Saturday, July 19, 2008

Carbon Pollution Reduction Scheme

This is my take on a ponderous, overly-long document. They were notes for a university class so if I’ve missed important points I’d appreciate being told.

According to the Green Paper we will have an emissions trading scheme (ETS) – a Carbon Pollution Reduction Scheme (CPRS) - by 2010 based on cap & trade. The cap will be consistent with the goal of reducing national emissions by 60% below 2000 levels by 2050 – a bound that may be too low but which is a start. The caps & hence the equilibrium carbon prices will be determined in a White Paper in December 2008.

Generally the scheme seems a good start to me. Many of the criticisms of it are at best naive.

There will be a cap on the price businesses would pay for permits from 2010–11 to 2014–15 so a hybrid trading/price system. This enhances the credibility of the scheme by ensuring carbon prices don’t get ‘too high’ and also provides predictability as we move into unchartered territory.

The propaganda arm of government has been quick to point out that more than 99% of all firms in Australia will not be directly involved in the regulation of emissions. Only about 1,000 firms will be directly affected although, as general equilibrium theory makes clear, there will be impacts throughout the community. That is the idea – to change people’s behaviour by making them respond to higher prices. Significant emitters must acquire or be granted permits.

The transport sector will be covered but, for 3 years, charges on petrol will be offset by excise reductions. This seems inevitable to me given rocketing fuel prices. If fuel prices did slump in 3 years the policy could be revised.

An ‘equivalent’ rebate will be applied to businesses in agricultural & fishing industries for 3 years – this was seen as necessary as excise system does not apply to this sector. A bit weird.

Forestry is included on a voluntary ‘opt-in’ basis. Carbon pollution permits additional to the cap would reward the net quantity of CO2 stored in forest. A liability would be imposed for net reductions in stored CO2. Deforestation is not included in the CPRS which I think is a mistake.

Agricultural emissions are not included until at least 2015. Predictable -  but this sector is a major source of emissions – eventually it must be included.

There is limited scope for offset credits on the grounds of the implied administrative complexity - you know ‘what would have happened in the absence of a particular decision’.

Carbon pollution permits could be used in any year from or after their year of issue (unlimited banking) with limited borrowing from future scheme caps is possible. Seems sensible.

The scheme will be designed to link with other schemes overseas to lower the price of carbon pollution permits in Australia. The decision to link would depend on the reliability of the monitoring systems, of another country. Sensible.

Revenue raised will help households & business adjust. It will provide low income households with increases in assistance through the tax & transfer system & all households with some assistance. This is reasonable. The aim is not to levy another tax but to change relative prices. I would cut GST and income taxes and push for greater reliance on ‘double dividend’ yielding green taxes such as those implied by the CPRS.

A Climate Change Action Fund (CCAF) will assist business transition to a cleaner economy. The CCAF will assist in funding capital investment in innovative low emissions processes; industrial energy efficiency projects with long payback periods; dissemination of innovative practice among SMEs. Strongly agree – demand management measures will be insufficient. Also need supply measures and measures to induce appropriate technology switches.

Free permits will be supplied to the most emissions-intensive trade-exposed activities to reduce ‘carbon leakage’. Around 30% of free permits will go to emissions-intensive trade-exposed activities. Strongly agree with the sense of this and disagree with much commentary on this issue. The objective is to charge for emissions associated with Australian carbon consumption not production – to charge on a destination basis. Ideally this would be achieved by taxing our consumption of carbon producing goods that are produced locally and by taxing imports of such goods – via retaliatory tariffs - if other countries are not taxing carbon emissions. Exports would be tax free. This amounts to charging for emissions on a destination basis.

The bureaucratic machinery to work all this out would be nightmarish. Just giving free permits to major exporters is enough. This principle should extend to all carbon intensive exports including those of environmentally friendly natural gas. The grizzles by BHP-Billiton and Woodside Petroleum are fully justified and I hope will lead to a policy change by government.

Assistance to trade exposed industries will be on the basis of industry average activity emission intensities to ensure businesses have an incentive to reduce their emissions leading up to the introduction of the scheme. It would reward those firms that have already taken action to reduce their carbon footprint. The rate of assistance given will be gradually reduced over time at a pre-announced rate to ensure all parts of the economy contribute to the objective of reducing emissions. I am not sure that these points reflect a sound understanding of the principles of destination accounting or not. Again, we should tax our consumption of carbon not our production – that is the point.

The Government proposes to provide a limited amount of direct assistance to existing coal fired electricity generators. To ameliorate the risk of adversely affecting the investment environment, the Limited direct assistance will be provided to existing coal-fired electricity generators via the Electricity Sector Adjustment Scheme (ESAS). I don’t really think this is sensible. These are non-traded goods and the prospect for carbon trading has been anticipated for years. For the most part this will be a cash handout to multinationals that will not have any effects of making them greener. I’d rethink this one.

An independent scheme regulator will be established to conduct reviews of the CPRS every 5 years. The responsibilities will be to monitor and enforce compliance, run auctions for permits, allocate free permits according to specified rules & maintain the national emissions registry. Unfortunately the Government will set and extend scheme caps and gateways, decide the nature and extent of international links, and decide when allocations of free permits to emissions-intensive trade-exposed industries should cease.

On this last point I would have set up an independent authority that had most powers with respect to these issues. There are too many opportunities for backtracking by future Labor and Liberal Governments. There are real credibility issues here. Industry will only undertake the sorts of massive capital investment programs sought if they expect carbon trading to last.

We need to be committed to a program of carbon pricing that will gradually lead to a phasing out of the use of fossil fuels in the economy.


Tim said...

Good piece, Harry. Thanks. The only thing I'd like to hear you comment more on is what you think the carbon price should be. (The govt has been quoting an inflation effect of .9% which implies a price of $20)

Anonymous said...

Surely if major emitters receive free permits, they have no incentive to raise the price of their products in a way which would hurt demand - therefore leading to no change in consumption.


Spiros said...

Al, that's not true. Garnaut covers this. Major emitters got free permits in Europe and put up their prices anyway. If you give an emitter a permit worth $100 then their choice is to not produce and sell the permit for $100, or use it by making things that emit carbon. If they choose to do that, they've got make at least $100 over and above what they would have made pre-permits, which implies they will put up their prices.

mkwrk2 said...

All this money redistributing is heavily based on a wrong assumption, that a natural process of the planetary aging had been initiated with and occurring because of a mere human impact.

It is not.

As I had already stressed at scientific/ engineering meetings and on Internet pages worldwide, this next financial burden on not-haves could be as much practically useful for a purpose of an environmental protection as apartment blinds postponed a sunrise on the Earth.

May one provide an appropriate e-mail address to draw the government minders’ attention to such a realistic opinion?

M. Kerjman

Anonymous said...

"The bureaucratic machinery to work all this out would be nightmarish."
Not for the bureaucratically minded exponents it won't.


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I like this submission by Kerjman having already written below here:

Really what is good in air trading but following one's profit only?

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