins, not the least our domestic use and export of coal.

While markets offer the most efficient means of setting prices, as Tim Wilson from the Institute of Public Affairs pointed out yesterday in this newspaper, carbon markets are extremely artificial and highly susceptible to parliaments making arbitrary decisions about regulatory parameters and chopping and changing according to pressures from electorates and rent-seeking industries. 

It was the European parliament's refusal to pass on higher costs to domestic consumers and industries that resulted in the price collapse. 

This week's events caused me to return to a question that interested me in the period leading up to the introduction of the Clean Energy Act: is there any economic or political theory that could inform whether or not Australia should move ahead with an emissions trading scheme or carbon tax before there is sufficient international movement? I wondered whether game theory offered any guidance, and indeed wondered whether Australian policymakers have at all resorted to game theory in their modelling and strategy. 

In fact, academic Peter Wood of the Australian National University is a leading international figure in the application of game theory to climate change policy, and with a team from the Crawford School of Economics and Government produced research for the federal government in the lead-up to the Gillard government's enactment of the Clean Energy Act last July. 

Game theory sits at the intersection of economics, psychology and politics and offers ways of thinking about the fundamental question that faced our country in the carbon tax wars: how should Australia proceed with introducing carbon emission reductions given that other polluting countries - many making much larger aggregate emissions than Australia - have not done so, and we don't know whether and when they may act and to what degree they may do so? 

Patently, apart from our moral obligation to act to reduce our country's emissions, the main reason for Australia to take action on climate change is not because of the effect our reductions will have on global emissions (we all understand how minuscule Australian emissions are compared with the rest of the world), but because what we do might positively influence what other countries do. 

We should call the first our moral motivation and the second our strategic motivation. 

I wonder which of these two motivations drove our decision to proceed with the Clean Energy Act ahead of the rest of the international community.

It seems to me that while our moral motivation may be laudable - to act as a good planetary citizen and do our duty, notwithstanding that it is a drop in the ocean in the global scale of things - it would not be wise if it detracted from our strategic goal of precipitating or encouraging other countries to follow suit. 

Just because our motives are morally laudable, what we do may be strategically counterproductive. 

Have we made the proper calculus between these two motivations? Or have we conflated one motivation with the other? 

I suspect that those who have prosecuted the case for unilateral action have indeed conflated these two motivations, subverting strategic considerations to our moral motives. 

If this subversion has been strategically counterproductive, then it is yet another instance of moral duty being confused with moral vanity: something Western environmentalists are highly susceptible to. Carbon reduction proponents have been more concerned with our country doing, and being seen to be doing, the moral thing by the planet, rather than keeping the global strategic challenge foremost in our decision-making. This is how posture trumps substance. 

For lay readers of the game theory literature produced by economists such as Wood, it is not possible to say whether the strategic decisions taken by the Gillard Labor government with the Greens were optimal. 

The outcomes so far, however, do not speak well. 

Federal Liberal backbencher Paul Fletcher argues that the Direct Action Plan committing the Coalition to the same targets for 2020 as Labor, funded from the budget rather than through a carbon tax, should be understood as Abbott's first strategic play in a multi-round process. 

If there is international movement in the period leading up to 2020, then Australia could make its second strategic play. 

Fletcher concludes: "After all, if we get to 2020 and find the rest of the world has not acted, then why would it be rational for us to continue to act unilaterally? 

"Some say we should act regardless of what the rest of the world does. This is the strategy inherent in Julia Gillard's carbon tax. The insights of game theory suggest it is a poor strategy - and a naive way to approach the global bargaining table." 

Consistent with Fletcher's compelling analysis is the idea that rather than scrapping the Clean Energy Act and its carbon tax, the Coalition should suspend the operation of the legislation in favour of the Direct Action Plan running its course. 

An Australian government of the future could then make a strategic judgment about where we are in relation to encouraging and obliging the rest of the international community to take action to reduce carbon emissions.

This nation's a bit player in game theory of climate change policy