Garnaut’s latest on emissions trading
March 20, 2008 by Tim Hollo
Right at the end of a crazy week, and right before the black hole of the Easter long weekend, the good Professor has published his latest paper on emissions trading which you can download here.
In short? It’s good.
Solid on auctioning permits rather than handing them out to polluters, although a bit of hedging his bets for trade exposed industries. Good on using revenue for energy efficiency - let’s hope the Government pick him up on that one at least.
Not so great on starting with lax targets and unlimited borrowing from the future.
Christine’s release is here.
I am a little worried about Garnaut’s hints that he will leave agriculture out initially.
My immediate family (including cousins) farm 30,000ha (crops not livestock). We all want to be on the front foot with regard to climate change.
We would like to implement emissions reductions strategies now, but can see we will be penalised if we do so and others don’t since they will be able to be viable selling cheaper than we could.
On another point, I know first generation biofuels are on the nose generally, however the “diesel tree” recently in the news has grabbed my attention. Some info here:
http://www.hort.purdue.edu/newcrop/duke_energy/Copaifera_langsdorfii.html
Proponents say it produces 12,000 litres of diesel per hectare. It requires minimal processing (filtering basically, no messy conversion process) in order to go straight into the fuel tank.
Assuming you don’t do something ridiculous (like Indonesia’s approach to palm oil) is there any analysis to indicate that the diesel tree suffers the same lifecycle problems as other first generation biofuels?
As an example, can anyone comment on the net lifetime emissions profile if a high rainfall Queensland cane farm or say a dairy farm is converted into a “diesel tree” plantation?
In such a circumstance can the “diesel tree” be an acceptable biofuel?
I have only read about half of the paper so far but it is much much better than the proposals from the state’s National Emissions Trading Taskforce, or the previous government’s Task Group on Emissions Trading. It is very good that Garnaut prefers auctioning permits (but it would be better without misplaced assistance to trade exposed industries). It is also very good that Garnaut seems to understand the importance of a simple scheme that is hard to be gamed or undermined. I like it how Garnaut has “being robust in the face of pressures from vested interests” as an objective of the scheme (p24).
I do like the concept about having multiple trajectories as a form of facilitating international cooperation but there are very serious problems with the proposal as it presently stands. For Australia to choose anything weaker than Trajectory D would be incredibly environmentally irresponsible. Trajectory B is premised on Australia making broadly similar effort to the average of other developed countries based on existing commitments. This ignores the much higher per-capita greenhouse emissions that Australia has and therefore is not in agreement with the principle of contraction and convergence.
I also have serious concerns about the reviews proposal that a shift to a tighter trajectory would occur five years after it is announced. This is too long and represents a huge environmental opportunity cost.
While it is not perfect (it is after all a discussion paper), it is a very good approach to emissions trading in Australia.
I confess to not having read the paper in full yet, but I want to know why a carbon tax is totally absent, off the agenda, nowhere to be found?
Perhaps this is simplistic, but adding x? percent to the GST would use existing administration and systems and is able to be implemented almost immediately. The exceptions to the GST could be roped in, and voila, you have a universal carbon inclusive revenue system.
- The GST effectively becomes a consumption tax on all human activity in Australia. This means all will share the cost in proportion to our consumption/carbon emissions - businesses included.
- Adding the GST+ x? percent to food instantly includes Garnault’s major ‘too hard’ basket ingredient - agriculture.
- Money raised form the increase and inclusions is easily quantifiable and could be specifically earmarked for carbon reduction programs.
- If we’ve made a huge blunder (the sceptics are right) a tax is easily undone. Unlike the dismantling of a trading system which will inflict much pain on those left holding worthless permits.
- Our exports can be tax exempt/credited until such time as there is a world carbon trading system (probably some time after the poplar caps have melted and Europe has a massive refugee problem).
- Imports will be simply included, taxed and not require complex and special treatment as they will with a trading system. It also does not place domestic production at a disadvantage.
- A tax is national and what the rest of the world is doing becomes irrelevant. No future ‘harmonising’ of various international trading systems either (more admin costs).
- When (if) a global carbon trading system comes in to force we can join and adjust a tax easily to suit.
- Trading systems come with all sorts of taxes attached, gst, capital gains, payroll etc. More paperwork and less revenue for carbon offset/ reduction technology than a carbon tax as part of the GST.
- Auctioning permits is a one off revenue raiser, a tax is forever
Auctions may be a transparent process and a market price will be set for the permits, but it is not equitable as it assumes an ability to pay market prices. Think of housing for a minute; we all need housing but the homeless can not afford to bid at auction. It is not axiomatic that those that need the permits will be able to afford them. Nor is it axiomatic that these same businesses/people are ‘evil’ and deserve to die / be homeless.
Accepting Garnault’s best of intent for transparency etc., if you think back door deals won’t be done for the powerful, I have a nice bridge in Sydney I can sell you - I might even auction it.
And before we get carried away, at what price will carbon be traded? We don’t really care except that at day one there must be a price set - bit like an IPO. At launch of trading there will be a massive reallocation of (paper) wealth with winners and losers.
