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Carbon market failure

by Rebecca Pearse on May 1, 2018

In 2014, the Australian federal government repealed a national compliance emissions trading scheme (ETS). This was a world first decision to get rid of flagship climate legislation with no replacement at the time. The ETS ran for only two years (2012-14). It has since been replaced by the Liberal/National Party (LNP) Coalition government’s preferred climate policy – a competitive grants scheme turned carbon offset scheme called the Direct Action Plan (DAP).

Many people have a view on how and why Australia’s carbon price failed, and what might have been if the ETS had stayed in place. My new book Pricing Carbon in Australia is a contribution to that discussion.

There are a few main tendencies in the debate. One technocratic line of analysis often expressed by policy experts and some environmental campaigners is that the ETS, though flawed, provided a framework for reform that could be ratcheted up over time. The populist response, led by the LNP’s Right-wing faction, was to eschew the ETS as fundamentally unjust, bringing no environmental benefit at unacceptable costs to industry and consumers. A third response was to switch off – over time voters became unconvinced by both the ETS and the DAP. Meanwhile, some environmentalists got on with other energy campaigns and grew distant from the ETS debate.

In the book, I consider how and why these different responses have emerged and interact with one another, helping to create the ongoing political impasse over climate policy and energy transition. My critical appraisal of the politics of carbon market failure begins with an analysis of the climate crisis in the Australian settler capitalist context.

The benefit of this point of departure is straightforward – competing political-ideological discourses don’t float free. They are embedded in material relations, and in struggles over the relationship between markets and society-ecology.

Carbon pricing, capital and the reluctant state

Since white settlement, Australia’s economic development has been largely insensitive to the unique and fragile ecologies of the Australian continent, and violently destructive of indigenous economies and populations. The centralisation of state power contributed to the transformation of the biophysical environment. The European developmentalist vision for Australia was institutionalised in nation-building projects during the ‘long boom’ of the eighteenth century. By the twentieth century, developmentalism fortified as a shared ideology between conservatives and Australia’s labour movement. The hegemony of fossil fuelled developmentalism in this historical context has been pithily summarised by Guy Pearse (no relation) as ‘quarry vision’.

Ecological marxist political economy is useful for understanding key aspects of the contestation over Australia’s ETS and the role of the capitalist state. For instance, the late James O’Connor identified the state as necessarily implicated in environmental struggles because state institutions are essential to the provision of non-human nature to capital.

Consider the essential role of resource departments in making coal and gas deposits commodifiable. They open up lands for exploration, resource Ministers approve mines, and lead trade missions to spruik Australia’s mineral exports. Other state agencies are also involved, and often tasked with dealing with the legitimation problems associated with social/environmental effects of fossil fuelled capital accumulation.

Unruly contention surrounds environmental regulation, which shapes how non-human nature becomes capitalised. States are also nominally democratic; they have competing bureaucracies and ways of ‘seeing’ particular policy problems. In the case of climate change, the Federal government is a key object of contestation. Australia’s national ETS was a flagship policy and political response to growing pressures to address greenhouse gas emissions. The ETS briefly instituted in Australia fit the global mould of ‘market-based’ climate policy. That is, law and policy that institutes tradeable carbon rights in order to meet a particular emissions reduction goal.

In the reams and reams of expert advice that informs state climate change strategies, marketised climate policy is pitched as a means to harness market forces to secure environmental protection. In former Prime Minister (PM) Julia Gillard’s words:

Putting a price on carbon is the only prudent answer because it unlocks one of the most powerful forces on earth – the genius of the free market. By resetting price signals, we will open the door to a new era of investment and innovation, creating thousands of jobs for Australians in the industries of tomorrow.

This argument is still constantly rehearsed. But overall, emissions trading as a new green accumulation strategy has proven pretty unsuccessful.

Part of the failures of carbon trading can be put down to neoclassical economic orthodoxy. Carbon price signals are understood as a means to correct market failure. The excess greenhouse gases in the global atmosphere are understood as aberrant and unintended externalities of otherwise efficient markets. There is a tendency toward heroic expectations about the effects of carbon price signals in our broken electricity markets and false assumptions about the equivalence of different parts of the carbon cycle. This understanding of climate change is ahistorical and asocial; it creates all sorts of problems and blind spots in climate policy practice.

Ultimately, climate capitalism via emissions trading has not materialised. The Australian ETS was not likely to provide an economic incentive that would meaningfully shift the cost structure of emissions-intensive production. It favoured fossil fuel capital over the less powerful network of carbon market entrepreneurs, finance sector and green investor groups of Australia.

Perhaps most importantly, the carbon market project rests on the assumption states are able and willing to institute carbon trading rules that deliver environmental goals, as well as acceptable and profitable outcomes for all relevant fractions of capital and citizens. Such an outcome has proven immensely difficult particularly in fossil fuel economies like Australia’s, where the emergence of carbon trading has formed part of the state’s search for ways to displace the climate crisis and protect emissions-intensive industry interests.

Marketised climate policy as displacement strategy

Borrowing from Colin Hay’s early work on global environmental crises and the capitalist state, I argue that marketised climate policy like Australia’s ETS can be understood as one of the state’s responsibility displacement strategies. The ETS was aimed at deflecting or deferring the climate crisis spatially (e.g. with carbon offsets), materially (e.g. through over-allocation of permits to polluters) and politically (e.g. with ideological appeals to markets as efficient allocative mechanisms).

