Exploring the topic of carbon policy effectiveness makes the rationale for measuring the effectiveness of carbon policy self evident.

The effectiveness of a policy is dependent on the environmental benefit with respect to the economic costs and benefits of the policy.

I consider the cost of a carbon policy the total cost of the policy to society, which includes government investment in developing and administrating the policy (and in some cases, actually financing the policy) and the costs imposed by the policy either directly or indirectly on households and business. Often policy seeks to leverage household or business investment.

The financial benefits of a carbon policy are the benefits to society, such as reduced power bills. The key environmental benefit is the reduction in GHG emissions, although there may be other environmental benefits also of high importance, such as reduced air pollution because of a reduction in the combustion of fossil fuels.

Can the transaction costs arising from a policy be considered a benefit? For example, under a white certificate scheme, electricity retailers may pass on their costs, with a mark-up, to consumers. These costs actually then reduce the financial benefits to end users – continuing the example of a white certificate scheme, the power bill savings from reduced energy consumption may be partially, wholly or more than offset by the increase in electricity tariffs. Can the profit made by the electricity retailer be considered a benefit? It could be considered an economic benefit (i.e. to shareholders of the retailer), but this economic benefit comes at the cost of others (energy consumers). It adds nothing to the environmental benefit. Whilst transaction costs are unavoidable, the larger the transaction costs for a given amount of carbon saved, the greater the cost of abatement.

Therefore, policy effectiveness, in my view, comes back to the total cost, including the transaction costs, per tonne of carbon saved. The lower the total cost per tonne of GHG emissions saved, the more effective the policy. With all other factors considered equal, this also translates into greater real economic benefit.

The expected or understood cost of carbon abatement may be misrepresented because the transaction cost of the carbon abatement is not included in the analysis. For example, marginal abatement cost curves, which have a focus on individual technologies, do not show the transaction costs of achieving the abatement. Different policy types may have different anticipated and unanticipated transaction costs. Thus the marginal abatement cost curve can be policy specific.

Policy effectiveness is important for a number of reasons.

First, carbon policy fundamentally aims to reduce carbon emissions, and the less this costs, the greater the amount of carbon that can be saved within a given investment.

Second, an ineffective policy does not generate the spin-off effects of an effective policy. For example, a policy that does not effectively reduce the energy used to heat and cool a home does not improve comfort as much as it otherwise would have, and in addition, does not create national competitive advantage in being able to export skills, services and products that effectively reduce home heating and cooling requirements.

Third, ineffective policy means carbon abatement is not an investment that can provide a financial return on investment, but rather becomes an expenese. Many carbon abatement technologies now exist that can, if applied efficiently, provide a reasonable financial return on investment. However, ineffective policy can result in poor or no financial return on investment.

Fourth, ineffective policy reduces the political capital that is so important to reducing carbon emissions. Ineffective policy damages credibility.