And who will really benefit from a trading system? If I weren’t philosophically opposed, I’d be buying shares in the ASX!! Why else do you think the carbon trading system has the support of ‘the market’ - there’s money to be made, and lots of it!
So it seems to come down to this, do you trust the market or the government to act in the best interests of the people?
Anyway come the revolution comrades, I’ll line up all those blinded by this market driven trading dogma and have them shot! This will have the added benefit of reducing our population significantly and part solve the carbon problem
Seriously though, why is a carbon tax not being discussed? It seems so bleedin’ obvious; it must be a paradigm thing.
Forgot to add …
I find it hard to imagine a government ‘adjusting’ an existing market trading system based on ‘free’ market principles with ease (try to visualise the government ‘adjusting’ the ASX). Just as I really can’t imagine a ‘free’ market trading system working for the common wealth (try to visualise the ASX redistributing wealth on a needs basis).
Unless I am mistaken the carbon issue is one best handled by those with a professed interest in the common good - this is not a vested interest market trading system for profit maximisation, however well intended!
It is a free market trading ideology that has got us in this mess in the first place, and to quote Einstein “The problems that exist in the world today cannot be solved by the level of thinking that created them.”
Subvert the dominant paradigm!
mcfarm, some really important points there. I think the very last is the key, really, isn’t it?
Re tax vs ETS, the main reason many greens support cap and trade systems, even though we have many problems with them on the basis of complexity and ‘privatisation of the atmosphere’ (’enclosure of the commons’), is the issue of environmental certainty.
Where a tax sets a price and hopes that it will have a particular environmental impact, cap and trade sets a definite limit on pollution (based, hopefully, on a sophisticated analysis of what environmental impact that level of pollution will have) and doesn’t care that much about what the actual final price on carbon will be.
While I agree that an ETS can be undermined by clever gaming of the market, at least at heart it sets a definite limit on pollution. If you rely on a tax, you really have very little idea of what sort of emissions cuts you will actually achieve.
That’s why I think either should play only a minor role, supplementing the main policies to really push energy efficiency, renewables, alternative transport, etc, etc, etc.
Tim, decouple “cap and trade”, they are separate issues with different supporting mechanisms and agendas.
It is only the cap(s) that gives environmental certainty, and this will be set by government(s) hopefully based on the best science available.
Trade is just trade, no environmental certainty needed, and so will need to be regulated to be effective. Most of Garnaut’s report deals with regulating trade imbalances, market failure compensation mechanisms, and the need for international trading mechanisms to be in synch / regulated.
I believe with a little thought, a greatly simpler “cap and tax” system is possible. The cap takes care of the environmental certainty, and the taxation revenue would fund equitable adjustments for those least able to pay, and pay for carbon reduction policy implementation (the main game), which in turn helps meet the cap.
As I see it carbon trading is just a Furphy, diverting much time and energy away from the “main policies”. Not only that but it will offer significantly less revenue to fund these same policies, because many billions of dollars will be ‘locked up’ in a trading system (unlimited hoarding). With the advent of an international trading system, a lot of this ‘carbon money’ will head off shore too - think (scary thoughts) carbon hedge funds and carbon futures trading. As I said, there’s big money to be made and this would be better off in the public purse, being used for the common good.
Raising the GST say 2% on ALL goods and services would fund huge amounts of carbon reduction programs and policies. I suspect it would be supported and barely noticed by most Australians, be transparent, equitable and so on. Easily implemented, easily administered, easily adjusted, the carbon tax would have the added benefit a dampening demand - unlike the imminent tax cuts. Dampening demand = less carbon released.
Mcfarm,
I’m not sure if I understand correctly by what you mean by ‘cap and tax’. But if what you mean is where the total amount of emissions covered is determined by a ‘cap’, and that determines how much taxation there is, then that is equivalent to a ‘cap and trade’ system with full auctioning of permits - i.e. the polluter must pay.
If there are permits allocated for free, then I agree with most of your criticisms.
Like a carbon tax, the revenue raised from such a framework can be spent on carbon reduction programs. As Tim pointed out, the advantage of a cap and trade system (with full auctioning of permits) over a carbon tax is that the amount of greenhouse gas reductions are quantified almost exactly - there is less environmental uncertainty.
Like a GST, cap and trade systems and carbon taxes are regressive to a certain extent. One thing I like about Garnaut’s proposals so far is that he wants to spend some of the money raised from auctioning permits in addressing regressive impacts.
Peter Wood,
In both cases, cap and trade or cap and tax, it is the target setting common denominator (aka the cap) on total carbon emissions that will limit emissions. What a tax or fine or trading system is meant to do is, a) facilitate and/or ensure the cap is met, and b) raise revenue to compensate the losers.
So the government has set the cap which, for reasons known only to themselves, is 60% by 2050. The trajectories are all moot and very rubbery, hence Garnaut’s stated need for much more economic modelling. However at this stage the 60% by 2050 is the only limit (proposed by the government) to carbon emissions we have.
