Green paper worse than doing nothing
I'm forming an opinion about the recently proposed emissions trading scheme.
I'm beginning to think that it is far more than merely not good enough: it's a disaster, for both the economy, and the environment, and will have the worst possible outcome for both.
It's as though the government has completely failed to understand the most basic definition of an emissions trading scheme:
1. Cap
2. Trade
Capping sets a global (or in this case national) limit to the amount of greenhouse gases that can be emitted.
A free market in emissions permits means that the cost of reductions is shifted to the point in the economy where they are cheapest to make.
Greenhouse pollutants are what economists call an "externality", ie a real cost which is not borne by the polluter; thus it is a market distortion, or even a market failure. The rest of the economy has effectively been subsidising the production of greenhouse gases. Cap-and-trade is one of various ways* to internalise those costs, and get rid of the market distortion that creates that invisible subsidy.
This principle, and the Kyoto Protocol itself, are based on the incredibly successful Montreal Protocol that reigned in global production of ozone depleting chemicals.
For example: Alice owns a brown coal fired electricity generating plant. She has to buy permits to emit CO2; there are only so many to go around, and they're expensive. The more people want to buy them, the more expensive they will get.
If it would cost Alice $100,000 per tonne to reduce emissions at the smokestack, and $1,000 per tonne to sponsor an accredited reafforestation scheme, then by gum, she'll pay the hippies to plant those trees.
Bob runs an industrial laundry contractor that services the hospital industry. His clapped out oil-fired steam boiler needs replacing. He invests in a natural-gas fired co-generation plant that produces steam, electricity and winter heating/cooling from one installation, and a massive flat-plate solar pre-heater on the roof.
This saves his business so many tonnes of emissions he now has excess carbon permits he can on-sell to other industries.
(Note that dollar figures are pulled out of my arse and in no way reflect reality. But you get the idea)
The same amount of CO2 gets removed from the cycle. The blow to the economy as a whole is 100 times less. Every year, the amount of permitted emissions as a whole is lowered. The economy gradually shifts from emissions-intensive methods of production, to low emission and zero emission methods, in the cheapest way possible
As the global cap is lowered, permits to emit get more and more expensive. Eventually, it will be worth Alice's effort to spend the $100k/tonne on cleanup. If she finds that she can no longer sell competitively priced electricity alongside all those who cleaned up back at $10k/tonne, or $1k/tonne, or $1/tonne, then she's outta business.
The gradually lowering cap puts everyone on fair notice of their economic future, and gives everyone fair time to decide whether to remediate, clean up, or shut down and move their capital elsewhere in the market (like say baseline wind production).
At least, that's the idea. It only works if everyone's emission penalties cost the same.
By exempting the most polluting industries (cement, coal, aluminium, electricity, agriculture) and lowering the petrol excise to match the ETS, the Rudd government has produced a bastardised, distorted market. The cost of reducing emissions will not shift to the cheapest-per-tonne point in the market. High polluting options will effectively be subsidised to emit by the entire rest of the economy, which will have to take the pain for them.
The absolute knuckle-dragging imbecility of the scheme is exemplified by the position on agriculture.
Originally, the sector was to be exempt entirely. Presumably after much farm lobby whinging, it was declared that reafforestation was in. Whoo-hoo, you say.
Not so fast.
Land clearing is exempt
Let me repeat that.
Bulldozing native forest and burning it attracts no emissions penalty whatsoever
Now, having cleared that land, I can now put it to productive use, say, a pine plantation, for which I am eligible for emissions credits.
So, rather than eliminating invisible subsidies that encourage emission, we've created an entirely new, highly visible one. Taken as a whole, the proposed scheme does this to the entire national economy.
Thus my developing opinion: It's worse than not good enough. It would have been better to do nothing.
Further reading
nb: I realise the situation is complicated further by the fact that Australia is just one market in a world market. I'll try to cover that in futre post.
* re: "various ways": there's certainly a case to be made that a straight $/tonne tax is a much simpler mechanism.
