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



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Climate teams: if countries pooled resources, they could support a low-emission transformation.
CC BY-ND

Suzi Kerr, Victoria University of Wellington

Despite the US withdrawal from the 2015 Paris Agreement on climate change, other countries, including New Zealand, remain committed to cutting their greenhouse gas emissions.

In our report, we explore how New Zealand, a trailblazer for emissions trading, might drive a low-emission transformation, both at home and overseas.

Turning off the tap

Emitting greenhouse gases is a lot like overflowing a bathtub. Even a slow trickle will eventually flood the room.

The Paris Agreement gives all countries a common destination: net zero emissions during the second half of the century. It is also an acknowledgement that the world has only a short time to turn the tide on emissions and limit global temperature rise to below two degrees. The sooner we turn down the tap, the more time we have for developing solutions.

Time is running out on meeting the goal of keeping global temperature rise below two degrees.
from Unsplash, CC BY-ND

New Zealand’s 2030 commitment is to reduce emissions 30% below 2005 levels (11% below 1990). In 2015, our emissions (excluding forestry) were 24% above 1990 levels. The government projects a gap of 235 million tonnes between what has been pledged and what New Zealand will actually emit in the period from 2021 to 2030.

Reducing emissions rapidly enough within New Zealand to achieve our Paris commitment could be extremely expensive, and even at a cost of NZ$300 per tonne, the target could not be met through domestic action alone.

International emission reductions help bridge the gap. New Zealand could turn off its own greenhouse gas tap while supporting other countries to do the same.

Joining forces across borders

In the past, New Zealand relied heavily on the global Kyoto carbon market and purchased international emission reductions using the New Zealand Emissions Trading Scheme (ETS). Some ETS firms bought low-cost overseas Kyoto units of questionable integrity while domestic emissions continued to rise.

In 2015, New Zealand pulled out of the Kyoto carbon market and its ETS is now a domestic-only system.

Under the Paris Agreement, carbon markets have changed in three important ways:

  • Currently, international emission reductions can be traded only from government to government. It is no longer possible for NZ ETS participants to buy international units directly from the market.

  • International emission reductions sold as offsets to other countries will have to be additional to the seller’s own Paris target.

  • Countries have flexibility to trade international emission reductions through arrangements outside of the central UN mechanism which is at an early stage of development.

A new approach to reducing emissions

What does this mean for New Zealand? First, we cannot and must not rely on international markets to set our future domestic emission price.

Second, as both taxpayers and responsible global citizens, we need to decide where to fund emission reductions. Most mitigation opportunities are in developing countries. The benefits of investing in lower-cost reductions overseas need to be weighed against the costs of deferring strategic investment in New Zealand’s own low-emission transformation.

Third, we need an effective mechanism to direct New Zealand’s contribution to mitigation overseas.

In collaboration with others, Motu researchers are prototyping a new approach: a results-based agreement between buyer and seller governments within a climate team.

For example, New Zealand could partner with other buyers – such as Australia, South Korea or Norway – to pool funding at a scale that provides incentives for a country with a developing or emerging economy – such as Colombia or Chile – to invest in low-emission transformation beyond its Paris target. These countries could then create a more favourable environment for low-emission investment – including by New Zealand companies.

Emissions trading could play an important role in New Zealand’s transition to a low-emissions economy.
from Unsplash, CC BY-ND

Retooling the ETS for domestic decarbonisation

So far, New Zealand has been moving at speed but in the wrong direction, relying heavily on international emission reductions to meet its targets from 2008 through 2020 while domestic emissions continued to rise. Gross emissions (excluding forestry) are projected to climb 29% above 1990 gross emission levels by 2030 under current measures. This is a far cry from our 2030 Paris target of net emissions of 30% below 2005 gross emission levels (11% below 1990).

New Zealand’s ETS has an important role to play in achieving a successful low-emission domestic economy, but it needs to be properly equipped.

Unlike other financial markets, the purpose of an ETS market is more than price discovery, resource allocation and liquidity. It is designed to create a change in behaviour to reduce emissions. Prices are driven not just by the interplay of demand and supply, but by current policy decisions, emission reduction opportunities, and expectations about future decisions and opportunities.