With a cap set by govt. policy (policy contains the ‘why’ we are doing it), the mechanism is the ‘how’ we get to the magic figure of 60% by 2050. The how will be one or more of; trading, taxes and fines. What I am arguing is that the trading system is not the best mechanism to get to the cap. It is being driven by a free market dogma, and the free market has been proven not to work for the common good as it is designed to maximise private profit.
A universal consumption tax is simple, and all will be caught in the net. Who is the polluter; the coal company who extracts the coal, the electricity utility that burns it, or the end user that smelts aluminium or turns on the air conditioner? With a universal consumption tax it doesn’t matter, they all will pay. But just as importantly they will all pay in proportion to their consumption.
It is relatively easy to calculate the rate of tax required to meet a stated objective, this is what economic modelling does best. The reason Garnaut is having some trouble with a trading system is the many variables and hence major exclusions (agriculture and forestry).
What is the difference between; setting a target based on economic data and then adjusting the appropriate number of permits for sale and, based on the same data setting the tax rate? Absolutely none.
I agree that money raised from the auctioning of permits should be spent on addressing the imbalances and inequities created. But this about spending the revenue once raised, at this point ‘how’ it is raised is irrelevant.
“As Tim pointed out, the advantage of a cap and trade system (with full auctioning of permits) over a carbon tax is that the amount of greenhouse gas reductions are quantified almost exactly.”
Firstly, accurately quantifiable carbon savings confers little advantage when the total figures for Australia’s carbon emissions are so rubbery.
Secondly, any carbon emission figures needed for economic modelling will be provided by scientific estimates based on latest data. If these calculations of science were tied in to total economic activity GDP in the economic models, the quantification of carbon savings will be quite accurate, irrespective of the mechanism used - tax or permit.
I suspect this is a case of not seeing the forest for the trees. We are all caught up in a debate (hijacked by economic rationalism) on the merits of a trading system, when we should be saying “what is the most effective and equitable mechanism to reach the goal (cap)”, and is the cap adequate to achieve this goal?” I really don’t believe a trading system is the most effective mechanism which, as Tim points out, is the privatisation of the commons. How the Greens can support such a system is beyond me - it smacks of political expediency.
The Magnificent Tarkine is a popular thread, so let me put the Green’s current position another way:
- The carbon trading system as proposed by Garnaut is the same as auctioning a limited number of permits to exclusively log the Tarkine based on a fee, payable to government, to be determined by trading on the open market.
The ONLY difference is that the Tarkine is currently protected by legislation for the common good. Now if that doesn’t make the Greens feel very uneasy about their support for free market carbon emissions trading, nothing will.
mcfarm, I can’t let that last one go
You misrepresent our position. Let me try to have a go at translating the Greens’ position on carbon trading to a forestry example.
Our position would be that we believe the best way to save old growth and high conservation value forests is to regulate to progressively stop logging in them. We are pushing for a range of regulatory measures that will help set up alternatives and make logging as unattractive as possible before finally making it illegal, at the same time articulating as strongly as possible the scientific underpinnings of why we need to do so.
In the meantime we recognise that Governments are pushing ahead with plans for tree trading. Within that reality, which we don’t necessarily support, we must play a key role in making sure that the tree trading system at least doesn’t undermine action to stop logging and, if possible, helps to phase it out. Therefore we want to see all permits for logging auctioned off to the highest bidder to ensure clarity and not transfer more wealth to those who do most damage. And we want to see the number of permits very strictly limited and falling to zero as fast as possible. Permits will not allow activities which have otherwise been made illegal.
I hope that makes sense. Of course we are spending a lot of time discussing emissions trading. That is the political reality we are in. We are getting an emissions trading system and pretending otherwise is fruitless. We need to make sure that it works for us, not against us. It might sound like political expediency to acknowledge that, but on the other hand it would be deriliction of our duty to not attempt to make it as good as possible. And before anyone says that is akin to what the Dems did with the GST, it is totally different - they had the power to stop it. We have to recognise our limitations, and the simple fact that we don’t have the power to stop this, even if we decided to try.
On another issue:
Forgive my cynicism, but, really? Setting a carbon tax level to achieve a given emissions reduction is notoriously difficult, if not impossible, given in particular that so many of the markets involved are highly inelastic. It has been argued that you’d just keep adjusting along the way depending on the results you were getting, but that would be a political minefield. It would be hard enough to get the concept accepted in the first place, and I can only see it happening if polluters were given ‘certainty’ that the tax would be reasonably steady, if not locked for years in advance.
I haven’t finished reading the ETS document either, but I’ll add my thoughts so far to what the other contributors have said.
Peter Wood @2, I share your concerns about a 5 year lag between announcement of a new trajectory and its implementation, I am even more concerned about this bit of text on p27 “If new international agreements required the movement to a new trajectory prior to the honouring of the notice period, the five years stability would be honoured by the authorities, and the emissions outcomes reconciled with international commitments through the purchase of international permits.” In other words, Australia is a rich country, if things get politically tough we’ll just buy our way out.