You can read my critiques of Australia’s ETS and offset policies here, here, and here. Like other affluent states, the Australian government legislated an ETS that was designed in ways that: a) transferred public wealth to incumbent industries in the form of cash compensation and free permits; b) shifted the carbon abatement task away from fossil fuel production through carbon offsets in the South or in other industries like Australia’s land sector; and c) dealt only partially with the regressive effects of carbon pricing particularly for low-income households.

These aspects of the ETS were not ‘design flaws’ in the narrow sense. They clearly benefitted fossil fuel capital at the expense of citizens, not to mention non-citizens in the global South and non-human life. Displacement strategies are a means to temporarily resolve the underlying contradiction between the state’s historical allegiance of fossil fuel capital and the immediate public pressures for climate change action.

Crucially, displacement strategies bring new problems. The dynamics of contention surrounding the state’s carbon market governance decisions show how marketised climate policy throws up particular kinds of legitimation / de-legitimation dynamics.

The EU-Australia carbon market link

Consider a moment of contention in 2013, when former PM Kevin Rudd replaced Gillard briefly in the lead up to the federal election that year. In the hope of ditching the term ‘carbon tax’ Rudd proposed to weaken the ETS by floating the carbon price in 2014, a year earlier than planned. Hurried negotiations for linking to the failing EU carbon market in 2015 began right away. The EU Parliament had recently voted against a stop-gap measure to address the huge excess of carbon permits deflating the market. Meanwhile, Australia was showing willingness to trade in the EU’s hot air credits!

In reply, then LNP leader Tony Abbott raised the major regulatory difficulties that an Australia-EU carbon market link would have produced. In his characteristic populist style, Abbott refuted the market status of carbon pricing and tCO2e commodities all together, saying:

This is not a true market. Just ask yourself what an emissions trading scheme is.. [It’s] a so-called market in the non-delivery of an invisible substance to no one.

This rhetoric from Abbott was one of countless examples of the Right’s strategy to leverage the contradictions of carbon trading in a bid to de-legitimise the ETS. LNP politicians and public figures have contested international carbon market transfers to middle men, at significant cost to Australian households, rural people in the global South and so on.

The Right’s rhetoric was ethno-nationalist, but the underlying distributive issues concerning who should bear the burden, costs and benefits of carbon trading are real and needed to be worked out. In response to the LNP’s carbon market critique, business groups shuffled uncomfortably with key groups like the Business Council of Australia and Australian Industry Group making clear they want international carbon offsetting for flexibility.

Key experts like Garnaut, with the Greens and their allies have tended to focus on objecting to the far Right’s climate science scepticism and argue for international carbon offsets as more efficient than the DAP. Meanwhile, most grassroots activists disengaged and shifted focus to local conflicts over mining and campaigns for renewable energy.

Discussing the EU-Australia carbon market link and other examples in the book, I argue that commonsense constructions of carbon trading as a uniquely effective means to manage difficult distributive dilemmas created by climate change are utopian. The Australian case in particular reminds us that market solutions do not de-politicise the state’s response to climate change.

Further, the Right’s objections to carbon trading have been a challenge to technocratic environmentalism. It has been immensely difficult for environmentalists seeking to secure and legitimate a carbon market worth having in Australia. The final chapter of the book considers environmental movement strategies vis-à-vis the carbon price debate.

Beyond technocratic environmentalism, toward energy justice

After the failure of the Rudd government’s ETS and the UN Copenhagen climate talks in 2009, many environmentalists exited the debate over carbon pricing in favour of mobilising through focused campaigns in sites of fossil fuel expansion, and for renewable energy transition. The shift toward coal and gas campaigning was described to me by campaigners as a deepening environmental justice struggle, embracing indigenous land rights struggles and local community concerns to protect livelihoods against coal and gas mines. Technocratic climate policy campaigns have become increasingly marginal.

In energy struggles across Australia there are new and old strategic issues in play. For instance, campaigners may not be able to stop or slow down enough fossil fuel projects to avoid breaking the carbon budget. The hard-going work of building community renewables and instigating new renewable energy regulations could get bogged down in similar conflicts to those we have seen with carbon pricing. And there is a silence concerning renewable energy capital and the ongoing privatisation of energy production.

Unions are calling for industry policy to ensure ‘just transition’ for coal-dominated regional economies, but they are not so far embracing the scale of decarbonisation environmentalists insist is needed. Meanwhile, fighting on multiple frontiers may exhaust movement resources and political momentum over time, and test ‘unlikely’ alliances between farmers, indigenous groups, and urban environmentalists. However, the recent #time2choose rally in Sydney points to the movement’s building power.

There is no overarching programmatic strategy, nor is there an appetite for one. But there is a maturing network of campaigns that continue to make weak and unfair climate and energy governance an unviable option for the state.

In summary, the state’s approach to carbon market regulation in 2012-14 highlights structural barriers to effective and just decarbonisation in settler capitalist economies. Climate crisis displacement strategies lead to new legitimation issues, creating new arenas of contestation. The experience of Australia’s ETS did not signal strong possibilities for effective re-regulation of the carbon market.

Of course, any emerging shift toward more direct energy reforms will bring with it familiar and new distributive dilemmas and displacement strategies. But given the recent experience of carbon pricing and the closing window for action to avoid the worst effects of climate change, stronger progressive action for just energy transition is needed. Thankfully there are signs of a building movement trying to make this possible.

Cover image: AAP Image/Alan Porritt

Rebecca Pearse
Beck Pearse is a lecturer in the Department of Political Economy at the University of Sydney, and key researcher affiliated with the Sydney Environment Institute.

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