You say with regard to the surrendering of permits “This will cause greater AEU scarcity, increase the carbon price unnecessarily, increase the cost to the economy of achieving the same level of abatement”. I don’t understand why you say the ‘same level of abatement’? The total amount of permits, hence level of emissions, is now lower because some permits have been surrendered. This is why the country has had to move up the abatement curve and increased the carbon price.

Or are you referring to the total national target (kyoto level, both covered (ets) and non-covered sectors) and that the non-covered sector can now pollute more. If the later, then maybe it should be made more clear as to why there is going to be automatic displacement from the non-covered sectors.

Thanks
Paul

“Is this true, if I reduce by electricity consumption, a coal fired power station will use say one tonne less coal”,

YES(approximately 1 tonne CO2-e per MWh)

“but will sell 1000kWh [1MWh] less electricity so the cost of the 999,999 permits it does buy ( assuming it was producing 1,000,000 MWh per year @ 1tonne/MWh) a will be spread over fewer sales so almost the same cost”

ANSWER If the scheme is operating at the safetey valve price of $10 in the first year or $40 in year 2, or $40+(CPI+5%) in years 3,4 or 5 then the price per tonne is not changed through the action

“If the permit price is being held below $40/tonne, the price per permit will be the same”.

If the scheme is operating below the price cap, in year 1, the permit price could technically fall below $10 if businesses sell of permits that are not needed near the end of the year if they have confidence in their forecasts.

In the following years to 2016, the sale of the spare permit will incease supply and the permit can also be sold for less than the safety valve price.

“Now if the utility starts up a wind farm, producing 100 MWh [lets say 100,000 MWh/year], and now only produces 900,000 tonnes of CO2, it will still sell 1000MWh [1,000,000 MWh)] of electricity so the cost will be averaged over larger sales”.

YES the cost of its permits will be spread over its total energy production sales. It will also receive less assistance in terms of free permits from the Government.

“ Similarly if prices are at the bottom of the range($10/tonne). If prices are intermediate, 10% conservation will reduce the permit price by 10%, but a utility will still be 90% better off with 10% of power from wind energy”.

AGREE, within the compliance market things work OK. The difficulty comes in seeking to do anything more than compliance in terms of reducing National Emissions.

As a collective organisation I believed the Labor Party when they pledged to take action on climate change and this meant reducing Australia’s emissions. I also believed the previous Federal Government’s pledge to head the same way which was made close to the election. I therefore Agree with a) The ETS was to to reduce emissions. But Governments also believe in supporting b) to lessen the impact emissions reductions might have on certain sectors. So we have a piece of the diabolical problem described by Professor Ross Garnaut.

In the global context I don’t believe that an ETS is the only mechanism that can underpin commitments and trading in offsets.

We are still searching for the silver bullet to avoid the structural economic change that is needed. We seek change without change. Whilst bio-char, carbon capture and storage, overseas credit units from avoided deforestation, renewable energy and other technologies could all be part of Australia’s solution they wont be enough without a market framework that prices in the climate harm cost in a way that has sufficient meaning to drive implementation of low emission technologies to the detriment of polluting technologies.

We are building walls to some extent but perhaps the bigger failing is in not building the foundations for a new low emissions house in a market economy that polluting industries can move into. Perhaps if we had a National Transition Strategy to complement the National Greenhouse Reduction Mechanism (being the tax or an ETS if we are prepared to cripple voluntary actions) we would not need to keep the walls. In the Tax versus Cap and Trade debate I discuss creating a Department of Climate Change Defence so we get the job done but a National Transition Strategy is probably the first step.

Is the ETS a victim of this outlook?
Well to some extent it is, as the ETS was seen as something that could provide business certainty. But can we have certainty when emissions are unsustainable?, only the certainty that this cannot continue.

I think that the ETS is actually a victim of its initial support, in that it was not a tax so that had to be good. It was never fully analysed as to how it would work in a complex market and every review since has protected an earlier position. I trace this as far back as the previous Howard Government Environment Minister Ian Campell in article with the headline “Campbell rules out ‘stupid’ carbon tax”*. I don’t even think that the former Minister was referring particularly to a tax, as it was probably inclusive of both an ETS or a tax compared with the Howard Government’s voluntary approach.

However, the ‘Stupid carbon tax” headline helped set the stage for picking an ETS option without thorough debate on the best mechanism (with the exception of Warwick McKibbin who explored the benefits of a hybrid Tax/ETS, but still without much on the impacts of voluntary mechanisms). The NETTs review, the Garnaut Review, the CPRS Green Paper the Wilkins Review of Government Climate Change Programs** (publicly released last week with minimal announcement if any) and the CPRS White Paper all seem to have followed on supporting an ETS with little mention of the collateral damage on voluntary mechanisms that are now causing the Government headaches.

If the ETS does not get through Parliament there may be an opportunity for a bipartisan approach to come up with a mechanism that works for all markets.

* http://www.abc.net.au/news/newsitems/200606/s1658808.htm
**http://www.finance.gov.au/publications/strategic-reviews/index.html

Thanks for the post, I’m still working to get my head around it. In the meantime I just wanted to ask a question, but, to start with you and I would most probably have the same view on the global reason for introducing an ETS in Australia. However, given all that has gone on what do you think the main or real purpose/emphasis for designing the ETS has been? Is it a) to reduce emissions or b) lessen the impact emissions reductions might have on certain sectors. I think the two are different. Given all the argy bargy that has gone on I would say it is b) and the unintended consequence (apart from not reducing emissions by a useful amount) is that we are building walls around particular sectors (e.g. coal fired generation) that will make it much harder to make needed changes as time goes on. I have posted previously that all my tax dollars being ponyed up to the coal sector is just making them welfare dependent.