Mcfarm @3, simply increasing the GST is no solution, the whole point of this exercise is to reduce the emission of greenhouse gasses by making greenhouse intensive activities less competitive with other activities. Putting a price on carbon reduces the attractiveness of an aluminium hulled boat, and to a lesser extent a fibreglass hulled boat, to a wooden alternative - though in this example the carbon price would need to be very high to precipitate a major shift to wooden boats (an emission cost of $50 a tonne for CO2-e should increase the production price of the most popular sized aluminium tinny (160 kg hull) by less than $250).
Mcfarm @6, I completely agree that cap and trade are separate issues, and should be decoupled. The auctioning of carbon emission permits is superior to a straight carbon tax because emissions are capped (subject of course to measurement and enforcement). By my thinking a carbon tax and the auctioning of permits are nearly identical, the main difference being that with permits the carbon price/tax is set by the market. Setting up a secondary market for the trading of permits when viewed through this prism is the same thing as setting up a secondary market for the trading of a tax liability. Do we really want people to profit through the trading of a tax liability, I say no, in fact I say lets design the system so that its impossible to profit financially through the trade of permits. Its easy to do too, all you need is a rule like “permits are not transferable, they may be sold back to the issuing authority at a price that is x% lower than the price paid at auction, or x% lower than the closing price at the last auction, which ever is lower.”
That covers the domestic trade in emission permits, as for the international trade in permits and abatements, hmmm, I’m in two minds about this. I think its a great idea for the “low hanging fruit” in other countries to be taken advantage of, however I also think its completely wrong for the cheapest greenhouse gas emission/abatement measures to be gobbled up by foreign entities leaving the locals only with comparatively expensive options for themselves. There is also the risk of permits being used to wage economic war. Its not that hard to envisage a state owned entity in China (with very very deep pockets) buying up the vast majority of emission permits in Taiwan in order to crush the Taiwanese economy.
I would prefer a model where there is no international trade in permits, but where a percentage of the revenue raised through the sale of permits in rich countries (maybe 20%) is used to take advantage of this low hanging fruit in less advantaged countries. This would not be a money making exercise, not a method for a rich country to shirk its responsibility in cutting emissions at home, it would be a gift.
Mcfarm @8, we seem to be in agreement.
One way or another, we as citizens and consumers are going to be paying for the decarbonising of the economy, lets not pay extra for the parasitic brokers and money men by establishing a trading market for permits as well.
Tim @9, regardless of whether the government sets a carbon price, or whether its determined by the market, the price and emission level will bounce around a bit. I am strongly in favour of a price floor for permits, without this every time there is a downturn in our export volumes, or a downturn at home, we will lose ground on the emission reduction front. A price ceiling on the other hand I am opposed to, as it fosters inaction.
Tim, I didn’t think you would let it go. I don’t believe I misrepresent the Greens position. What I don’t comment on, and you clarify, is the good intent and the need for the current position.
I don’t disagree with the logic of having to be in the trading game to have an effect on the score, but disagree with “and the simple fact that we don’t have the power to stop this, even if we decided to try.” Just because something is difficult to change doesn’t mean it shouldn’t be attempted, all the more so if it’s the right thing to do. But real my point is, no one is debating “is this the right system (game) to be in?”. The game is on and you are automatically players - are you even on the right field?
Carbon taxes and results are difficult to assess in isolation due to the great many variables in any economic system, hence an all inclusive consumption tax is what I am suggesting - the gst is almost there. And taxes are altered all the time with different results - some politically palatable some less.
Whilst superannuation isn’t a tax, it has been varied upwards more than once with the argument being ‘it is an investment in the future of all Australians’. An all inclusive gst could be varied up if the people knew the change was an investment in the future being equally shared by all. I don’t think it would be politically unpopular at all, in fact I think it would be a smart move as a trading system is seen as remote and elitist to Jill and Joe average. All they know at the moment is that their electricity bills are likely to go up 50% once trading starts. A 2% increase on an all inclusive gst doesn’t seem so bad in comparison. BTW the 2% is plucked out of the air - bit like the ALP’s 60% by 2050.
Also, unlike an interest rate rise which a borrower can do nothing about, a consumer can reduce consumption if the tax bites. Yes this also holds true for a price rise due to the cost of permits, but it’s effect will be uneven and inequitable and will require massive intervention to support the most vulnerable.
A board based consumption tax, with the extra revenue (easily quantified) used to fund energy efficiency gains and smooth market failures and which would ultimately mean the tax could be reduced once the cap is reached, is doable. And we have experience with implementing such a system and the one off blip to inflation when first introduced.
Of course the cap will have to change (90% by 2040 seems about right) but 30 years is an eternity in politics
Can the Greens stop Lindsay Tanners plan’s to cut the renewable rebates grants scheme?
The government can submit the budget, but doesn’t it need to pass both houses and doesn’t that mean you have a chance to influence it?
