Climate explained: how emissions trading schemes work and they can help us shift to a zero carbon future

Putting a price on greenhouse gas emissions forces us to face at least some of the environmental cost of what we produce and consume.
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Catherine Leining, Motu Economic and Public Policy Research

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Climate Explained is a collaboration between The Conversation, Stuff and the New Zealand Science Media Centre to answer your questions about climate change.

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Would you please explain how the New Zealand Emissions Trading Scheme (ETS) works in simple terms? Who pays and where does the money go?

Every tonne of emissions causes damages and a cost to society. In traditional market transactions, these costs are ignored. Putting a price on emissions forces us to face at least some of the cost of the emissions associated with what we produce and consume, and it influences us to choose lower-emission options.

An emissions trading scheme (ETS) is a tool that puts a quantity limit and a price on emissions. Its “currency” is emission units issued by the government. Each unit is like a voucher that allows the holder to emit one tonne of greenhouse gases.

The New Zealand Emissions Trading Scheme (NZ ETS) is the government’s main tool to meet our target under the Paris Agreement. In a typical ETS, the government caps the number of units in line with its emissions target and the trading market sets the corresponding emission price.

In New Zealand, the price for a tonne of greenhouse gases is currently slightly below NZ$25, which is not in line with our target. We are still waiting for the government to set a cap on the NZ ETS, which is (hopefully) coming.

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Read more:
Why NZ’s emissions trading scheme should have an auction reserve price

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In the past, we had no limit on the number of emission units in the system, which is why emission prices stayed low, our domestic emissions continued to rise, and the system accumulated a substantial number of banked units.

How an ETS works and who pays

The government decides which entities (typically companies) in each sector (e.g. fossil fuel producers and importers, industrial producers, foresters, and landfill operators) will be liable for their emissions. In some cases (e.g. fossil fuel producers and importers), liable entities are not the actual emitters but they are responsible for the emissions generated when others use their products.

There is a trading market where entities can buy units to cover their emissions liability and sell units they don’t need. The trading price depends on market expectations for supply versus demand. Steeper targets mean lower supply and higher emissions mean higher demand; both mean higher emission prices and more behaviour change.

Each liable entity is required to report emissions and surrender to the government enough units to cover the amount of greenhouse gases they release. The companies that have to surrender units pass on the associated cost to their customers, like any other production cost. In this way, the emission price signal flows across the economy embedded in the cost of goods and services, influencing everyone to make more climate-friendly choices.

Supplied by author, CC BY-ND

There are several ways for entities to get units.

First, some get free allocation from the government. Currently, these free allocations are granted to trade-exposed industrial producers (for products such as steel, aluminium, methanol, cement and fertiliser) as a way of preventing the production and associated emissions from shifting to other countries without reducing global emissions. Producers who emit beyond their free allocation need to buy more units, whereas those who improve their processes and emit less can sell or bank their excess units.

Second, entities can earn units by establishing new forests or through industrial activities that remove emissions. By stripping emissions from the atmosphere, such removal activities make it possible to add units to the cap without increasing net emissions. The government publishes information on ETS emissions and removals every year.

Third, entities can buy units from the government through auctioning. In this case, market demand still sets the price. The NZ ETS does not yet have auctioning, but again this is (hopefully) coming. The government currently does allow emitters to buy uncapped fixed-price units at NZ$25.

In the past, entities had a fourth option – buying offshore units – but this stopped in mid-2015. This option is not currently available under the Paris Agreement. If that changes in the future, quantity and quality limits will be needed on offshore units.

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Where the money goes

The entities that surrender units to the government directly face the price of emissions – either because they had to buy units from other entities or the government, or because they lost the opportunity to sell freely allocated units.

When the government sells units – through auctioning or the fixed-price mechanism – it earns revenue. In 2018, the New Zealand government sold 16.82 million fixed-price units and received NZ$420 million in revenue. When selling fixed-price units that allow the market to emit more, the government has to compensate through more action to reduce domestic emissions (like reducing fossil fuel use or planting more trees) or purchasing emission reductions from other countries – and these actions have a cost.

When ETS auctioning is introduced (potentially in late 2020), the government will receive more significant revenue. It has signalled that any revenue from pricing agricultural emissions (methane and nitrous oxide) will be returned to the sector to help with a transition to lower emissions.

What will happen with NZ ETS auction revenue from other sectors is an open policy question. So are the questions of how large the NZ ETS cap, and how high the emission price, should be. This will be determined under the Zero Carbon Bill and future amendments and regulations to the ETS.

This article was prepared in collaboration with Bronwyn Bruce-Brand and Ceridwyn Roberts at Motu Economic and Public Policy Research.