Since de-linking from the Kyoto market in mid-2015, NZ ETS participants have had no certainty on how to invest. They need clear near-term signals for unit supply and cost and predictable processes for longer-term decision making.

Five changes to make the emissions trading work

  1. Introducing a cap (fixed limit) on NZ ETS units sold or freely allocated by the government will define supply and enable the market to set an efficient price. In the past, the NZ ETS borrowed the global Kyoto cap, which essentially allowed unlimited domestic supply. The Kyoto cap is no longer available and we have committed to reducing domestic emissions.

  2. Establishing a price band will provide a minimum and maximum emission price limit, set by government. A price floor will guarantee a minimum return on low-emission investment and a price ceiling will safeguard against upside price shocks. When the floor and ceiling are far apart, the market has latitude when setting the price. The closer they are, the more the government manages the price. The price band will be implemented at auction and replace the current fixed-price option set at NZ$25 per tonne.

  3. Fixing both the cap and the price band for five years and extending them by one year each year will provide short-term certainty. The government will also need to set indicative trajectories for caps and price bands for a further 10 years in alignment with its decarbonisation objectives. This will enable long-term decision-making.

  4. Given the technical complexity of the ETS, we recommend that an independent body be tasked with advising government on ETS supply and price settings. Ultimately however, decisions on caps and price bands are political and therefore should be taken by government, with transparency and public accountability.

  5. The era of top-down carbon markets, unlimited unit supply and rising domestic emissions has ended. Right now, only governments can purchase international emissions reductions. In the longer term, ETS participants may also be able to do so. However, the quantity must be limited and displace other supply under the cap to avoid devaluing domestic investment and disrupting New Zealand’s progress toward decarbonisation. All international emission reductions applied toward New Zealand’s targets must be quality assured to manage risks with environmental integrity.

These adjustments can be achieved through practical legislative amendments and regulation. There is merit in implementing these changes as soon as possible so that low-emission investors and emitters can get on the road.

Setting the ambition of domestic ETS caps and price bands can be politically challenging. That is why New Zealand skipped this step the first time around and borrowed the Kyoto ones instead. Under the Paris Agreement, New Zealand needs to establish a resilient policy architecture with cross-party support that offers predictable processes to guide future political decision making. It’s time for us to forge our own pathway to a successful low-emission economy.

The ConversationThis article was prepared by Suzi Kerr, Catherine Leining and Ceridwyn Roberts at Motu Economic and Public Policy Research. The supporting paper was funded by the Aotearoa Foundation and informed by participants in Motu’s ETS Dialogue. The content does not necessarily represent the views of or endorsement by ETS Dialogue participants, their organisation or the funder.

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

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

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Emissions trading for electricity is the sensible way forward


Tony Wood, Grattan Institute and David Blowers, Grattan Institute

The preliminary report from the Finkel Review of electricity market security will be presented to COAG today. Leaked versions indicate that the report notes the urgent need for long-term policy certainty on climate change and that some policies (such as carbon pricing) reduce emissions at lower cost than others (renewable energy targets or regulation).

These are hardly inflammatory observations. Yet they link directly with this week’s furious debate within the Coalition government over the inclusion of a particular form of carbon pricing, an emissions intensity scheme, and whether it, and all of its relatives, should be excluded from next year’s climate policy review.

How does it work?

An emissions intensity scheme sets an intensity baseline – effectively a limit on how much carbon dioxide the generators can emit for each unit of electricity they produce.

Power stations can produce electricity above the baseline, but they would have to buy permits for the extra CO₂. Power stations that have lower emissions intensity create permits, which they can then sell.

For example, the intensity baseline might be set at one tonne of CO₂ for every megawatt hour (MWh) of electricity. A brown coal generator produces electricity at 1.3 tonnes CO₂ per MWh.

For every MWh the generator produces, it therefore has to purchase 0.3 permits. Alternatively, a wind farm that emits no CO₂ will create 1 permit for every MWh of electricity generated.

An emissions intensity scheme increases the cost of producing electricity from high-emitting generation, while reducing the relative cost of low-emitting generation. It thus drives emissions down in the electricity sector, because the cost difference favours a switch from high- to low-emitting generators.

Why this type of scheme?