Would the Greens be able to work with the coalition and use your numbers to negotiate passage of the whole budget only on the condition that the renewable grants are not reduced?
It seems crazy to kill this scheme right now. I could understand killing it after Garnaut’s carbon trading scheme is working, but killing it before that seems retrograde.
If they kill it now it leaves us going the next two years with no government program to encourage clean generation.
Killing it would surely make Rudd blacker than Howard would have been for most of this electoral term.
Please don’t just sit by and let it happen. We should be able to do more than just complain about this. We need to keep things ticking over on the clean generation front.
I’ve finished reading the ETS discussion paper, and I see a heap of problems with it, however I’ll start by firstly addressing Christine Milne’s 20 March media release.
1. Christine agreed with the Garnaut ETS’s use of permit revenue to address energy efficiency. I’m not quite sure where Christine got this idea from, the word efficiency appears in numerous places in the Garnaut ETS, these are normally associated with policy efficiency, or economic efficiency, rather than energy/greenhouse efficiency. On p79 as part of the summary of the ETS (also p8), efficiency gets no mention as a use for permit revenue (payments to households is mentioned though).
2. Christine was pleased to see that …. (the Garnaut ETS) …. supports retrofitting Australia’s housing stock for better efficiency …. (as a) …. sensible use of funds from emissions trading. I think that Christine may be guilty of reading in the ETS what she wishes to see rather than what is there. Neither the words housing, nor retrofit appear anywhere in the Garnaut ETS. The most applicable sections that I could find on this issue appear on p18 and p53
“Individuals and households will be affected by the extent to which firms pass on higher input costs in the form of higher prices, including for consumer products. If governments were to decide to assist households for the impact of this on their disposable income, assistance could be provided through the tax and welfare system or by assistance to household’s adjustment to greater efficiency in energy use, or through support for new technologies to reduce dependence on emissions-intensive goods and services.”
“In the case of households, there is a strong environmental as well as equity rationale for returning the revenue from the rent value of the permits that is passed through to households, in an economically and environmentally efficient way. …. Policy instruments for returning rents collected from households could include adjustments to the social security and income tax systems, and assistance through information or capital subsidies to support efficient household adjustment to higher energy prices. This will be discussed more comprehensively when the Review presents its full reports.”
By my reading this translates as: payments to households is purely an optional measure in the ETS; assistance for greater efficiency in energy use by households is but one of several options for such payments; and “support for efficient household adjustment to higher energy prices” is about an efficient process/policy, it takes rose coloured glasses to interpret this as retrofitting the existing housing stock for greater efficiency. Its quite possible that I missed something during my reading of the ETS, but I failed to see the Garnaut ETS offering much support for retrofitting existing housing at all.
3. “The Greens strongly support Professor Garnaut’s recommendation that all permits should be auctioned.” I fully agree that the permits should be auctioned. Unfortunately this is not what Garnaut advocates, he advocates that Trade Exposed Emission Intensive Industries (TEEII) be issued with free permits or compensated with cash as a transitional arrangement (p40 and elsewhere). Admittedly this is not a huge difference, but I feel it would be better if these industries were compensated with cash and then forced to compete like everyone else for permits.
4. “I Remain seriously concerned … (about) … unlimited banking and hoarding of emissions permits.” I fully agree with this concern, if you know that you can “buy your way out” in the future then it acts as a considerable barrier against taking action now. I believe that emission permits should be valid for 12 or perhaps 18 months on a use it or lose it basis, and should be non transferable (but may be surrendered for a small financial loss).
5. “I also have related concerns with Professor Garnaut’s recommendation that we should start on the most lax emissions trajectory and take up to ten years to move to the strongest.” This is a valid concern, but at least the most lax emission trajectory is a start. I must say I was more concerned about the 5 year delay between announcement of moving to a new trajectory and doing so, and at the method he proposes for bridging this 5 year gap, than I was about any starting trajectory. The movement between trajectories should happen several times, whereas the starting point happens only once.
6. “I certainly hope that Minister Wong will not sweep this paper aside as ‘an input’ as she did to the last.” No, I think this contribution should be treated as just an input, the Garnaut ETS has (in my view) many shortcomings, for example the NZ ETS (p85) appears to have a superior arrangement for the banking and borrowing of emissions than what the Garnaut ETS advocates (p80 and elsewhere).
So moving right along………..
The trading system, as supported by all political parties, does the following;
- it introduces price flexibility (aka instability) by allowing carbon permits to be freely traded and hoarded. The only variable will be price, as the amount of carbon emissions will be ‘fixed’.
- it will be inefficient at reallocating resources (in this case price). Market systems work best when they allow more ‘goods’ to be produced to meet demand. But this is not a ‘free’ market, as the ‘goods’ (carbon emission permits) will be, by government decree and issue, a limited and restricted commodity.
So in essence the only thing the market gets to play with is price, as all else is controlled by government and the supporting science.
Given the above, why bother creating an unstable market trading system at all? Why not have the government set the price annually, based on the desired and then quantify results, all with a known revenue base?
