Economists Call for Price on Carbon

The Australian

A group of senior economists has written an open letter advocating a price on carbon as an essential reform for the national economy, with an emissions trading scheme the preferred option.

The group of high-profile economists includes Grattan Institute Director Saul Eslake, St. George Chief Economist Besa Deda, Citigroup Global Markets' Paul Brennan and Westpac Chief Economist Bill Evans.

The letter follows this week's release by Professor Ross Garnaut of the final update to his landmark 2008 study on climate change.

"We are all of the view that the introduction of an emissions trading scheme is a necessary and desirable structural reform of the Australian economy, designed to change relative prices in a way that provides an effective incentive to consumers and producers to shift over time to more low carbon energy efficient patterns of consumption and production," the letter published today said.

"As such, it should be broadly based in its application and highly transparent in its implementation."

The economists said there should be five elements in designing a mechanism to price carbon.

The method had to apply across as many high carbon-producing sectors of the economy as possible and the market should set the price of a carbon permit with any price cap high and non-binding.

Revenue from the scheme should compensate low-income households for higher costs of living and provide transitional aid for emissions-intensive industries hit by a carbon price.

A well-designed pricing scheme would encourage development of new technologies, which would eventually lower the community's cost of reducing emissions.

Lastly, an independent authority should administer the pricing scheme, similar to the Reserve Bank of Australia setting the overnight cash rate.

Adding his voice to the letter, former federal Liberal Party Leader John Hewson said it was important to have the economics right for the carbon price.