Catherine Leining, Policy Fellow, Climate Change, Motu Economic and Public Policy Research

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Why NZ’s emissions trading scheme should have an auction reserve price

New Zealand’s emission reduction target for 2030 is to bring emissions to 30% below 2005 levels, and to be carbon neutral by 2050.
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Suzi Kerr, Victoria University of Wellington

While people’s eyes often glaze over when they hear the words “emissions trading”, we all respond to the price of carbon.

Back in 2010, when the carbon price was around NZ$20 per tonne, forest nurseries in New Zealand boosted production. But when prices plunged thereafter, hundreds of thousands of tree seedlings were destroyed rather than planted, wiping out both upfront investment and new forest growth.

Emission prices have since recovered but no one knows if this will last. With consultation underway on improving the New Zealand Emissions Trading Scheme (NZ ETS), the government should seriously consider a “price floor” to rebuild confidence in low-emission investment.

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Read more:
A new approach to emissions trading in a post-Paris climate

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How a price floor works

If we want to make a smart transition to a low-emission economy, we need to change how we value emissions so people make the investments that deliver on our targets. Implementing a reserve price at auction – or a “price floor” – is a powerful tool for managing the risk that emission prices could fall for the wrong reasons and undermine much needed low-emission investments.

In New Zealand’s ETS, participants are required to give tradable emission units (i.e. permits) to the government to cover the emissions for which they are liable. A limit on unit supply relative to demand reduces total emissions and enables the market to set the unit price.

In the future, the government will be auctioning emission units into the market. A reserve price at auction, which is simple to implement, can help avoid very low prices. If private actors are not willing to pay at least the reserve price, the government would stop selling units and the supply to the market would automatically contract.

The government’s current ETS consultation document suggests that no price floor will be needed in the future because a limit on international purchasing will be sufficient to prevent the kind of price collapse we experienced in the past. However, that assessment neglects other drivers of this risk.

When low ETS prices are a pitfall

Ideally, ETS prices would respond to signals of the long-term cost of meeting New Zealand’s decarbonisation goals and achieving global climate stabilisation. With today’s information, we generally expect ETS prices to rise over time. For example, modelling prepared for the New Zealand Productivity Commission suggests emission prices could rise to at least NZ$75 per tonne, possibly over NZ$200 per tonne, over the next three decades.

However, ETS prices could also fall because of sudden technology breakthroughs or economic downturn. Even though some low-emission investors would lose the returns they had hoped for, this could be an efficient outcome because low ETS prices would reflect true decarbonisation costs. Technological and economic uncertainty imposes a genuine risk on low-emission investments that society cannot avoid.

But there is another scenario in which ETS prices fall while decarbonisation costs remained high. This could arise because of political risk. For example, if a major emissions-intensive industrial producer was to exit the market unexpectedly and it was unclear how the government would respond, or if a political crisis was perceived to threaten the future of the ETS, then emission prices could collapse and efficient low-emission investments could be derailed.

Even when remedies are on the way, it can take time to correct perceptions of weak climate policy intentions. The New Zealand government’s slow response to the impact of low-quality international units in the ETS from 2011 to mid-2015 is a vivid example of this.

A simple and effective solution

With a price floor, an ETS auction will respond quickly and predictably to unpredictable events that lower prices. A price floor signals the direction of travel for minimum emission prices and builds confidence for low-emission investors and innovators. It also provides greater assurance to government about the minimum level of auction revenue to expect.

It is important to note that ETS participants can still trade units amongst each other at prices below the price floor. The price floor simply stops the flow of further auctioned units from the government into the market until demand recovers again and prices rise.

We have three good case studies overseas for the value of a price floor.

1. The European Union ETS did not have a price floor for correcting unexpected oversupply and prices dropped because of the global financial crisis, other energy policies and overly generous free allocation. It now has a complex market stability reserve for this purpose, although that operates with less ease and transparency than a reserve price at auction.

2. To counteract low EU ETS prices, the UK created its own price floor as a “top up” to the EU ETS. Although this did not add to global mitigation beyond the EU ETS cap, it did drive down coal-fired generation in the UK.

3. California’s ETS was designed in conjunction with a large suite of emission reduction measures with complex interactions. Its reserve price at auction has ensured that a minimum and rising emission price has been maintained, despite uncertainties about the impact of other measures.

Keeping NZ on track for decarbonisation

In New Zealand, the Productivity Commission supports the concept of an auction reserve price in its final report on a transition to a low-emissions economy.

The only potential downside of a price floor is the political courage needed to set its level. It could be set at the minimum level that any credible global or local modelling suggests is consistent with New Zealand and global goals. The Climate Change Commission could provide independent advice on preferred modelling and an appropriate level. The merits of a price floor warrant cross-party support.

If the market operates in line with expectations, then the price floor has no impact on emission prices. But the price floor usefully guards against price collapse when the market does not go to plan.

