Everything I have read so far on both CPRS and a carbon tax concentrate on the effect of an increase in price driving a move from high to low CO2 emission energy sources. There is a lot of talk about the effect on voluntary actions and the difficulty in attracting investment to new renewable energy sources. The only incentives discussed is the compensation to companies in the form of free permits, subsidies to selected renewable technology and compensation to consumers in the form of increased targeted taxbreaks/welfare.
What is needed is a massive and relatively sudden re-engineering of our society, this will not work from the top down, the power for this change will come from the individual. It is not simply a matter of individuals reducing their dependence on fossil fuels but rather choosing to purchase low CO2 emission technology and adopt more sustainable practices. The problem is that right now and for at least the next 10 years there is not enough sustainable technology to go around, consequently too much pain and very little gain.
If we are going to ask each individual to bear the cost then they should have some control over the benefit.
Therefore I would suggest a counter intuitive approach a – Carbon Credit Scheme.
it would operate the same as a carbon tax imposed at source lets say initially at 5%, this carbon credit is then passed through the money chain until it is redeemed on renewable/sustainable products. It would operate in a similar way to the many reward schemes currently available. In the early years there would be only a small effect on CO2 emissions but it would rapidly escalate, fossil fuels eventually funding their own replacement.
Obviously there will be a lot of debate over the process for identifying those products that can be purchased through carbon credits. What ever the agreed process once a product makes it on the list it would become a very attractive business investment, it would ensure the massive private investment in low CO2 emission technology that is required.
The biggest issue is deciding what products would be redeemable, for example public transport could be included.
I’m no environmentalist or economist so I have probably unwittingly made some heretical statements, however I find the logic of a Carbon Credit very appealing.

I do concede that in addition to the need to place a meaningful cost on greenhouse gas emissions I follow the theme of enhancing voluntary mechanisms so that they work for households and businesses to choose between a greenhouse costs or low emission alternatives that avoid the carbon cost. I guess that I have confidence that the free market will work if and when when a meaningful carbon price and escalating carbon risk is brought into the economy.

As for making a mountain out of a molehill, I have addressed this point in my discussion paper contained in our submission(http://www.aph.gov.au/senate/committee/economics_ctte/cprs_09/submissions/sub33) to the Senate Economics Committee (section 4.2. Can voluntary action make the difference?). In short, my view on this is that it is not appropriate to compare a voluntary response in the absence of a carbon cost, with a market that would apply a meaningful carbon cost.

In addition, I actually do make more than one point in this paper, such as:
* A cap and trade approach is the wrong policy instrument to use during economically turbulent times.
* The Australian Government has not had a full an open debate on which policy mechanism would be best suited to reducing Australia’s emissions.
* Those developing emissions trading would seek to create scarce emission permits whilst at the same time capping the costs which defies economic logic. With the CPRS we see unlimited permits at $10 per tonne (or down as low as 50 cents per tonne for those that receive 95% free permits) in the first year followed by unlimited permits at $40 per tonne. This is more like a carbon tax approach anyway.
* A carbon tax would be simpler than an emissions cap and trade system (reducing red tape).
* That a carbon tax is better at driving innovation because encourages a greater market to find low emissions options for customers to choose from.
* Greater price certainty.
* Less need for full information.

I agree that having a carbon tax is not all that different to particularly the Government’s proposed ETS except that the ETS trashes the effectiveness of voluntary action as something that contributes to achieving National greenhouse reductions and it introduces perverse responses.

I think it is naive to believe that because the word ‘cap’ is used in the Government’s proposed CPRS that it will actually deliver a fixed maximum quantity of emissions, or indeed that the proposed CPRS is designed to work from the cap. I would urge a closer look at the legislation and compromises that are proposed which reveal that this scheme just like a tax, is based on the Government hoping to manage the carbon price below its so called safety valve of $40 per tonne (following the $10 start in year 1), and this is largely dependent on bringing in overseas carbon credits.

I fully agree with you that the targets should be set by science and if they were then the need for voluntary actions would not be as critical. I also acknowledge that managing economy shocks is a critical issue.

To me, choosing the right mechanism is about effectiveness in the midst of compromised options. It is the effectiveness and sending the right price signals to a responding retail market as well as the wholesale market, rather than compensation which is important.

Thanks for your comments. I will be rabbitting on about the latest changes to the CPRS proposal as well.

In the senate committee enquiry current voluntary abatement accounts for only 1.3 million tonnes when we need to reduce emissions by 135 million tonnes, I think your huge issue over voluntary abatement is really making a mountain out of a molehill.

