15 December 2010 – The Grattan Institute has firmly backed a market based mechanism with a floor price as the most efficient way to reduce pollution, in a new report released today.

“Government consistently underestimated commercial innovation when money was at stake,” the Institute said. “They consistently got it wrong when predicting which technologies would deliver the cheapest reductions.”

The report, the Institute’s second energy report entitled, Markets to Reduce Pollution: Cheaper than Expected, says that in six case studies of pollution pricing schemes in Australia and overseas, costs to reduce pollution, and actual prices, were much lower than governments and their experts expected.

“Environmental markets routinely delivered substantially lower prices in practice than in forecasts,” Grattan Institute chief executive officer John Daley said.

“Technology innovation is the key to reducing carbon emissions cheaply. Experience shows that markets are more likely to deliver more innovation, at lower cost, than specific government programs,” Professor Daley said.

“However, technology needs certainty and a price. A floor price should be set to encourage the market to do what it does best.”

A floor price said Professor Daley, would act “a little like the reserve price in a house auction – effectively reducing total pollution if it turns out to be cheap to reduce pollution.

“If governments think that reducing pollution will be expensive, they worry about the impact on the economy, and set relatively weak targets. If the economic cost of reducing emissions and achieving targets is less than expected – and this happened in all the schemes reviewed – then a floor price effectively tightens the pollution target.”

Australian Greens Deputy Leader, Senator Christine Milne said the report backed approach of The Greens.

“Setting a floor price for carbon is a natural fit with our proposal to start with a fixed price for carbon,” Senator Milne said.

“The idea of a hybrid of carbon tax and emissions trading is one the Greens are very interested in and the Grattan Institute’s positive contribution to the debate is very welcome.

“The Institute suggests increasing the floor price at 4 per cent above inflation each year, the same rate of increase the Greens propose for the interim carbon tax.

“The Grattan Institute report also backs up the Greens’ argument that emissions reductions are, in practice, always found to be cheaper and easier than governments and business fear.

“That is why, unlike the Grattan Institute, we believe it would be better to start carbon pricing without a target. Once we get the carbon price in place, we will be able to see how much higher we can aim.

“With a debate starting about the role of complementary measures after carbon pricing is introduced, the Institute’s recognition that there are often good economic justifications for direct policy interventions in addition to carbon pricing is most welcome.”

See full report

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