The emissions trading scheme is effectively a grand experiment in identifying the price of international emissions reductions. It won’t necessarily reduce emissions in Australia, but it has the capacity to do so, so what should be the bottom line in negotiations?

Now that the Liberals have effectively dealt themselves out of the game it is up to the Green and other independent Senators. The current legislation won’t necessarily reduce Australia’s emissions, but it does give the Minister, and then the Climate Change Regulatory Authority the power to do so.

There are lots of questions for the Senate inquiry on implementation issues not specified in the legislation. Two questions are fundamental. Firstly who can buy permits at auction and secondly what are the conditions on the acceptance of international units, and at what point will the Minister step in to avoid the system becoming ‘swamped’.

At present, Australia’s legislation is about fitting Australia into a global system and then letting the system sort out where emissions reductions should take place. The proposed structure for protecting emissions intensive exporters, while imperfect, is probably workable. The timetable for special assistance for coal is short enough to support investment in the best medium-term solution, a dash for gas electricity generation on Australia’s eastern sea board based on Queensland’s ample coal seam methane reserves. While no-one likes rewarding polluters, some transition arrangements are necessary, for coal power in the short-term, and for exporters until there is a global agreement to prevent carbon leakage.

What about all those well-meaning households investing in photovoltaic systems? A big concern of GetUp and others is corporate Australia free-riding on Australian households’ voluntary emissions reductions. When households reduce their carbon foot print, polluters can simply increase their emissions.

Actually, what the emissions trading scheme is trying to communicate is that photovoltaics are not a particularly economically efficient way of reducing emissions. You can now by a 1KW system for around $4000 after rebates. But that might only save 0.9-1.4 tonnes of carbon dioxide each year, because the daytime operation of solar electricity competes more with gas generation than coal.  After taking into account the value of the power generated, one is effectively paying $170 for every tonne of CO2 that is offset. That is four times the early phase price cap. It might be much cheaper and effective to simply buy emissions permits from the market.

The key test is not whether a well-meaning investment in reducing household emissions has the effect of lowering overall emissions or the price, but whether households can effectively improve the emissions target by purchasing emissions themselves or through a charity. If charities are enabled to participate as bidders in the auction system then we have the potential for an efficient outcome and a significant reduction in emissions, almost irrespective of the 5% reduction target. It works like this. Currently, if the average Australian emits 25 tonnes of Carbon dioxide equivalent each year, then the power companies and petrol refineries will be required to buy 25 tonnes worth of emissions permits from the auction system. The average person can reduce their emissions by purchasing green power, which should reduce the number of permits that the power company has to buy. This may then allow those permits to be used by another emitter, resulting in no net reduction.

Alternatively the person could make a donation to a Charity that was willing and able to purchase emissions units from the trading scheme. It simply sits on these permits as a tangible contribution to saving the Great Barrier Reef, Murray-Darling Basin or other likely climate change victim. Because these permits are simply purchased and taken off the market, then the available permits for polluters falls and the price rises. If the price of permits was $10/tonne then by spending $250 a person would reduce emissions around Australia by 25 tonnes, offsetting their entire emissions without giving a polluter a free-ride.

If enough Australians felt that it was really important that we hit a 90% reduction or 85% reduction by 2020 then, assuming that non-emitters can acquire permits, it is simply a question of how much they are willing to spend.

This is highly efficient, as it should directly demonstrate the willingness to pay to reduce emissions, with the government then using the additional auction revenue to compensate other households and businesses hit by the price rises. The big question is whether the CPRS regulations will allow individuals, charities and other organisation to voluntarily up the pace of emissions reductions. If it does, than having a framework to reduce emissions is much better than no framework at all.

The international financial crisis is an interesting time to be encouraging the globalisation of the carbon market.

On the one hand, Mr Rudd and Ms Wong are concerned at the lack of international agreement, yet on the other they are willing to trade emissions with uncapped countries. This is the real zero-gain game; notional emissions reductions in developing countries allow developed countries to continue emitting. Developing countries are uncapped, so global emissions continue to grow, effectively unchecked. We become more economically efficient in our emissions, but unfortunately, efficiency won’t save the planet.

There is an open question of foreign emissions from developing countries flooding the Australian market. If it happens then there are mechanisms in the legislation to stop those emissions being tradable, but can we trust Labor to activate them? We want Indonesia and Papua New Guinea to stop destroying their forests, but do we want saving those forests to enable more coal to be burnt in Australia?

One solution would be a price floor that protected Australian investments in abatement and created a clear signal for when the rules on foreign reductions would be implemented. Another would be for the Australian government to support forest protection by buying such permits, but without these permits then becoming part of the Australian scheme and perhaps bridging the gap between 95% and 85% target ranges. An annual allocation of $500 million would be a clear expression of Australia’s bona fides and support an international agreement.

Ultimately the question comes down to how much Australians are willing to spend, not just locally, but globally, to save the planet.

The Australian: An ETS won’t cut it in this climate

 

Alex Wadsley
CLIMATE Change Minister Penny Wong has admitted that it is not a Ferrari, but it is probably not a soviet-era Lada either. The best car analogy might be an early MG race car. It is perhaps best in class for its time, but so dependent on the skills of the driver that you don’t know whether it will win the race or go into the ditch at the first turn.