The government will have to set the initial price of carbon for trading to commence - not unlike having a reserve price for your house at auction - Zoltars’ floor price set at commencement. The risks of having a no reserve auction should be obvious to all house sellers and eBay peoples.
So if the government must determine a reserve (floor) price for auction, why not do that every year based on the feed back the sales will provide. The government will most definitely get feedback (complaints and lobbying) whether by auction or fixed price, the method of sale will be irrelevant.
A trading system will not eliminate lobbying for carbon regulation modification. The major players will argue the science, and/or lobby for a weakening of the science based figures based on the effects on the economy/employment/exports, and/or argue for an increase in the number of permits issued for the same reasons. I believe this lobbying has already started.
The efficiency gains (carbon emission reduction)will be determined by the incentives and/or disincentives of the system. The trading system will require businesses to pay as much as they can afford for the permits whilst simultaneously reducing their dependence on them. This assumes the business in question can afford to do either, and it will be a delicate balancing act if they can.
Some business will have deep pockets, largely due to their histories of externalizing the cost of carbon. This will be further assisted if they can pass on the increases to a captive customer base - think coal generated power. These industries will be the major players in a trading market with a fixed quantity good/commodity.
Market manipulation. There are many historical examples of businesses and people ‘cornering the market’ of a limited or restricted commodity. In the process of ‘cornering the market’ many livelihoods were destroyed, and even the commodities credibility and viability has been badly burnt. This has been done with silver and other commodities, why not the limited issue of freely traded and hoarded atmospheric carbon permits?
Once a trading system has been set up as the pinnacle of environmental responsibility and efficiency, it widens the ever opening door for nuclear power generation. Of course this will be countered by the Greens and public opinion so that government policy will be swayed against it, but that’s my point.
In the end, government policy should (and will) decide who are the winners and losers in this carbon trading game. So why waste time, effort and money with a carbon trading system that will, by Garnaut’s own admission, require massive government supervision and intervention?
Those of you who are old enough may remember just how hard it was to police the ‘midnight valve openings’ that allowed toxic discharges into Australia’s rivers. Not only was it hard to catch them at it, it was hard to prosecute and gain a conviction. Initially the fines imposed were less than the polluter would spend on champagne at a corporate lunch. Monitoring of the rivers, analysis of the pollutant and tracing to source, and big fines pushed by public opinion saved the day.
So what about those that break the carbon emissions ceiling or cap? How will this be monitored? Will it be monitored? How will it be proved that company X actually did the emitting? And what will be the disincentive to breaking the cap? Will it be a fine, or something more draconian?
Whatever the answers to these questions, it won’t be a market trading system that provides the answer! Again it will be government agencies and/or private certifiers that will monitor and control.
So all this monitoring and certifying information will be gathered, which will allow a government to set various usage/efficiency benchmarks, which in turn will allow a price for carbon emissions to be set based on desired outcomes - no market trading system required!
Just to add fuel to the debate; the Energy Supply Association of Australia agrees that it is governments role to set the price on carbon emissions. No mention of allowing the market to set the price.
From ABC news online today;
“ESAA chief executive Brad Page says the Government’s role is to set a clear emissions target and put a price on carbon emissions.”
What ESAA are arguing is that government should not tell the industry and market how to achieve the efficiencies required to meet the targets and afford the price. They argue “set the target and price, then get out of the way and let the market determine the best way to do it.”
This is probably in response to NASAA’s Jim Hansen calling for a halt to coal fired electricity expansion, but interesting nonetheless.
Anyway, my caveat is that the government must stay in the way or we may end up with nuclear power generation if the market is left to it’s own devices.
Sorry Zoltar, your comments @12 had not appeared when I posted @13, and my opening “So moving right along ….” may appear dismissive of your post. Don’t take it that way please, as it was not. I thought I was following my own @11 rantings.
Mcfarm @15, no offence taken
Mcfarm @13, I agree that the secondary trading in permits (and its derivatives), will do nothing of itself to reduce emissions, I view it as just a needless layer of financial parasites that will increase the overall cost to the community in addressing climate change. Supporters of trading will argue that a secondary market and derivatives are essential for establishing a price for permits heading off into the future, and that it is this future price that will drive the decarbonisation of the economy. I believe they are half right on this point, having a future price on emissions is essential* in order for businesses to embrace emission reduction decisions with a long term payback/benefit.
*essential as a form of coercion in a market driven solution, it is not essential if actions are mandated by regulation
The need for a secondary market and for derivatives to set a future price, I view as a complete furphy, a future price can be achieved by the establishment of a price floor. For example if the price floor is set at 90% of the average price of permits in the preceding year, then this immediately establishes a baseline price many years into the future. $20/t this year means a minimum of $18/t next year, $16/t the year after, $14/t in the 4th year, $13/t in the 5th year etc. This 90% of average as a floor price was deliberately simplistic, a more realistic formula might be [90%, or if there is an overshoot in emissions then, 100% + n*(%overshoot of last years emissions budget)] * average of last years permit price. Where n here is an escalation factor that may change over time depending upon the emission trajectory we are on and upon how essential it is that we meet our budget. I would envisage values of n between 2 and 5. Under such a price floor formula the “future price” would depend upon the likelihood of Australia’s emission reductions being within budget, for n=2 and a likely emission overshoot of 2.5% the future price for emissions would appreciate at a minimum of 5% per year.
