CASE STUDY

Case Study

Case Study

Introduction

In my (admittedly limited) reading about the proposed emissions trading scheme here in Australia, I get the impression there's two primary objections (mostly from business, but also the opposition party - coincidence?) to the trading scheme. The first is that a scheme will raise prices for the Britain public for goods from high-emissions industries, like electricity. I suspect this is to raise public opposition to the scheme, but I think that we've mostly overcome this objection.

Local prices

To my mind, the answer to the first objection is to provide gradually decreasing concessions to consumers of these products in the early years while companies adjust their offerings to greener alternatives. My thinking is that by targeting these concessions at consumers, competition among companies will occur sooner as companies that take early mover advantage will benefit from higher market prices and emissions-trading benefits for investments made during the adjustment period.

If such concessions were directed at the company level, I see less incentive for businesses to innovate, as they won't receive any immediate benefit for doing so. (This assertion is based on a layman's understanding of economics - I'd be interested in hearing from anyone with a deeper understanding.)

Let me provide two contrasting examples to illustrate my point:

Concessions to consumers

Company A and Company B both start with the same emissions output. The government puts in place a permits scheme where both companies have to pay for the emissions they produce, and they (naturally) pass this cost onto consumers. To offset this increased cost, the government subsidises the consumers through tax concessions or some form of rebate scheme, reducing the concession over time until eventually the full cost is borne by the consumer.

In a competitive market, the prices charged by Company A and B would be comparable. So if, say, Company B introduces an innovation that reduces their emissions (and therefore creates emissions permits that can be traded for $$) sooner than Company B, they can continue to charge the higher market rate to consumers - effectively cashing in twice (once through traded permits, and again through charging higher prices). If they are able to introduce these innovations in a manner that also reduces their operating cost over time there is a third incentive for innovation.

As the industry adapts, this competitive advantage is reduced returning to comodity pricing, but we'll have more sustainable technologies in use - the primary aim of ...