Having a carbon tax is not all that different to an ETS with the added detraction that it is very difficult to quantify what percentage of tax to set to achieve the required reduction. The other main issue is that tax rates are not at all flexible, particularly in the upwards motion. I believe that it will be particularly difficult for the government to keep ratcheting up the tax rate without causing a great deal of consternation from most sectors of the economy, and also having the tax rate set by a government who is more interested in ensuring voter satisfaction than the environment will make it next to impossible.
Ideally the cap for the CPRS should be set by an independent climate board to achieve the required reductions, however then we have the possibility of sending a supply side shock through the economy, and we all know the effect that can have (see the 1970′s recession due to oil price hikes by OPEC).

So in short there needs to be a balance, and I believe the benefit of being able to quantify the amount of emissions reductions that will be achieved is far more important than the insiginificant issue of whether voluntary abatement is compensated.

I think you will find that people who genuinely care about the impact they are having on the environment will not be concerned about being compensated for contributing to the health of the planet, and as others have specified voluntary abatement will reduce the shock to the economy which can only benefit those who cannot afford to make the contributions that others can but have to bear the cost of greenhouse gas emissions.

The link is now working (April 7,2009) and takes readers to a paragraph within the Households and Communities section, where the relevant documents can be accessed. Submissions are still not posted.
See http://www.climatechange.gov.au/resources/community.html#offset

We need to add conventional tangible voluntary actions such as buying GreenPower, improving efficiency, so we will include these at the same scale (60MT) as the wealthy benefactor throwing Australian made AEUs in the bin.

In any equation, where the units are the same (AEUs) it is not possible to make actions of opposite signs to contribute to a single directional change without cancelling each other out.

1) WITHIN THE 5 YEAR TARGET AND GATEWAY PERIOD
The wealthy benefactor buys 60MT of AEUs and throws them in the bin, which take care of the 60MT of tangible voluntary achievements that were meant to lower scarcity in the market and cancels the change to the market price of AEUs.
The end result is that available permits are 60MT less, emissions are 60MT less but we have lost 60MT of the 120MT of voluntary action paid for within the 5 year period because the scarcity was cancelled out. In terms of any change to market scarcity there is zero change.

2) CARRYING THROUGH TO THE FOLLOWING 5 YEAR TARGET AND GATEWAY PERIOD
The zero change of market scarcity carries through to the following period as the Government makes its changes to the cap based on the “feasibility” to lower the cap and there has been no improvement to this “feasibility” from voluntary action. So now we lose the second 60MT of additional voluntary action.

END RESULT
The two voluntary actions have cancelled each other out to the total value of 120MT across two target periods.

WHAT IF CONVENTIONAL VOLUNTARY ACTIONS WERE NIL?
If we consider again the model scenario that deals only with throwing Australian made AEUs in the bin, there are yet more things that need to be factored in.
Firstly, we don’t have a true cap so the sudden market shock may largely be taken up by the Government issuing beyond cap $40 permits.
More of the shock may be taken up by some businesses reducing production because the price of permits is unnecessarily high. The big players will take more of the cheap permits out of the market leaving the small players with a higher cost burden and some may unnecessarily go out of business. (It is also worth noting that electricity generators would see this scenario as causing unnecessary competition for AEUs that would unnecessarily force up electricity costs and prices).
Whilst there may be a driver for low emissions technology (in the absence of conventional voluntary cancellation) it is it is not as simple as plugging in an emissions reduction box. Low emissions performance costs in both setup and to operate. The AEUs in the bin option takes up opportunities making it harder for further reductions to be achieved.
So whilst the market may technically comply, it is not the case that businesses won’t be screaming louder for the cap to stay higher, making it less “feasible” for the Government to lower the cap.

At least we agree that there will be very little retirement of credits in practice. Many customers will distrust the option, some like me will regard it as flawed logic to use where a cap is set based on “feasibility” and the option is doomed as a voluntary concept where the price AEUs will increase through time (which they must), making further voluntary action less affordable. In a proper market framework, tangible voluntary actions (drawn from a pool of opportunity beyond that which applies to CPRS covered businesses) should reduce in cost as low emissions solutions become mainstream.

CONCLUSION
Because the AEUs in the bin option causes voluntary cancellations, perverse outcomes and is likely to be rejected by markets, The DCC should abandon this concept.

http://balneus.wordpress.com/2009/03/31/overview-of-carbon-polluter-rewards-scheme-submissions/

Let’s say for the sake of argument that in the year 2015, an extremely wealthy benefactor decides to purchase 10% of our AEUs (very roughly 60 Mt CO2e) at a cost of somewhere over $1 billion. What effect would this have?

