Science Blog

Carbon Trading - The devil is in the detail
Professor Frank Muller - University of New South Wales
11 February 2007
Frank Muller is an adjunct professor with the Institute of Environmental Studies at the University of New South Wales. He is a policy expert with specific interests in greenhouse and sustainable development policy. He previously headed greenhouse policy in the NSW Cabinet Office and spent the 1990s in Washington advising governments and the United Nations on climate change.

This opinion piece was first published in the Courier Mail, Brisbane.

THE Federal Government's renewed interest in making polluters pay for dumping heat-trapping greenhouse gases into the atmosphere is welcome news.

For too long Canberra has debated whether or not to do anything serious about climate change while other countries got on with deciding what to do. This has lost us ground in the race for economic advantage in a cleaner global economy.

Last week's issues paper released by Prime Minister John Howard (Feb 8) is disappointing progress. Many of the questions it raises were addressed in a series of discussion papers issued seven years ago by the Australian Greenhouse Office.

And it leaves the door open for the Government to continue hanging out for the ideal global scheme instead of getting on with implementing a carbon price in Australia.

Europe is now into the third year of a trading scheme that caps emissions from large industrial sources. From next year, the caps will be tightened, pushing up the price of greenhouse pollution.

In the United States, nine northeastern states and California are developing rules for similar schemes. Several emissions trading Bills already have been introduced into the new US Congress with strong support among Democratic leaders.

None of these schemes is perfect. We can learn from their strengths and weaknesses in devising the best scheme for Australia. But they all pursue the basic "Kyoto" approach of a mandatory emissions cap coupled with tradable emissions permits.

For Australia to start pushing a different approach would be just another delaying exercise.

Emissions trading is like so much of public policy -- the devil is in the details. There are a number of key questions to ask if the Government comes back with a firm proposal.

* Does the scheme impose a legal cap on emissions that can be tightened over time to achieve the deep cuts necessary to avoid dangerous climate change?

* Does it cover all the major emissions sources that it is practical to cover or does it exempt favoured sectors, such as resources or transport? The wider the coverage the lower the costs and the better the environmental outcomes. A new plan from major US corporations and environmental groups shows the way by proposing an "upstream" scheme targeting fossil fuel suppliers.

* Does it mask the carbon price signal or allow it to flow through the economy working its magic? Everyone understands that emissions can be cut with cleaner power plants, cars and factories. But consuming less carbon-intensive goods and services, building more efficient homes and offices and even shifting our choices between work and family can all play a role. An effective carbon price will help the economy find the best and cheapest path to a low emission future.

* Does it create long-term rights to pollute? In every American and European scheme, permits constitute a licence to emit that can be withdrawn, not a secure property right as proposed by our state governments and sought by the big polluters. Down the track taxpayers could face a huge bill to buy back these rights, if scientists say deeper emissions cuts are required -- similar to the mess we face today of over-allocated water rights.

* Is the scheme fair to consumers, workers and taxpayers? By the time a carbon price is introduced, industry will have been on notice for nearly 20 years that it was coming. Yet, there is a strong push for permits to be issued free of charge, as a form of compensation. This benefits shareholders, but not coalminers or their communities. Most permits have been handed out free in Europe -- yet power companies still put up prices and made windfall profits along the way. New York state now proposes to auction all of its emission permits. We can use revenues to assist disadvantaged communities and income groups and fund clean technologies, or even hand them back to consumers using compen-sating tax reductions.

* Does the scheme preserve competitiveness without sacrificing environmental effectiveness and economic efficiency? Special measures are warranted for a few highly energy-intensive, trade exposed industries (aluminium, steel, LNG) that face competition from developing countries not yet subject to emission limits. But such measures should be narrowly targeted on the basis of objective criteria and not shield domestic consumption from the carbon price.

* Is the scheme simple and transparent, with low transaction costs? Or is it a boondoggle for financial intermediaries, lawyers, consultants and lobbyists? Medicare and industry super funds show how we in Australia can develop low-cost schemes that serve the public well. But emissions trading done badly could look more like American health insurance or those parts of our financial sector that are ripe with fees. A good emissions trading scheme should put more engineers to work reducing emissions than middle men making a cut.

We need a carbon trading scheme that serves the common good, not sectional interests.

A good scheme will pass environmental, economic and social tests, satisfying the three pillars of sustainability.

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