Mcfarm, when dealing with a limited quantity of emission permits (if you exclude the international trade in permits), and with demand for permits anticipated to exceed supply, then this means that some businesses/individuals are going to miss out (or get less than they wanted) each year. The task is to distribute these permits in the most equitable way possible, and that’s not so easy. I feel that an auction has some benefits over a direct sale, though neither is perfect. In particular, I’d like to see the auction of permits broken up into sections/sectors, so you have similar classes of business competing against each other for the bulk of available permits, together with a common pool available for all to bid on. The breakdown could be big emitters and small emitters, it could be by industry sector, or state, or region based, or some other method. 20% of all permits may be reserved in a common pool, and it should be this common pool that is most highly contested. Which ever method is used (auction or sale) there will need to be actions taken to correct “market failures”, such as having charities (like meals on wheels) compete with business for emission permits. We also don’t want to see a sole trader’s lawn mowing/gardening business, with a comparatively modest green house intensity, put out of action because an aluminium smelter has bought up the last available emission permits to produce another couple of tons of aluminium.
Mcfarm, monitoring and enforcement of emissions is critical under any scheme. The Garnaut ETS talks about “make good provisions” (p44) for those with emissions in excess of their number of emission permits. This assumes of course that there are permits that a business/individual can buy that have not already been consumed. I would like to see any penalties and make good provisions suitably onerous that no business would deliberately choose to overshoot their number of permits. The penalty could comprise a payment of [the number of permits that they are short * the minimum price for permits achieved on the day of permit trade which had the highest minimum price in the last 12 months * x%], together with a limitation imposed on the business/individual as to their eligibility to compete in the sectorial market for permits at the next auction (for large breaches). The make good provision could be a requirement to surrender the number of permits they were short this year in the following year, they would still need to purchase permits in the following year for their anticipated next years emissions on top of this. A limited eligibility to compete in any sectorial market in a subsequent year would force the business/individual to purchase a greater share of their permits in the more tightly contested common pool market, this is a deliberate additional penalty for non compliance.
I’ve touched on the auctioning of permits, the setting of a floor price, and penalty/make good provisions in this post, but there are quite a few areas that I still haven’t addressed. Such as: the international trade in permits, and the risks inherent in this; the treatment of Trade Exposed Emission Intensive Industries; banking, borrowing and hoarding of permits; abatement; etc.
Tim, Christine, I am interested in knowing if the Greens will be making a submission on the Garnaut ETS discussion paper? Or is the Garnaut review seen as a Labor instigated and controlled matter, and as such, formal participation in the review process could be seen as compromising the Greens ability to comment upon and criticise the review?
Submissions to many of the papers generated in the Garnaut process close on April 11, submissions on the ETS closes on April 18.
To the moderators.
You must post comments in strict order of moderation and publication/insertion to the site, NOT in order of chronological receipt!
Please notice what has happened to the response order and replies in this thread. Zoltar@17 responds to mcfarm@13 and 15, but these been moved and are now @14 and 16. You have inserted a moderated comment AFTER Zoltar’s response was published, but placed it BEFORE his actual post in the thread. This throws the whole thread out, makes it difficult for anyone else to follow, and renders the numbering of post system useless.
This is a slow moving thread and perhaps it’s not so important in this case, but in a hot topic it would make a real mess.
Re Dr Aitkins recent contributions to the debate:
Don Aitkin | April 09, 2008
AUSTRALIA is faced, over the next generation at least and almost certainly much longer, with two environmental problems of great significance. They are, first, how to manage water and, second, how to find acceptable alternatives to oil-based energy. Global warming is not one of those two issues, at least for me, and I see it as a distraction.
I am going against conventional wisdom in doing so. But Western societies have the standard of living, the longevity and the creativity we have because we have learned that conventional wisdom has no absolute status and that progress often comes when it is successfully challenged.
If you listen hard to the global warming debate you will hear people at every level tell us that they don’t want to hear any more talk, they want action. I feel that the actions I have seen proposed, such as carbon caps and carbon trading, are likely to be unnecessary, expensive and futile unless there is much stronger evidence that we are facing a global environmental crisis, whether or not we have brought it about ourselves.
The story about anthropogenic global warming (AGW) doesn’t seem to stack up as the best science, despite the supposed consensus about it among “thousands of scientists”.
The above placed neatly on the front page of the Austrlaina yesterday, and buried behind everything every where a small release by Aunti (below).
Migratory bird numbers plummeting, study shows http://www.abc.net.au/news/stories/2008/04/10/2212835.htm
It seems the avian world is also in “Consensus”.
Don Aitkin exhibits another fine example of what it means to be unnaturally conservative in a rapidly changing world.
