Friday, June 6, 2008

What is emissions trading?

(This is part 2 of an updated version of an article I published in the Palerang and District Bulletin in May 2008) Part 1; Part 3.

The Australian Government has announced that it will establish a ‘cap and trade’ emissions trading scheme. Under the scheme, the Government sets a limit on the overall amount of greenhouse gas emissions allowed in Australia (that is, it sets a cap). The Government then issues emissions permits up to that limit.

Each permit represents a standard quantity of greenhouse gas; for example, one metric ton of carbon dioxide equivalent. Companies then acquire permits from the Government to cover their emissions. The basic idea is that because there is a limit (or a cap) to overall emissions, these permits represent real monetary value and therefore put a price on carbon. Companies will be able to trade their permits, thus allowing the market to find the cheapest carbon abatement options.

Experience in Europe where cap and trade has operated for several years now, indicates that this type of market is only as effective as the cap level and the price placed on carbon. An over-generous cap level results in a lower carbon price and provides insufficient incentive to change towards a low carbon economy. As a result, the effect on emissions will be negligible.

Some of Australia's large emitters, particularly those in the mining and power sectors, have been trying to influence the government to allow for free permits. This would result in a similarly unsatisfactory outcome as in the European Union, where too many free permits were given to Europe's power companies, resulting in windfall profits for the big emitters, higher prices for consumers and little emissions reductions.

So far the indications coming from Climate Change Minister Wong are encouraging, who stresses that the government wants to include all companies in the emissions trading scheme and not give special treatment to some at the detriment to others. Hopefully, the government will also stand firm on including oil and petrol, unlike the New Zealanders, who bowed to pressure to take the important transport industry out of the equation.

All parts of the economy need to be transformed towards a low carbon future. Transport plays a major role in emissions, it also needs to play a major role in emissions reductions.

Continue reading: Tree planting as part of markets.

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