The government, ETS participants and investors need to understand that international purchasing is not the only driver of downside price risk in the NZ ETS. A price floor would strengthen the incentives for major long-term investments in low-emission technologies, infrastructure and land uses in the face of uncertainty.

To reach New Zealand’s ambitious emission reduction targets for 2030 (a 30% reduction below 2005 levels) and beyond, bargain-basement emission prices need to stay a thing of the past.

This article was co-authored with Catherine Leining, a policy fellow at Motu Economic and Public Policy Research.

Suzi Kerr, Adjunct Professor, School of Government, Victoria University of Wellington

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Carbon taxes, emissions trading and electricity prices: making sense of the scare campaigns

Dylan McConnell, University of Melbourne

Yet again, electricity prices are set to be a key point of contention in an Australian federal election.

The Coalition responded quickly to Labor’s election commitment to an emissions trading scheme (ETS), with Prime Minister Malcolm Turnbull warning of “much higher electricity prices” and a “very big burden” on Australians.

Other ministers joined in. Treasurer Scott Morrison labelled the plan a “a big thumping electricity tax” and Environment Minister Greg Hunt branded it “Julia Gillard’s carbon tax on steroids”, warning of “even higher electricity prices for Australian families”.

The centrepiece of the Coalition’s climate policy, meanwhile, is the A$2.5 billion Emissions Reduction Fund. An important element of this scheme is the “safeguard mechanism”, which is due to kick in on July 1 this year. This has implications for the electricity sector and may also affect electricity prices.

National summary of retail electricity cost components
2015 Residential Electricity Price Trends

These policies will affect the wholesale electricity market, in which electricity is bought from power generators and sold on to retailers and consumers.

As you can see from the figure to the right, the competitive component of the retail prices makes up about 50% of the typical household electricity bill, and the wholesale component typically makes up half of that. The other major cost is poles and wires.

So how exactly will the different climate policies affect electricity prices?

The safeguard mechanism (Coalition)

The safeguard mechanism will require Australia’s largest emitters to keep emissions below a baseline. This will prevent emissions reductions under the ERF being offset by increases elsewhere. Businesses that go over the baseline will have to pay.

The safeguard is based on the high point in annual emissions from the whole electricity sector between 2009-10 and 2013-14. Generators’ individual baselines and associated penalties only come into play if the whole sector goes over the baseline.

As you can see in the figure below, emissions have fallen by almost 20 million tonnes per year since the first baseline year (2009-10), partially in response to years of declining demand.

Electricity Sector Emissions
Quarterly Update of Australia’s National Greenhouse Gas Inventory: December 2015

Current projections for electricity growth suggest that the baseline won’t be breached for some years. As such, individual generators are unlikely to be penalised, and wholesale prices would not be expected to change dramatically.

Electricity sector emissions trading (Labor)

Labor’s electricity sector ETS is a “baseline and credit” scheme, based on a model proposed by the Australian Energy Market Commission (AEMC), which actually submitted the proposal to consultation on the safeguard mechanism.

This also places a baseline on the electricity sector, but it is calculated on the basis of emissions intensity (tonnes of emissions per unit of electricity generated) rather than overall emissions. Generators with emissions intensity below the baseline (for example, gas generators) would earn credit, so “cleaner” power plants would generate more credits.

Power plants that go over the baseline (for example, brown coal) would have to buy credits for the amount they go over. “Dirtier” plants would thus have to buy more credits.

This is substantially different to a carbon tax or the previous emissions trading scheme. Under these policies, all generators are penalised, some more than others, as you can see in the figure below.

Impact of carbon price and baseline and credit scheme on different generation technology in the electricity sector. A carbon prices increases all prices, relative to emissions intensity. A baseline and credit scheme increases the price of high-emissions-intensity generation, but lowers the price of low-emissions-intensity generation.
Author

This difference is important for electricity prices. Dirtier plants would be expected to increase their selling price to cover the financial penalty on their emissions. But cleaner plants, earning revenue from selling credits, could afford to sell their electricity more cheaply.

This is important, because cleaner plants (typically black coal or gas) set the price. Gas in particular would probably be significantly cheaper under this proposal. As such, the impact on wholesale prices would be small, or negative.

In fact, as the AEMC itself noted, the impact on the wholesale market could be an increase or decrease in prices (depending on where the baseline is set).

The brown coal exit (Labor)

Another component of Labor’s climate platform is a plan to finance the closure of brown coal power stations, an idea first proposed by ANU climate economists Frank Jotzo and Salim Mazouz.

In this proposal, brown coal plants would bid for the payment they would require to finance their own shutdown, with the cheapest bid being selected. The remaining plants would pay this cost, in line with their emissions.