As you point out, emissions credits would become more scarce. With this sudden shock to the system, the price of credits might double or triple. Like any change in the carbon price, this would have a whole-of-economy effect. The incentive to reduce carbon emissions, for big business and individuals alike, is increased, resulting in a sudden transformation across the whole economy and a net 10% reduction in emissions (in reality, the economy would not be able to respond so quickly, but this is just an exaggerated, fictional example).

Will this increase the feasibility of deeper cuts in the future? Yes, because we have shifted forward in time some of the transformation, albeit at a high short-term cost. Maintaining the same level of emissions (which is really a 10% cut on 2014 emissions) in 2016 should be achievable at no cost at all, thereby making deeper cuts more feasible.

For the record, I think that there will be very little retirement of credits in practice. I would be happily surprised if it was more than a few thousand tonnes a year. But if it is more, then it will have a positive effect on to speed of our transition to a low carbon economy.

Could you please explain why these mechanisms are not contradictory?

I can accept that reducing my emissions or buying GreenPower does improve Australia’s potential capacity to reduce emissions, will free up permits, lower the AEU price and make the situation more feasible for the Government to reduce the cap in 5 years time (crippled but not killed)

I cannot then accept that throwing AEUs in the bin, doing nothing to improve Australia’s potential capacity to reduce emissions, causing AEU scarcity and making the situation less feasible for the Government to reduce the cap in 5 years time, would actually carry through lower emissions.

If we accept that it is the “feasibility” aspect that determines whether the cap is reduced the AEUs bin option cannot work.

As for your other points thanks. I think that we all have a range of valid points.

With the devil is in the detail of any system it is easy to compromise any approach. I agree with Ross Garnaut that the Global Financial Crisis has provided an opportunity to get a system established when emissions will be lower. I also think that this may have provide a little more time to get the mechanism right and sort out complementary measures, voluntary mechanisms (including GreenPower)and the National Carbon Offset Standard before the legislation is rushed into Parliament. On these last three matters we are not even close. The DCC Website has not had the link to the Discussion Paper on the National Offsets Standard working for around three or four weeks and none of the offset submissions have been posted so it is difficult to know what is going on in this area.

I don’t believe that this is the same, because voluntary action under a carbon tax approach is not the same as voluntary action under a cap and trade system. Voluntary mechanisms are in my view crippled under a cap and trade approach where there is the knowledge that emissions reductions allow permits to be freed up for use elsewhere. The voluntary situation is made worse where the Federal Government makes suggestions that organisations are carbon neutral by taking no action under its CPRS, and where voluntary mechanisms such as GreenPower are left out of the CPRS and NGERS legislation and left riddled with double counting.

I also don’t accept that it is accurate to compare the apparent market price of a carbon tax with a carbon tax rate, particularly under this CPRS draft which includes high proportion of free permit allocation and significant assistance to EITEIs that influence the price. Whilst this can also be true where concessional tax rates are used as transition assistance, my key point is that the tax approach does facilitate a greater response through the whole economy and may therefore deliver an outcome at a lower rate as the cost is spread across the economy more effectively. The average rate across the economy that takes into account free permits or lower tax rates to some, is probably a more important number.

Beyond the direct hypothetical ‘what if’ situations, I think that it is important to think about the complexity of how such targets are negotiated and the impacts on what is agreed. As with the Murray Darling Basin Situation, when complex multiple interests are involved with cap and trade, the targets are low and the compromises become so great that the mechanism fails to deliver in a least cost manner.

I have never presented the carbon tax as being in an unadulterated state suggested by Matt B and have acknowledged that there are likely to be tax concessions and transitional assistance with both approaches. I do however assert that with the carbon tax approach, that it works as a foundation policy upon which complementary mechanisms can be built, rather than being an all-consuming policy that engulfs complementary measures and cripples voluntary action and mechanisms.

The claim that the CPRS will “(extinguish) the effectiveness of voluntary actions” is just another way of saying some people would have cut their emissions anyway. So what?

Anyway, I see no sign that voluntary reductions for non-economic reasons are having any significant effect right now – why should we expect them to be significant in the future?

I’d also disagree with Tim’s point summarised as “Critical difference is that the total economy change will facilitate a tightening of targets faster than limiting the game to the biggest players.”

An ETS will raise the price of carbon emissions for everyone, so everyone will have the chance to respond to the higher price. The game will not be limited to the biggest players.