I'm beginning to think that it is far more than merely not good enough: it's a disaster, for both the economy, and the environment, and will have the worst possible outcome for both.
It's as though the government has completely failed to understand the most basic definition of an emissions trading scheme:
1. Cap
2. Trade
Capping sets a global (or in this case national) limit to the amount of greenhouse gases that can be emitted.
A free market in emissions permits means that the cost of reductions is shifted to the point in the economy where they are cheapest to make.
Greenhouse pollutants are what economists call an "externality", ie a real cost which is not borne by the polluter; thus it is a market distortion, or even a market failure. The rest of the economy has effectively been subsidising the production of greenhouse gases. Cap-and-trade is one of various ways* to internalise those costs, and get rid of the market distortion that creates that invisible subsidy.
This principle, and the Kyoto Protocol itself, are based on the incredibly successful Montreal Protocol that reigned in global production of ozone depleting chemicals.
For example: Alice owns a brown coal fired electricity generating plant. She has to buy permits to emit CO2; there are only so many to go around, and they're expensive. The more people want to buy them, the more expensive they will get.
If it would cost Alice $100,000 per tonne to reduce emissions at the smokestack, and $1,000 per tonne to sponsor an accredited reafforestation scheme, then by gum, she'll pay the hippies to plant those trees.
Bob runs an industrial laundry contractor that services the hospital industry. His clapped out oil-fired steam boiler needs replacing. He invests in a natural-gas fired co-generation plant that produces steam, electricity and winter heating/cooling from one installation, and a massive flat-plate solar pre-heater on the roof.
This saves his business so many tonnes of emissions he now has excess carbon permits he can on-sell to other industries.
(Note that dollar figures are pulled out of my arse and in no way reflect reality. But you get the idea)
The same amount of CO2 gets removed from the cycle. The blow to the economy as a whole is 100 times less. Every year, the amount of permitted emissions as a whole is lowered. The economy gradually shifts from emissions-intensive methods of production, to low emission and zero emission methods, in the cheapest way possible
As the global cap is lowered, permits to emit get more and more expensive. Eventually, it will be worth Alice's effort to spend the $100k/tonne on cleanup. If she finds that she can no longer sell competitively priced electricity alongside all those who cleaned up back at $10k/tonne, or $1k/tonne, or $1/tonne, then she's outta business.
The gradually lowering cap puts everyone on fair notice of their economic future, and gives everyone fair time to decide whether to remediate, clean up, or shut down and move their capital elsewhere in the market (like say baseline wind production).
At least, that's the idea. It only works if everyone's emission penalties cost the same.
By exempting the most polluting industries (cement, coal, aluminium, electricity, agriculture) and lowering the petrol excise to match the ETS, the Rudd government has produced a bastardised, distorted market. The cost of reducing emissions will not shift to the cheapest-per-tonne point in the market. High polluting options will effectively be subsidised to emit by the entire rest of the economy, which will have to take the pain for them.
The absolute knuckle-dragging imbecility of the scheme is exemplified by the position on agriculture.
Originally, the sector was to be exempt entirely. Presumably after much farm lobby whinging, it was declared that reafforestation was in. Whoo-hoo, you say.
Not so fast.
Land clearing is exempt
Let me repeat that.
Bulldozing native forest and burning it attracts no emissions penalty whatsoever
Now, having cleared that land, I can now put it to productive use, say, a pine plantation, for which I am eligible for emissions credits.
So, rather than eliminating invisible subsidies that encourage emission, we've created an entirely new, highly visible one. Taken as a whole, the proposed scheme does this to the entire national economy.
Thus my developing opinion: It's worse than not good enough. It would have been better to do nothing.
Further reading
nb: I realise the situation is complicated further by the fact that Australia is just one market in a world market. I'll try to cover that in futre post.
* re: "various ways": there's certainly a case to be made that a straight $/tonne tax is a much simpler mechanism.