Similar to the ETS, it would be expected that this cost would be reflected in increased offer prices to the market from the remaining generators. The direct costs would be temporary (a one-off payment) and small, relative to the overall wholesale price.

Indeed, Jotzo and Mazouz estimated it could cause a one-off rise of 1-2% in retail power bills. Analysis company Reputex found the impact could be between 0.2% and 1.3%.

However, Danny Price of Frontier Economics has suggested that the scheme could push up retail power prices by between 8% and 25%, as the result of a short-term price shock. But given the significant excess capacity in the market, and assuming that the market is indeed competitive, it is hard to see how such a increase would happen.

This point aside, the price argument misses the point of the scheme, which aims to deliver an “orderly transition” away from brown coal. The longer-term effects on supply and price of a brown coal exit will be similar, regardless of how the industry closes.

In fact, if it were left entirely to the market, the sudden retirement of an entire power plant might create even more of shock. This proposal is chiefly about ensuring an orderly, predictable transition.

50% renewable energy target (Labor)

The final element of Labor’s climate platform is a 50% renewable energy target by 2030. At this stage, not much detail has been unveiled other than shadow environment minister Mark Butler’s pledge that it will be “designed in a way that does not disturb investor sentiment around the delivery of the existing Renewable Energy Target” – something that a sector beset by uncertainty would welcome. As such, it is quite difficult to speculate on how electricity prices might react.

The current Renewable Energy Target is a certificate scheme that requires retailers to buy a certain amount of renewable energy. The cost of these certificates is passed on through electricity bills. However, as shown by the government’s own modelling, the interaction with the wholesale market results in a net saving to consumers.

Interestingly, and as the AEMC points out, the electricity ETS is designed to be flexible and integrate with a renewable energy target. Indeed, such an ETS could drive investment in renewable energy, replacing current subsidies through the Renewable Energy Target. The 50% target could theoretically be achieved through the ETS alone, if the baseline was set at the right level.

A bipartisan approach?

As it stands, the government’s climate platform is unlikely to have any impact on electricity prices. However, it will also not have a major impact on the electricity sector’s emissions.

Labor’s policies will have an impact, but as the AEMC notes it may occur “without a significant effect on absolute price levels faced by consumers”.

The government’s current polices will require strengthening to further reduce emissions. To achieve this, the Grattan Institute and others including the Business Council of Australia have supported ideas that would turn the Liberal platform into something very similar to Labor’s.

Indeed, modelling commissioned by the government itself assumes that Direct Action will eventually morph into a similar baseline-and-credit ETS, in order to meet long-term climate commitments.

Political slogans aside, perhaps a bipartisan approach is possible, without a significant effect on power bills.

Dylan McConnell, Research Fellow, Melbourne Energy Institute, University of Melbourne

This article was originally published on The Conversation. Read the original article.

Labor unveils phased emissions trading scheme

Michelle Grattan, University of Canberra

A Labor government would bring in its emissions trading scheme (ETS) in two stages, together with a separate scheme for the electricity sector, under a climate change action plan released by Opposition leader Bill Shorten and climate spokesman Mark Butler on Wednesday.

The plan confirms an ALP government would commit to 45% emissions reduction on 2005 levels by 2030, and pledge to ensure that 50% of Australia’s electricity was sourced from renewable energy by then. Australia’s pledge for last year’s Paris climate conference was to reduce emissions by 26-28% on 2005 levels by 2030.

With Labor’s proposed ETS set to be a battleground in the July 2 election, Shorten will stress that it would not include a carbon tax – which was so politically damaging for the Gillard government – or a fixed price on pollution.

The ETS details are part of a broad climate policy that would cost $853 million over a decade – with $355.9 million over the forward estimates.

The funding would include $300 million to assist trade exposed industries to move to a cleaner economy; commit more than $200 million for the Australian Renewable Energy Agency to undertake a solar thermal funding round, and provide about $100 million for a community power network to connect community housing and other projects to renewable energy.

The policy would also allow the Clean Energy Finance Corporation more flexibility for investments in renewables.

Phase one of the ETS would operate for two years, from July 2018 until June 30, 2020, to establish the architecture of the permanent scheme, which would aim to drive a long term transition in the economy to clean energy.

The first phase would cover facilities emitting more than 25,000 tonnes of carbon pollution annually. It would put a cap on pollution from these enterprises, that was consistent with meeting the current bipartisan target of ensuring a reduction in emissions levels of 5% on 2000 levels by 2020.

No price would be imposed in this phase, and polluters would not be required to buy permits if they stayed within their limits. But when a polluter breached its cap, it would have to provide the regulator with an equivalent number of “offsets”. Offsets could be sourced internationally as well as locally.

The policy says that given that Australia’s emissions intensive, trade exposed sector competes in global markets, those companies should have full 100% access to international offsets under phase one of the ETS.