Also: “I think that the most important thing for the tax to work is Government commitment to increasing the tax if National emissions are not reducing fast enough and this can be adjusted on a yearly basis.”

Problem is you can’t do it on a yearly basis. The time scale involved in developing alternative energy sources and building the physical capital is so much longer than this – by the time you realise you’ve blown it by setting the tax too low you’ve lost a decade or two. Then you have to push it up higher than you would have in the first place.

MattB’s comments about comparing the CPRS with a hypothetical carbon tax is spot on – anyone who thinks there won’t be special dispensations for entrenched interests under either system is dreaming.

But we should be wary of claims that favouring existing interests will make emissions reduction less rapid under an ETS (or a carbon tax where the average price of energy doesn’t change because of the favours).

What it will do is make the process less efficient in the economic sense, which is a different matter. For example, it might mean reductions in emissions are skewed more toward less energy use overall and less toward a greater proportion of energy through renewables, that sort of thing.

In other words, there is some irony in industries claiming they need special favours to avert the adverse economic consequences of a tax or an ETS, when in fact the special favours will actually cause the adverse economic consequences.

Thanks for your contributions. I have addressed some of your main points below. I couldn’t agree more with your main complaint that the targets are inadequate, but I think that moving to a carbon tax won’t solve this problem, and we are better off aiming at improving the CPRS.

A carbon tax and cap-and-trade scheme are actually very similar. Both are market-based schemes (as opposed to regulation or information-based policy instruments) that achieve their desired effect by putting a price on carbon emissions. Both schemes aim to achieve a transition to a low carbon economy at the lowest possible long-term cost.

To achieve this two-sided goal, we need to make changes across the whole spectrum from individuals to our biggest companies, but we should make the least expensive cuts first. How do we do that? Simply by putting a price on carbon emissions and leaving it up to the rational economic self-interest of individuals and companies to decide where those cuts should be made.

At least, that’s what the economic theory tells us. In reality, many people and companies are driven by moral (or marketing) reasons to do more than rational economic self-interest would dictate. This is the basis of green consumerism, low-impact lifestyles, and lots of other “voluntary” initiatives. Which brings me to your point that:

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Voluntary actions including the cancellation of Australian Emissions Units (AEUs) are meaningless within the context of reducing National emissions under the CPRS.

Voluntary actions, under both a tax and a cap-and-trade system, will help to achieve the overall aim of transitioning to a low carbon economy at the lowest possible cost; the difference is that whereas under a tax this action contributes to the “low carbon” part of the goal, under a cap-and-trade scheme it contributes to the “low cost” part of the equation, by reducing the burden on industry – and therefore the whole economy. Either way, voluntary actions help.

If you have a problem with your actions helping the economy rather than the environment (and clearly many people do, based on the reaction to the legislation), you can also purchase and retire some carbon credits – and now you’re back to the “low carbon” side of the coin. The two voluntary measures – reducing personal emissions, and surrendering AEUs, are quite complementary, rather than contradictory, as you suggest. (Having said that, I still believe that rational economic self-interest will remain as the primary driver of change. For most people, the reason they will install insulation, reduce their driving or buy products with low embedded carbon will be because it is cheaper, once the proper carbon price has been introduced).

I would make a similar argument regarding other measures such as the MRET – it complements the cap-and-trade strategy because it helps to force along the process of innovation, thereby reducing the overall cost of the low-carbon transition. It is well established that market instruments alone are not enough – see Chapter 16 of the Stern climate change review for an excellent summary.

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It is however, all too easy to fall into the trap of thinking that because a cap and trade approach uses the word ‘cap’, that this would deliver a better emissions outcome

But equally, there is no guarantee that a tax will deliver a better emissions outcome. Consider these two scenarios:

1. We set the tax too high (that is, higher than is necessary to reach our national target, whatever it may be). Environmentalists are thrilled. Businesses leaders, on the other hand, are furious, pointing to unnecessary economic pain and job losses. No government wants to be branded as economically irresponsible, so they are forced to reduce the tax to an insignificant level or repealed it.

2. Due to political pressure, we end up setting the tax too low. There is insufficient incentive to lower our emissions, and it slowly becomes clear that we are missing our targets. Even so, raising the tax is a huge political struggle. The profitability of our big emitters is already reduced, and they are prepared to fight any tax increases tooth and nail, by stoking the old fears about job losses and demanding compensation. Meanwhile it’s 2015 already, and our emissions have been steadily increasing.

Both of these scenarios are bad, but based on current experience the second one is more likely.