We do seem to have this problem in Australia of avoiding change when it is needed and is the ETS a victim of this outlook?

There are quite a few economists and other people involved with climate policy who do not believe that there should be trading between land use sectors (probably including agriculture) and non land use sectors. With land use, measurement is much more uncertain, and accounting is much more uncertain. There is also the issue that the amount of emission reductions is much more uncertain, and could be quite high (this was suggested by the chapter on land use in the Garnaut Review as well). If the amount of possible emission reductions in the land use sector is quite high, a weak cap in an ETS would not be sufficient to make these emission reductions happen. For these reasons I do not support the inclusion of land use and agriculture in an ETS covering the rest of the economy. Therefore other carbon pricing or emission reduction policies in the land use sector should be considered.

I would not support capping particular sectors associated with fossil fuel use. Determining particular caps for each sector would be a dogs breakfast, more politically difficult (each sector will plead for a weaker cap) and most probably more expensive, for no more net emission reductions.

There was a mistake with what I said above, under the CPRS the year of the fixed price of $10 per tonne is 2011-2012, not 2010-2011. In 2010-2011 there will be no carbon price.

From mid-2012 until the financial year staring in mid-2016, Australia’s emissions could exceed the emissions determined by the cap if the carbon price becomes sufficiently high that firms buy permits at the price of the fixed cap (which will be $40 or more). Whether this happens or not will depend on the emissions trajectory and what the Australian economy is doing, but bear in mind that the first five years of the trajectory (as specified in the White Paper) will have reductions that are quite low.

My understanding is that firms will be able to buy an unlimited amount of international CDM credits (Certified Emission Reductions or CERs) to account for their emissions in any case. At the moment the CER price is much less than $40 per tonne, so it is likely that this will prevent the Australian carbon price becoming as high as the price cap. There are two problems with firms being able to buy an unlimited amount of CERs: firstly, with CERs, additionality is questionable, there have been studies that suggest that many CDM projects would have happened even if CERs were not available; secondly, my understanding is that firms will be unable to sell Australian permits on the international market, leading to the possibility that the Australian carbon price is lower than international carbon prices, leading to the risk of carbon leakage to Australia.

Surely the efficiencies are within an industry, we are actually trying to stop the biggest CO2 emitters from closing down by giving out free permits to ensure they don’t close, that’s surely whats making a “dogs breakfast” out of a potentially clean trade mechanism. You are not going to be able to stop exporting some CO2 emissions, why not phase out 20% of aluminium refining, keeping the most efficient operations going?
We can move fastest and further with coal-fired electricity, because we lots of lower carbon alternatives, it cannot be exported( except for aluminium) that’s where we need maximum squeeze with a cap of 90% present CO2 going down 2% a year to 10% in 2050. It would be clear that no new coal fired plants can be built without at least 90% CCS, and all others will have to be closed as they approach 40 year life.

All actions taken to increase emissions or decrease emissions are voluntary in the absence of a scheme, under a cap and trade scheme or under a carbon tax scheme. (percentages applied to the efforts of individuals, households and businesses in terms of where emissions might have been if people took no action cannot be realistic as there is no reliable way to make such an assessment).

Under an emissions trading scheme any business can choose to increase emissions and it is only customer ‘willingness to pay’ for the necessary Australian Emissions Units (AEUs) or approved international emissions units (IEUs) that control the success or otherwise of the business. New greenhouse intensive businesses can start up providing they are given and buy AEUs or buy IEUs. Any decision a business makes to reduce emissions and avoid the need to pay the cost of such units, or to sell excess units to others is also voluntary.

It is therefore only the voluntary cost that matters even beyond 2015.

The key difference (appologies to Jenna for rabbitting on) is that under emissions trading, voluntary mechanisms and the effectiveness of voluntary actions to reduce emissions by any more than the legislation requires, are significantly harmed. So I agree that voluntary action by more than the cap will always be minor but only under emissions trading. I don’t believe that this aspect can be fixed and believe that the Government could be more open and transparent on the issue.

Under a carbon tax however, all actions for reduction are voluntary whether acting on direct or indirect emissions, and all actions contribute to the end result in a straight forward way. Where voluntary actions are damaged under one option and supported as mainstream by another I don’t think that a generalised statement can apply.

I also agree on the “dogs breakfast”.

Assuming that the Government’s legislative package is passed, the future cap will of course be dependent on legislative developments and changes that might take place between the passing of legislation and 2016, the supply (and cost) of overseas offset units that bypass the cap, and ultimately Australia’s (businesses, individuals & Governments) preparedness for a cap.

So Tim is correct that the CPRS is similar to a carbon tax because of the price ceiling, but only until mid-2016. In my opinion, a much better way to make the CPRS similar to a carbon tax is to introduce a price floor.

The CPRS legislation has turned into a dogs breakfast. Unfortunately when the full implications of the 20% MRET are grasped we’ll do it all over again.

Is this true, if I reduce by electricity consumption, a coal fired power station will use say one tonne less coal, but will sell 1000kWh less electricity so the cost of the 999,999 permits it does buy will be spread over fewer sales so almost the same cost. If the permit price is being held below $40/tonne, the price per permit will be the same.

Now if the utility starts up a wind farm, producing 100 MWh, and now only produces 900,000 tonnes of CO2, it will still sell 1000MWh of electricity so the
cost will be averaged over larger sales.

Similarly if prices are at the bottom of the range($10/tonne). If prices are intermediate, 10% conservation will reduce the permit price by 10%, but a utility will still be 90% better off with 10% of power from wind energy.