In phase two, pollution levels would be capped and reduced over the decade to 2030. The design of the 2020 ETS would be finalised during the 2016-19 parliament.

The separate scheme for energy generation would start from 2018. Labor says this scheme would ensure “that reducing carbon pollution from generation can be internalised and managed in a manner that strengthens energy security and protects consumers”.

Electricity generation would be covered by a cap on carbon pollution reflecting a proportional share of the overall emissions reduction task set for the broader ETS. Each generator would be given a baseline.

Labor argues there would not be a significant impact on the price of power for consumers.

The opposition says that when China’s national emissions trading scheme comes online, one in every three people in the world will live under an ETS. “By 2030, emissions trading will be the biggest market in the world. Rejecting an ETS means isolation from the global marketplace.”

The opposition contrasts its policy with the government’s Emissions Reduction Fund “which sees billions of taxpayer dollars paid to polluters without achieving any additional and enduring emissions reductions”.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

PolicyCheck: Labor’s phased emissions trading scheme

Alan Pears, RMIT University

Welcome to PolicyCheck, a new form of political coverage that aims to make better sense of policies launched by the major parties in the lead up to the 2016 election. Here, The Conversation’s academic experts look at the history of policies, whether they have been tried in Australia before, and how likely they are to succeed.

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Labor has announced a six point climate change strategy, aimed at increasing renewable energy use, improving energy efficiency and transitioning away from old and inefficient coal power stations.

The policy includes a plan to reintroduce an emissions trading scheme for large emitters (over 25,000 tonnes annually), introduced over two phases.

How would it work?

Labor’s policy documents says that:

Phase one of the ETS will operate for two years, from 1 July 2018 until 30 June 2020 to align with the second (and final) commitment period of the Kyoto Protocol;

Phase two of the ETS will operate from 1 July 2020. Pollution levels will be capped and reduced over the course of the decade in line with Australia’s international commitments under the Paris agreement;

The broader ETS does not apply to the electricity sector (see separate fact sheet on Cleaner Power Generation); and

The scheme will allow business to work out the cheapest and most effective way to operate and will not involve taxpayers handing over billions of dollars to Australia’s large polluters.

Fairfax reported that

The cost up until 2020 would be about 3 cents per tonne of carbon for those industries exposed to foreign competition. For other firms, that cost will be about 30 cents a tonne.

The scheme design beyond 2020 would be worked out in the future, but would focus on meeting Australia’s international commitments.

A separate scheme for energy generators would start from 2018.

What’s the history behind the proposed scheme?

Climate policy has been a hot topic in Australian politics for over 25 years.

The Hawke government made a conditional commitment in 1992 to cut carbon emissions. In the mid-1990s, industry staved off a carbon pricing scheme under the Keating government by committing to a voluntary Greenhouse Challenge program.

John Howard’s 1997 pre-Kyoto Protocol statement, Safeguarding the Future, mapped out a number of response measures, intended to underpin Australia’s efforts to gain an easy target under the Kyoto Protocol.

Indeed, Australia got a Kyoto target of 8% above its 1990 emissions level, while the overall developed country goal was a 5% cut.

The Australian Greenhouse Office, set up after the Kyoto meeting, produced numerous reports and discussion papers exploring climate policy options, including various options for pricing emissions.

Former Prime Minister John Howard grudgingly proposed a cap and trade plan in 2007 on advice from senior bureaucrat Peter Shergold.

That scheme was meant to be up and running by about 2011, but plans were cut short by election of Labor’s Kevin Rudd as prime minister in 2007.

Rudd promised a strong commitment to climate action, and under his leadership, the Carbon Pollution Reduction Scheme was developed (it was basically an ETS). In 2010, today’s prime minister Malcolm Turnbull also preferred an ETS, even crossing the floor to support it.

This scheme was eventually rejected by the parliament because the Greens and many others considered it was too compromised to be effective. This was the beginning of the shambles that has surrounded Australian climate policy in recent years.

Julia Gillard replaced Rudd as Labor leader in the mid-2010 and worked closely with the Greens and other cross-benchers to develop the Clean Energy Future package. Part of that package was a plan to put a price on carbon.

The plan was to transition into a market-based emissions trading scheme in 2015, but the so-called carbon tax was axed by the Abbott government in 2014 (despite evidence it was effective in reducing emissions).

Australia’s present Direct Action policy has as its centrepiece the Emission Reduction Fund, which uses taxpayer funds to support a very limited number of emission reduction actions through an auction process.

The associated “safeguards” mechanism is yet to be finalised, but provides a possible basis for a future emissions trading scheme.

How is Labor’s “phased” ETS different to what they previously proposed?

Separating the electricity industry from the broader ETS allows transition to be managed more delicately, and reduces risk of criticism over the impact on electricity prices.