Other forms of carbon pricing, such as a cap-and-trade emissions trading scheme, also increase the costs of high-emitting generation relative to low-emitting generation. But there are differences between the two schemes.

The main one is the short-term impact on prices. A cap-and-trade scheme places a price on each tonne of CO₂ emitted, which is paid to the government. Under an emissions intensity scheme, a price is imposed only on the carbon emitted above the intensity baseline.

Under a cap-and-trade scheme, our brown coal generator would have to purchase 1.3 permits for each MWh it produced, as opposed to the 0.3 it purchases under the intensity scheme.

As a result, electricity prices do not increase as much under an emissions intensity scheme as under a cap-and-trade scheme, at least in the short term. But there are drawbacks.

An emissions intensity scheme does not raise any revenue, as permits are purchased from other generators rather than the government. No revenue means no compensation to those impacted by decarbonisation.

Smaller price increases also mean that consumers are less likely to cut back on their own electricity use. This means that overall emissions will not be reduced as much as under a cap-and-trade scheme.

On the plus side, the lower price increase also means that there is less effect on overall economic activity. This can be mitigated under a cap-and-trade scheme, however, if the government uses the revenue wisely.

Bipartisan support at last?

Consulting firm Frontier Economics assisted the New South Wales government with the design of its greenhouse gas abatement scheme, an emissions intensity scheme that ran in that state from 2003 until 2012, with some success.

In 2009, Senator Nick Xenophon championed the emissions intensity approach as a better alternative to then prime minister Kevin Rudd’s proposed Carbon Pollution Reduction Scheme (CPRS). Malcolm Turnbull joined with Xenophon to attempt to persuade Rudd to adopt the scheme as an alternative to the CPRS; that attempt failed.

In the past couple of years, an emissions intensity scheme has again been advocated as a potential circuit-breaker to the climate policy impasse that has been the norm in Australia for the past decade. The electricity market rule-maker, the Australian Energy Market Commission, the Climate Change Authority and we at the Grattan Institute have all advocated for an emissions intensity scheme in the electricity sector.

This position was also reflected in the Labor Party manifesto at the last general election. While ambivalent about what form it takes, the major generation companies and business groups have all been arguing for a form of carbon pricing.

The Coalition government could get to an emissions intensity scheme in the electricity sector from its existing policies. An absolute limit on total emissions for the sector has already been set under the safeguards mechanism. Arithmetic and legislation are required to change the absolute limit to an emissions-intensity limit.

The advantages and disadvantages of an emissions intensity scheme against other forms of carbon pricing have been debated by academics, economists and policy wonks ever since Australia first committed to tackling climate change. But two things are clear.

First, an emissions intensity scheme would provide the stable carbon policy that the electricity sector needs to have investment confidence and contribute to electricity security.

Second, an emissions intensity scheme would, for some time, limit the impact on electricity prices. Apparently, these are matters of importance to both sides of politics.

The Conversation

Tony Wood, Program Director, Energy, Grattan Institute and David Blowers, Energy Fellow, Grattan Institute

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

Ten years of backflips over emissions trading leave climate policy in the lurch


Marc Hudson, University of Manchester

Ten years ago on Saturday (December 10) Prime Minister John Howard announced the Coalition government would investigate an emissions trading scheme to reduce greenhouse gas emissions.

It was a remarkable backflip after a decade of rejecting such a policy. But fast-forward ten years and we have seen a dizzying array of U-turns on climate, most of them bad news for the atmosphere.

In the latest turn of events, the Coalition government has ruled out an emissions intensity scheme (a form of carbon trading) ahead of a national review of climate policy.

So as Australia gears up to review both its electricity market, with an initial report to be released on Friday, and climate policies, what might the future hold?

Howard’s slow warming

Emissions trading and carbon taxes were considered as far back as the very early 1990s.

In August 2000 an emissions trading proposal from the Australian Greenhouse Office fell in Cabinet, a result ascribed by journalists to then-Senator Nick Minchin. A second proposal, in July 2003 from at least five ministers, was personally vetoed by John Howard.

