Carbon tax, Emissions trading, what's it all about? June 2007.

A carbon tax is being promoted as a way of reducing our greenhouse gas emissions, while emissions trading seeks to engage with market forces. These issues are becoming more complex as the Federal Government stalls and delays implementation.

The atmosphere has traditionally been regarded as a free dumping ground where anyone can dispose of any waste gas they please. In the last 30 years regulations have been introduced to many countries to limit the disposal of environmentally damaging gasses such as sulphur dioxide, nitrous oxides, CFCs, dioxins, and heavy metal contaminants in smoke plumes. These gasses have generally caused environmental damage that was limited in spread to 10s or 100s of Km from the source. Until now carbon dioxide has not been regulated. The free use of the atmosphere has been in contrast to disposal of liquid and solid pollutants which incur disposal costs to render them environmentally safe. These costs are recognized by industry as part of the cost of doing business, and are incorporated into the cost of their products.

With the recognition of CO2 as an environmental pollutant with a global impact, there should be a cost imposed on the disposal of the gas into the atmosphere. If the atmosphere is allowed to be used at no cost, it is in effect a subsidy of environmental services from all societies of the earth to the polluter. The cost of CO2 disposal is currently borne by all of us in the form of environmental degradation, and this cost should be internalized into the costs of production by those industries that emit CO2. Of course this will put up the prices of their products if they cannot devise ways to continue production without releasing so much CO2. So far so good, and even John Howard agrees there should be a price on carbon.

A Carbon tax

The simplest way to enforce a price on CO2 is to impose a tax on its release. Each tonne released would incur a tax liability, and governments could do what they pleased with the funds, for instance reduce the rate of the GST. Greenhouse gases other than CO2 would incur tax at the rate appropriate for their greenhouse potential. Advantages of this system are that it is simple, and imposes the cost directly where it matters. Disadvantages are that no government wants to impose a new tax, and the tax does not set an emissions target.

Emissions trading systems

The most talked about model is a "cap and trade" system which works as follows. The country sets an emissions cap for the total amount of greenhouse gases that can be emitted from all industries in a given year. Any industry that puts CO2 or any other greenhouse gas up their chimney is responsible for holding a permit to release it. Each tonne of CO2 requires a permit. The total number of permits for the country is set in advance, to achieve a reduction, and the cap decreases by a small amount such as about 1% per year.

Big business wants the permits to be given out to them gratis, to cover their historical level of emissions (so called grand fathering) while others say they should be sold at auction, which is the only rational way. Handing over the permits for free would be in effect a huge public subsidy, as these permits will have market value. The permit price at auction will vary depending on the demand and the cost of alternate strategies for abatement. If an industry can reduce it’s CO2 for $15 a tonne it would never want to buy permits for $30 a tonne, while other industries will have to. This gives a competitive advantage to the most carbon efficient industries, and rewards innovation that reduces carbon emissions at least cost.

Most emissions trading regimes include carbon offsets, ie activities that remove carbon dioxide from the atmosphere, giving companies the option of holding either an emissions permit or an offset certificate for each tonne released. The best known offset scheme is growing trees, as photosynthesis builds “sequesters” carbon into plant tissues. Carbon absorbed in this way is locked up for as long as the plant material exists. In the case of leaves the sequestration lasts for months, carbon in the trunk of a tree may stay there for 100 years but is at risk of release by bushfire, or if the tree dies and rots, or is harvested for timber. Calculations of the amount of carbon and the duration of sequestration are complex and full of variables. Compared to leaving coal in the ground where the carbon has been for millions of years, any carbon offsets from forestry must be viewed as temporary and insecure.

Other sources of offsets are by destroying high greenhouse potential gasses of which methane is the best example. Methane has 16 times the global warming potential of the same amount of CO2. Just burning methane to CO2 is of benefit, but if it can be burnt in a gas turbine to produce electricity all the better. As both landfill rubbish tips and coal seams generally release methane into the atmosphere, technologies to harvest this gas and burn it for power have been developed. Such generators earn offset credits for the methane destroyed, as well as selling electricity.

There is great potential for rorting carbon offsets, by claiming an offset for activities that either do not sequester carbon, or do so only temporarily. Critics of emission trading schemes can point to many examples where money has changed hands but no net environmental benefit has occurred.

The whole idea of a cap and trade system is to reduce CO2 release, and in the absence of geosequestration which is as yet technically not feasible, that means reducing the amount of fossil fuels burnt. Our mining companies are opposing change every step of the way as emissions reductions in Japan, Korea and China would reduce demand for Australian coal, and they want to sell as much as they can while it is still a tradeable commodity.

What are the features of a dodgy emission trading scheme, such as we might expect the captains of industry to propose? It will have:

• Emission offset credits granted for changes to industrial processes, claiming that “the old way would have produced XX tones of CO2, our new way will produce Xx tonnes less therefore we should get an offset credit.”
• Handing out of emissions permits free, to cover historical levels of pollution, supported by arguments that to charge for permits would disadvantage investors or companies. This gives a disincentive to make reductions before the the day that the scheme comes in. An “early mover disadvantage”.
• Recognition of offsets from activities in other countries that are poorly policed and may not actually be occurring at all. These arrangements will be justified as being “most efficient” and “least cost” and promoting development of poor countries.
• Sweetheart deals for industries with strong lobby groups to protect them from increases in the cost of electricity. Such industries will be labeled “energy intensive and trade exposed” so as to not be directly called “aluminium”. Such industries will threaten to pollute the atmosphere from elsewhere in the world if Australia does not give them free license to continue environmentally destructive practices.
• Sufficiently generous offset provisions that there is no need to reduce the burning of fossil fuels.
• Recognition of offsets from a large range of activities that sequester dubious amounts of carbon for only short periods of time. Anything that makes offset permits easier to produce will bring down the price of emissions permits.

A great deal has been written on emissions trading, and the following links are just a few favourites:

Web Links

The National Emissions Trading Task Force, set up by the state governments:

http://www.emissionstrading.org.au/

And particularly the August 2006 discussion paper

http://www.emissionstrading.org.au/key_documents/discussion_paper

The Australian Business Council for Sustainable Energy has a list and descriptions of landfill gass projects in Australia:

http://www.bcse.org.au/default.asp?id=101

Carbon Trade Watch is a European organisation set up to monitor that carbon trading does not disadvantage people in poor countries:

http://www.carbontradewatch.org/aboutus/roots.html

The Chicago Climate Exchange: we are not yet sure if the CCX leads to genuine environmental benefits, but its intriguing to visit. http://www.chicagoclimatex.com/content.jsf?id=821

the Garnaut Review

www.garnautreview.org.au/