It will involve much lower carbon prices that will be more closely linked to international carbon prices. This leaves Labor open to criticism from many economists and advocates, who take the view that a much higher carbon price is an essential element of an effective climate response.

The low carbon price expected, and the heavy reliance on international permits will severely limit the amount of revenue from carbon pricing for some years. This denies the government a potential revenue source to fund other climate action.

Why has this issue been so fraught in the past?

Climate policy has been controversial in Australia since the early 1990s. Powerful industry groups have lobbied since then to limit climate action, and the issue has been framed as the economy versus a future, uncertain environmental impact.

This conflict was amplified by the Coalition under Tony Abbott, both in opposition and in government.

The government has warned that Labor’s proposed plan will drastically increase electricity prices. However, such dire warnings rely on old modelling that has not factored in recent reductions in renewable electricity prices and improvements in energy efficiency.

The end of the resources boom has led many to realise that we need to diversify our economy. Conflicts over coal mining and coal seam gas, as well as big increases in electricity prices, have also challenged past acceptance of the benefits of fossil fuel industries.

Meanwhile, more frequent extreme climate events, coral bleaching and unusual weather patterns have reinforced concerns that climate is actually changing faster than expected.

What will happen to Labor’s policy?

The Labor proposal seems to address many of the political vulnerabilities of its previous policy. At the same time, it captures some of the present government’s agenda.

However, it will be seen as weak by many climate response advocates.

After the anti carbon tax campaign that helped bring Tony Abbott to power in 2013, it remains to be seen whether or not voters are ready to rein in emissions by making pollution a costly business.

Is there a policy you want us to check? Contact us at checkit@theconversation.edu.au.

Alan Pears, Senior Industry Fellow, RMIT University

This article was originally published on The Conversation. Read the original article.

China announces national emissions trading scheme – experts react

John Mathews; Anita Talberg, University of Melbourne, and Peter Christoff, University of Melbourne

China has confirmed that it will launch its national emissions trading scheme.

In a joint US-China climate statement, issued as part of President Xi Jinping’s state visit to the United States, China confirmed that its new trading sytem will cover “key industry sectors such as iron and steel, power generation, chemicals, building materials, paper-making, and nonferrous metals”.

Below, our experts react to the development.

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John Mathews, Professor of Strategic Management, Macquarie Graduate School of Management, Macquarie University

Xi Jinping is scoring a propaganda coup by announcing China’s intention to introduce a national cap-and-trade scheme in 2017, while he is a guest of Obama at the White House. It will not be lost on observers that China will be introducing the very kind of scheme that failed to get through the US Congress, passing the House but being defeated in the Senate.

How interesting that China the communist country is introducing the kind of market-based emissions trading scheme that the United States was unable to launch.

There are two further points to make. The first is that China is introducing its national scheme after trying out various options as local and city-level experimental schemes over the past couple of years. In 2012, pilot programs were initiated in seven provinces, and have been closely monitored since. Here China is teaching the world a lesson in how to introduce reform: first try it out at a small scale in a variety of forms, and then scale up the most successful.

Second, China is not relying on these market-led cap-and-trade initiatives alone. It is also reducing coal consumption in its power sector through direct state intervention, and has been actively promoting solar photovoltaic and wind power through state-guided targeted investment, national planning, and local promotion programs. So the new scheme will take its place as an initiative that helps to solidify China’s trajectory towards greening its energy systems – after direct state action has done the heavy lifting.

Anita Talberg, PhD candidate, Australian-German Climate and Energy College, University of Melbourne

China’s greenhouse gas emissions represent a quarter of the global total. For this reason alone, any tangible progress on Chinese climate action is encouraging. However, what is more promising is what a Chinese emissions trading scheme could mean for the world.

To date we have only seen pockets of emissions trading across the globe; most notably the EU has had a scheme since 2004 and a Californian system has been operating since 2013. Despite concerted efforts, there has been very little headway in linking regional emissions trading schemes. This is because carbon credits would become fungible.

So if one market crashes, so do the connected markets. The entire system is only as strong as the safeguards in the weakest market. The environmental effectiveness of the entire system is only as credible as the monitoring and verification in the least stringent scheme.

The EU and the rest of the world will be looking closely at the integrity and robustness of the Chinese market’s design. If China gets it right, and can elicit enough buy-in, it could represent a turning point for climate change.

Peter Christoff, Associate Professor, School of Geography at University of Melbourne

The announced introduction of China’s national emissions trading scheme in 2017 places irresistible pressure on Malcolm Turnbull to revisit the issue of an Australian ETS.

When China joins the European Union (the world’s third biggest aggregate emitter) and a number of other major emitting countries and states using cap-and-trade schemes to help cut emissions, some 40% of total global emissions will be covered by carbon markets.

