He says the carbon price should rise by four per cent annually until a floating price is introduced in mid-2015.
Prof Garnaut also takes a swipe at the opposition’s “direct action” plan in his latest review update, arguing the contest of ideas between market-based mechanisms and regulation was “won decisively by the market economy” last century.
The sixth update to Prof Garnaut’s landmark 2008 climate change review acknowledges that following Copenhagen it’s now a “messy world” when it comes to climate change policy.
But the economist argues it is still in Australia’s national interest to encourage world action.
Under an effective international trading system Australia may be a large exporter of emissions-intensive products and a large importer of entitlements to emit greenhouse gases.
However, Prof Garnaut argues there is little chance of a global agreement unless all rich countries play their part.
“Taking into account the history of policy discussion in Australia and internationally, and the desire for deep trade in entitlements, an emissions trading scheme, initially with a fixed (and rising) price, is the best instrument for long-term emissions reductions,” he says.
On the contentious issue of petrol, Prof Garnaut recommends compensation be delivered through a cut to the fuel excise.
“The increase in petrol prices following the introduction of a carbon price would be offset through a one-off reduction in petrol excise.”
The cost would be covered by reforming fringe benefit arrangements for private car use.
Past modelling suggests an initial carbon price of $26 is needed if Australia is to reduce emissions by at least five per cent by 2020.
That price would bring in $11.5 billion in 2012/13.
The update proposes half the revenue should go to compensate households through tax cuts “rising to the great majority of revenue by the end of the first decade”.
“A large amount of revenue could be used to reduce personal income tax rates … at the lower end of the income distribution,” Prof Garnaut states, adding the Henry tax review provides a model.
Prof Garnaut believes there’s also a strong case for returning revenue to businesses which promote efficiency and increase output by cutting “distorting taxes”.
But he accepts, as he did in 2008, “that revenue will be provided to trade exposed and emissions-intensive industries rather than to general reductions in business taxation”.
This should be transitional assistance for three years to compensate industries which have to compete against countries which haven’t imposed a price on carbon.
Then assistance should be administered by an independent regulator running the emissions trading scheme.
The update further envisages targeted assistance for regions suffering large-scale job losses and short-term support for clean energy innovation.
Prof Garnaut argues businesses hit by the carbon price should be able to purchase Kyoto-approved carbon farming initiative offsets.
But they should be limited to four per cent of emissions in 2012 rising to 10 per cent by 2020.
The government, through the independent regulator, should be able to pay land users for storing non-Kyoto approved carbon in their land.
However, such credits would be limited to two per cent of total permit revenue in 2012 rising to four per cent by 2020.
Prof Garnaut admits these limits “are arbitrary”.