Cloudy horizon on emissions trading

• Chris Hammer
• The Age, July 19, 2008
• http://www.theage.com.au/national/cloudy-horizon-on-emissions-trading-20080718-3hkh.html?page=-1

AS THE debate over the best time to introduce an Australian emissions-trading scheme swirled around Canberra this month, the Government's independent adviser on climate change, Ross Garnaut, was inevitably drawn in.

Opposition Leader Brendan Nelson had criticised Kevin Rudd's commitment to start trading in 2010, saying it would be irresponsible to rush the scheme's introduction.

"The very real concern that all of us have as Australians is that, with Mr Rudd proposing to implement an emissions trading scheme from 2010, that he will put Australia well ahead of the rest of the pack," Nelson said.

But Garnaut quickly corrected that perception. "For those who say we mustn't be first, you've got your wish, because we are a long way from being first," he said. "The best we can hope for is that we are not a drag on the pack."

The European Union introduced emissions trading in 2005. It's moving to a revised scheme this year, and is already committed to a redesigned scheme from 2013. Non-EU countries Norway, Iceland, Liechtenstein and Switzerland have already linked their schemes to that of the EU.

New Zealand is in the process of introducing emissions trading, Japan has a voluntary scheme, and Canada will introduce one in 2010.

The United States does not have emissions trading at a national level, but some 28 states and provinces in the US and Canada either have or are introducing emissions trading. Significantly, both Barack Obama and John McCain have supported introducing emissions trading.

But that doesn't mean all the schemes are identical. Far from it.

The Europeans were the early movers on emissions trading, and they made mistakes. Their biggest was to hand out free carbon permits. This, combined with another blunder — asking individual EU member countries how many permits they needed — resulted in too many permits. The market collapsed and over time the permits became largely worthless.

Australia has learnt from that mistake, as have the Europeans. Both systems will aim to auction as many permits as possible, and have them issued by a central authority.

Dr Regina Betz, from the Centre for Energy and Environmental Markets at the University of NSW, emphasises that European power generators profited from the permits, but didn't change their behaviour.

"They were passing on the costs to their customers, and they actually benefited and made billions of euros in windfall profits. They got the permits for free, but they were putting a price on them," Betz told The Age.

From 2013 European power generators will be required to buy permits, but the Australian Government has rejected the advice of Garnaut and has indicated that owners of coal-fired power stations will receive either cash or free permits.

"My concern is that the Government's commitment to … the electricity sector will mean that we will see a substantial proportion of permits given away free. So we could be following some of the EU mistakes there," says Australian Conservation Foundation climate campaigner Owen Pascoe.

The Europeans, like Australia, will continue to offer free permits to trade-exposed industries such as aluminium and cement.

One difference between Australia and the Europeans is the range of targets to which governments have committed. At this stage, Australia has only committed to a 60% reduction in 2000 greenhouse emissions by 2050. An interim target for 2020 will be determined by the end of the year.

"We don't know what the impact of this scheme will be until we see the medium-term targets," says Pascoe.

The Europeans have already embraced a medium-term target of reducing emissions to 20% below 1990 levels by 2020. They say they will increase these cuts to 30% provided other developed countries such as Australia get on-board by 2012.

Individual European countries have been even more ambitious. Norway aims to get emissions to 30% below 1990 levels by 2020 and be carbon neutral by 2050.

Britain is committed to reducing 1990 emissions levels by 20% by 2010, and Germany wants a 40% reduction by 2020.

Japan wants to cut current emissions by 60% to 80% by 2050 and New Zealand is perhaps the most ambitious of all: it wants to be carbon neutral by 2020.

A significant difference between the European scheme and that proposed in the Rudd Government's green paper is the sectors that are covered.

The Europeans don't include transport, whereas the Australian scheme does, albeit with the promise to offset any price rises with fuel tax cuts for the first three years.

But for Hugh Saddler, managing director of Canberra-based consultancy Energy Strategies, the Government has largely got it right by having more sectors included than the Europeans.

"I actually think they have gone a bit too far on some of the minor categories … I'm a bit surprised they've included waste and some (fugitive) emissions from coal mining. Because there is no way of measuring them with any great accuracy," he says.

The Europeans don't include agriculture in their scheme. Nor will Australia, until at least 2015. Including agriculture is administratively difficult. Unlike energy, transport and industrial processes, it's extremely difficult to measure emissions from farming.

These differences matter. At some time in the future, the goal is for all these international schemes to link together.

"International trade in permits lowers the global cost of abatement, allows greater flexibility for developed countries in meeting their commitments, and provides a financial incentive for developing countries to take on commitments," Ross Garnaut stated in his draft report this month.

But Dr Tony Beck, from the Asia-Pacific Emissions Trading Forum, says the Government has taken a cautious approach, ensuring only very limited international linkages for the scheme's first five years.

"It will ultimately have all the advantages and disadvantages of being part of a global market," he told The Age.

Chris Hammer is a Canberra correspondent who writes on the environment.