Tellingly, Chinese President Xi Jinping made his announcement at a joint White House Press Conference with President Obama. Together they emphasised how the world’s two largest emitters are now collaborating closely to tackle global warming. Pressure is building within the US to create a national integrated scheme on the foundations of its regional efforts, and other major emitters, like Brazil and Russia, are contemplating similar measures.

Australia’s Direct Action Plan cannot easily be linked to this growing global carbon market. Its underfunded “reverse auction” process cannot acquire sufficient emissions to meet even Australia’s 2020 target. Its “safeguard mechanism” is unlikely to require major Australian emitters to reduce their emissions significantly. Australia is now transparently out of step with global trends and, relying only on current measures, incapable of meeting the tougher mitigation targets which will be required of it in the near future.

John Mathews, Professor of Strategic Management, Macquarie Graduate School of Management; Anita Talberg, PhD student in the Australian German Climate and Energy College, University of Melbourne, and Peter Christoff, Associate Professor, School of Geography, University of Melbourne

This article was originally published on The Conversation. Read the original article.

Malcolm Turnbull and his emissions trading scheme shadow

Michelle Grattan, University of Canberra

Malcolm Turnbull, it seems, cannot escape the emissions trading scheme (ETS) bogey. This time, it comes in the form of China’s plan – which had been foreshadowed but is now confirmed – to introduce a national ETS.

Turnbull’s desire to do a deal with prime minister Kevin Rudd in 2009 for an ETS triggered the leadership contest that installed Tony Abbott as leader. The push against an ETS came from conservative Liberals, many of them climate change sceptics, and the Nationals.

After he was toppled as opposition leader Turnbull continued to strongly defend an ETS. Later, as a shadow minister and a minister he had to get fully on board with Abbott’s Direct Action.

More recently Turnbull went further. To win the vote of some conservative Liberals, who were needed for him to have the numbers to topple Abbott, Turnbull made it clear that as prime minister he would stick with the present policy and not contemplate an ETS.

When he got the leadership, he had to commit in writing as part of his Coalition agreement with the Nationals that he would maintain existing policies on climate change, carbon taxes and emissions reductions targets.

Sacrificing his views brought him support, but has left him looking on the wrong side of history – after earlier being on the right side of it. It is embarrassing, to say the least, that his expediency has been highlighted so quickly.

In terms of domestic politics, China’s decision should give some assistance to Labor, which has promised an ETS although it has not yet released the details.

Environment Minister Greg Hunt, who also used to believe in an ETS, is left arguing that Australia, with its taxpayer-funded emissions reduction fund, has “the best, most effective scheme in the world”, a claim that does not pass the credibility test.

Turnbull has a double problem. He knows Australia doesn’t have a gold-standard anti-emissions policy. And he is wide open to the charge of hypocrisy.

The Climate Institute’s John Connor says that with other countries broadening their emissions-reduction policies, “the prime minister is dancing around the reality that our policy toolbox is going to need a whole lot more in it”.

This will present problems for Turnbull as he approaches the election and – if the government is re-elected – beyond it.

In the run up to the poll is he just going to deny his past and go for an all-out attack on Labor’s ETS?

Will he at some point augment or change Direct Action to ensure that it has more bite and is fit for purpose as other countries ramp up their efforts? If so, how and when would that be done?

And what room to move will the Liberal conservatives and the Nationals give him to make necessary adjustments?

Frank Jotzo, director of the Centre for Climate Economics and Policy at the Australian National University, thinks Turnbull will look for a way through.

“The plan may well be to gradually reform the Direct Action scheme to make it work a bit like an ETS – for example by giving the present ineffective safeguards regime some teeth. But that would be very much inferior compared to a proper carbon pricing scheme.”

Connor believes the move by China and others “will give Turnbull more flexibility in arguing for stronger policies within his own team. He can point to much more robust policies abroad and dispel fantastic notions, popular amongst conservatives from 2009-12, that Australia was at risk of leading the world.”

As Connor points out, the irony is that if Turnbull had prevailed in the 2009 leadership vote and carried the deal with Rudd, Australia would have had an ETS policy, alongside stronger renewable energy and energy efficiency policies he supported with Rudd, leaving it in a better position with its climate policy now.

Abbott’s ascension not only stopped that ETS deal but ensured the Gillard government’s emissions reduction scheme – which never got the chance to reach its full form as an ETS – was repealed after he won government.

Now, from beyond the political grave, Abbott’s inadequate climate policy still reigns, a challenge for his successor into the future.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Too big to fail: China pledges to set up landmark emissions trading scheme

Alex Lo, University of Hong Kong

Chinese President Xi Jinping has made a landmark commitment on climate change during his state visit to the United States. A Chinese cap-and-trade carbon pricing program is scheduled to begin in 2017, and will be the world’s largest carbon market.