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A carbon tax must be set in the context of agreed goals such that businesses will have certainty that if collective emissions don’t reduce fast enough, the tax will be increased. This creates a huge imperative for businesses to reduce emissions and to be seen to b reducing emissions so they are not responsible for increasing costs to all others in the economy.

On the contrary, this situation encourages free-riding on the efforts of others. I doubt the “naming and shaming” approach, if that’s what you are suggesting, will be effective at all. Each business will continue to maximise their own profits, hoping others will do the hard work on emissions reduction.

In any case, why would our emissions targets under this scenario be any different to the current inadequate levels? The targets would be a product of the same political process, so we would presumably still be aiming for 5/15% by 2020. We would be no better off.

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Neither a cap and trade approach nor a carbon tax are immune to being compromised when dealing with the realities of picking winners to protect jobs and existing businesses.

I think you hit the nail on the head there. You can’t compare a pure and perfect carbon tax system with a compromised CPRS – the carbon tax legislation would have to go through the same process as the current legislation, probably with the same result or worse, as MattB points out above.

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The more I think about it, the more Peter Wood’s suggestion of a cap-and-trade system with a price floor makes sense – it seems be a “best of both worlds” scenario, addressing the problems of both cap-and-trade and a carbon tax.

Overall, I agree strongly with John Newlands that we should be spending our effort trying to reform the currently proposed legislation rather than arguing for something entirely different. The emission reduction targets are the most obvious area to be attacking, and that’s where we should be focusing our attention.

So under an ETS with a price floor, voluntary measures will count more than under the CPRS. I agree with you that the CPRS is also a hybrid scheme, because of the transitional price cap. It is true that under an ETS with a price floor voluntary measures don’t count all of the time like they do when there is a carbon tax (or when there is no carbon price). But when they don’t count as much (when the emissions cap is determining the price), you get the added advantage that a specific cap is being met. This has direct environmental benefits, and benefits in terms of facilitating international cooperation. I believe this is more important than whether voluntary efforts count.

One way that a price floor could be introduced is by having a reserve price when permits are auctioned. Another way that a price floor could be implemented would be to have firms pay an extra fee (e.g. $20 per tonne) when they surrender their permits. In that case the carbon price becomes equal to the sum of the permit price and the surrender price.

Kyoto targets were negotiated without regard to the mechanism that would be used within countries to reduce their emissions, and credibility will come from legitimate action.

I would argue that a target negotiated for a cap and trade approach will 1) never the right target and 2) will be less than a learning by doing approach that can be motivated by a tax mechanism which fully involves the whole economy. Critical difference is that the total economy change will facilitate a tightening of targets faster than limiting the game to the biggest players.

I guess that my central argument as to why carbon tax is better than an ETS with a price floor is that voluntary actions are not constrained, they become central to driving innovation to avoid the need to pay the tax.

I am dismayed by the fact that under the CPRS, customers will pay more but have little choice. Under the CPRS, a customer cannot buy renewable or lower emissions electricity from the grid to avoid their scope 2 emissions and be assured that they avoid or reduce the CPRS pass through costs. NGERS, the CPRS Exposure Draft Legislation and the NRET Exposure Draft Legislation don’t cover renewable energy to be bought by customers and so the GreenPower concept is nothing more than a donation to all other grid users.

I think that the most important thing for the tax to work is Government commitment to increasing the tax if National emissions are not reducing fast enough and this can be adjusted on a yearly basis.

I agree on implementation issues yet my view is that it would be best to have targets that are determined independently of the mechanism. I regard adjusting the caps to reflect voluntary action as guessing and fiddling.

A carbon tax acts on a tonne of CO2-e emissions more consistently than a permit price that can plummet because of economic cycles and over-allocation.

If we were to be setting caps at a sustainable level
determined by science, I would be quite happy with a cap and trade approach but unfortunately this is not the case.

A Cap and trade approach with a price floor becomes hybrid that incorporates a tax at the lower end, and our CPRS also has a tax of $40/tonne at the upper end.

To some extent I could accept that the future of CDM based credits that are currently available from developing nations may not cease should all countries adopt targets, but there would need to be a major overhaul of the mechanism. As it stands, Australian companies will be able to buy CDM credits based on renewable energy projects from overseas, but won’t be able to buy locally produced renewable energy as an energy product to avoid CPRS costs and to avoid scope 2 emissions.

My view is that determining the most cost effective way to use the revenue to pull through better technologies is secondary if selecting a carbon tax as the central policy issue. If using a Cap and Trade approach however, using the revenue in a way that picks winners beneath the cap is contrary to the concept of the mechanism (whether this is for coal CCS, renewables or smelting).