The editor is practicing a surprising integrity by publishing the Aitkin article on the front page of the Australian.
It is good to see alternative opinion having representation.
I for one however will never confuse opinion with good science nor will I equate the word consensus in this context with opinion. As Dr Aitkin seems to be trying to achieve.
In the 70’s there was a growing concern that air quality in the US could be directly linked to among other things the health of the breathing. Pretty obvious really. It took however over 30 years and millions of man hours of exacting study and concurrent collection of statistics to actually create enough traction to create change in industrial practices. And only then when there was a competitive advantage visible for a motive. This despite the formation of the EPA in the 70’s, and legislation created to enforce that change.
The global environment is a big thing and so is the understanding of it. Opinion is just that, opinion. Dr Aitkin has one. Describing millions of man hours, sweat and tears, the verified proofs and building of incontrovertible evidence as opinion is infelicitous. Using the media trick which creates a link by semantic association is gimmickry, no more relevant than a quack in the face of a deluge. Creating a CONSENSUS=OPINION hype is in my opinion quackery of the lowest order.
The consensus the front page Australian article speaks of is in actual fact just verified work, verified again and again and again and again ad infinitum, despite 40 years of selfless toil and career risk, finally there’s a body of good solid work as evidence justifying all that effort. The last 10 years in particular have been very difficult for those working toward creating an awareness of an obvious reality. What we are doing collectively is not healthy for us or the environment.
Sure there needs to be more research, that’s how science works, it consistently carries out QA self analyses. That cannot happen however in the kind of environment people like Dr Aitkin promote. That environment hands all the controls back to the idiot child of unregulated industrial enterprise. The same world which created the problems which the natural world is attempting to address by a response triggered by its investigators. It has been proven beyond any doubt that industry cannot self regulate.
“junk science” is a term created by the status quo in the 80’s to undermine work perceived as a threat to unregulated free practice. A web site was created and regular media releases where issued to promote the interests of various industrial identities, by actively undermining researchers publishing work with obvious health and environmental warnings implied by the body.
Exactly the same methodology as used by Aitkin has been used against environmental science recommendations for as long as the dichotomy between health the environment and big industry has existed.
This renewed push by the old flat worlders to throw a tree across the recently re aligned tracks of the politics attempting to control the global industrial juggernought is transparent. Its entirely see through when the impetuous of expanded coal exports and the interest of the nuclear industry lobby is viewed through it.
Its just opinion motivated by greed Dr Aitkin, but I am sure you would call it pragmatism.
My question at then end of @17 was obviously overlooked, so I’ll repeat it.
Tim, Christine, I am interested in knowing if the Greens will be making a submission on the Garnaut ETS discussion paper? Or is the Garnaut review seen as a Labor instigated and controlled matter, and as such, formal participation in the review process could be seen as compromising the Greens ability to comment upon and criticise the review?
Before you get too excited by Garnaut , you should read Ted Trainers paper, which completely undermines the whole thing.
Dave
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http://ssis.arts.unsw.edu.au/tsw/Garnaut.html
The Interim Garnaut Report: A Critical Comment.
Ted Trainer
University of NSW.
15.4.2008.
This paper is a radically critical comment on the Garnaut Interim Report on the mitigation of CO2 emissions. Although Garnaut says the problem is very serious he assumes that it can be solved without significant difficulty. My criticism sketches the reasons for concluding that the problem cannot be solved, at any cost, in a society that insists on remaining committed to affluent living standards, high levels of production and consumption, and economic growth. The reasons are to do with what I see as the impossibility of scaling up renewable energy sources, geo-sequestration and nuclear energy sufficient to replace fossil fuels. There are several biological and technical limits to the proportion of our energy we can derive from renewables, which I discuss at length in my Renewable Energy Cannot Sustain A Consumer Society, (Springer, 2007.) The failure of the Stern Review and the IPCC Third Working Group (on mitigation) to deal with these issues is discussed at some length in two of my papers referenced in this Garnaut paper.
Garnaut makes no reference whatsoever to any of these issues. He rightly points to the need for huge reduction in emissions, but proceeds as if there is no need to consider how fossil fuels can be replaced. This paper indicates the limits to alternatives, and argues that it is not possible to explain how Australia’s expected 2050 energy demand budget could be met without using unsafe amounts of fossil fuels.
The 10 page paper can be found at http://ssis.arts.unsw.edu.au/tsw/Garnaut.html
Sorry, Zoltar. I completely failed to see that question and only just found it.
The Greens don’t see it as our role to make submissions to the Garnaut review per se.
There is no suggestion that formal participation in the review would compromise our ability to comment upon it or criticise it. Neither would we have a problem with ‘legitimising’ the process by taking part. It is a good process and a worthy process. However, as a political party rather than a lobby group or NGO, we don’t see it as our role to make official submissions.
That said, we have had meetings with the good Professor to discuss our concerns and our issues, primary amoung which are setting the cap and ensuring full carbon accounting for forestry, but also including other aspects of the regime.