In a US-China joint climate statement issued yesterday, China pledged to lower carbon dioxide emissions per unit of gross domestic product (GDP) by 60-65% from the 2005 level by 2030, and introduce a national emission trading system covering key industry sectors such as iron and steel, power generation, chemicals, building materials, paper, and non-ferrous metals.

China is the world’s largest emitter of greenhouse gases, producing 25.9% of the world’s total carbon dioxide emissions in 2012.

Carbon pricing creates incentives for cutting greenhouse gases. According to the World Bank, 39 national and 23 subnational jurisdictions are putting a price on carbon through emission trading schemes (ETSs) and carbon taxes. These schemes and taxes cover 12% of the annual global greenhouse gas emissions: 8% from ETSs and 4% from carbon taxes.

China’s pilot schemes

China’s decision to run a domestic ETS was made in a closed-door meeting as early as 2010. Since 2013, pilot ETSs have come into operation in seven major cities and provinces: Beijing, Shanghai, Chongqing, Tianjin, Shenzhen, Hubei and Guangdong. Carbon prices vary across these pilot sites, ranging from US$1.9 per tonne in Shanghai to US$7.3 per tonne in Beijing (as of September 14-18, 2015).

The Chinese carbon markets have developed faster than expected. The pilot ETSs were approved in 2011, and China took only two years to get them up and running. Now, another two years later, President Xi has confirmed a crucial move towards a national scheme.

Meanwhile, the pilot schemes continue to tighten their regulations. For example, Guangdong Province plans to include more sectors, such as transport and construction, in its pilot ETS, which is the largest one in China. Chongqing City has reduced its cap at a greater rate than anticipated, lowering the number of freely allocated carbon allowances by 7%. There are plans for linking up ETSs across regions and creating new schemes in other provinces and cities, such as Hangzhou City and Anhui Province.

The blossoming of Chinese carbon markets stands in contrast to Australia’s stepping back from the transitory carbon tax, which would have become an ETS this year if it hadn’t been repealed by the Abbott government. While President Xi declared the climate change commitment on US soil, US President Obama himself failed in 2010 to get the Senate’s support for a similar cap-and-trade program. As a so-called “socialist market economy”, China seems to be more proactive than the neoliberal states such as the United States and Australia.

Hurdles to overcome

But there are still a lot of uncertainties about China’s scheme. The initial plan for a national ETS was scheduled in 2015, later deferred to 2016, and finally now confirmed for 2017.

Officials know all too well that any time sooner is unrealistic. Market regulation and infrastructure are far from complete. Companies are not active in the domestic carbon market. Local government officials and enterprises have limited capacity and expertise to manage trading activities.

Financial institutions are interested but concerned about the small scale of the market and the low trading volume. This is an issue because even small cities and counties have set up their carbon exchanges to reap benefits from carbon trading (and have closed down prematurely). Building a national cap-and-trade system will be a steep learning curve for China.

The falling coal consumption in China has made room for capping emissions. China used to be highly sceptical of emissions trading because it requires an absolute emissions cap to function properly, which would pose limits on the use of coal for power generation.

At the same time, car ownership in China is increasing, meaning that petrol use is likely to increase too. The Beijing government could keep cars off the roads by forcing car owners to drive only on alternate days (depending on their licence plate number), as it did during the APEC Summit held in Beijing in 2014 and the Tiananmen parade in 2015. Some heavy industries were forced to shut down their plants temporarily to meet emissions targets.

It may turn out that 2017 is too soon for China to develop a national ETS without an outdated “command-and-control” approach. A better way forward may be to develop an interim carbon tax scheme before moving to an ETS, as Australia previously attempted to do.

Experts have indicated that carbon taxes are a better option than ETSs. In 2011, UK climate economist Nicholas Stern, the principal author of the influential Stern Review, along with a group of prominent economists and senior academics from Chinese official think tanks, said:

…a carbon tax is probably the more robust instrument than a cap-and-trade system for cutting carbon emissions at this stage of China’s development, and it is also the favoured option of China’s policy-makers.

China needs a lot more time to build up a fully functioning carbon market, but it doesn’t have time to get it wrong. Covering more than a quarter of the world’s greenhouse gas emissions, the Chinese carbon market will be a game-changer, but it will also be too big to fail.

Alex Lo, Assistant Professor, University of Hong Kong

This article was originally published on The Conversation. Read the original article.

Article: New Zealand and Carbon Pricing

The link below is to an article that considers New Zealand’s position on carbon pricing and reports that it will link with an Australian emissions trading scheme.

For more visit:
http://www.bloomberg.com/news/2012-07-12/new-zealand-resists-higher-carbon-price-plans-link-to-australia.html