However, the pressure became overwhelming as the Millennium Drought wore on and states proposed to knit together a national scheme from below. Federal bureaucrats forced Howard’s hand. In Triumph and Demise, journalist Paul Kelly describes the moment Howard realised he would need to consider emissions trading:

[Department of Prime Minister and Cabinet secretary Peter] Shergold reached the bullet point advocating an ETS [Emissions Trading Scheme], Howard asked: “What’s that doing there?” It was the decisive moment; the next exchange was a classic in the advisory art.

[Treasury secretary Ken] Henry said: “Prime Minister, I’m taking as my starting point that during your prime ministership you will want to commit us to a cap on national emissions. If my view on that is wrong, there is really nothing more I can say.” It was a threshold moment.

“Yes, that’s right,” Howard said cautiously. Henry continued: “If you want a cap on emissions then it stands to reason that you want the most cost-effective way of doing that. That brings us to emissions trading, unless you want a tax on carbon.”

Howard did not want a tax on carbon.

Howard after a speech outlining his ETS policy on the third day of the Liberal Party’s Federal Council in June 2007.
AAP Image/Paul Miller, CC BY

Kelly goes on to describe the shift in the business community as a “tipping point”.

So, on December 10 2006, John Howard put out a press release declaring that Peter Shergold and a panel would investigate an ETS. Shergold delivered his report in May 2007, and both the Coalition and Labor went to the 2007 election with an ETS policy.

Rudd’s great backflip

Kevin Rudd began auspiciously, receiving a standing ovation for ratifying the Kyoto Protocol, and famously declaring that:

climate change represents one of the greatest moral, economic and environmental challenges of our age.

But then Rudd and his inner circle began the tortuous process of formulating their own Carbon Pollution Reduction Scheme.

Rudd formally hands over the official document ratifying the Kyoto Protocol to UN Secretary-General Ban Ki-moon.
AAP Image/Ardiles Rante, CC BY

It quickly became bogged down in concessions to the mining and electricity sectors. The first attempt at legislation, in May 2009, had a higher emissions reduction target of up to 25% if international action materialised, but failed.

The second effort created an even more generous cushion for the miners (doubled to A$1.5 billion)
, but also failed after the Liberals replaced Turnbull with Tony Abbott on December 1, and the Greens in the Senate refused to vote for the plan.

Fresh from the horror of the Copenhagen climate conference, Rudd could have triggered a double-dissolution election over the scheme, but didn’t. A Greens proposal for an interim carbon tax was ignored. Rudd toyed with a behaviour change package, but was overruled.

On April 27 2010, Lenore Taylor broke the story that Rudd was kicking an ETS into the long grass for at least three years. Rudd’s approval ratings plummeted.

The toxic tax

After Julia Gillard replaced Rudd in 2010, she negotiated a three-year fixed carbon price as part of an emissions trading scheme. It was quickly politicised as a “great big tax on everything”, and lasted two years after coming into effect.

Abbott proposed a different way of reaching the same emissions reduction target – a Direct Action scheme, which critics said simply subsidised polluters. Turnbull famously called it “bullshit” in 2009.

A pro-carbon tax protest for climate action in Sydney in June 2011.
AAP Image/Dean Lewins, CC BY

Turnbull didn’t change Abbott’s policy when he became prime minister in September 2015. It has been recently reported that the Direct Action scheme’s Emissions Reductions Fund is “running out of steam”.

What next?

Only the brave or ignorant would make any specific predictions about the absurd(ist) rollercoaster that is Australian climate change policy.

In the last few months we’ve seen the Climate Change Authority issue a majority and minority report.

On Tuesday, transmission companies called for a trading scheme at least for the electricity sector, but the right wing of Turnbull’s own party seems implacably opposed, as do commentators such as Andrew Bolt. Now the Turnbull government appears to have capitulated.

Business, industry and green groups have been crying out for policy consistency and an orderly transition away from coal.

Now we wait for the results of the two reviews into Australia’s electricity and climate policy.

There’s the Finkel Review into the reliability and stability of the National Electricity Market, which was commissioned in response to the South Australian blackout of September 28. That will presumably create new terrain in the debate on renewable energy for which there is currently no additional target beyond 2020.

Then there’s the review of Direct Action itself, and its safeguard mechanism. In 2015, under pressure from Nick Xenophon, the government promised it would begin the review on “30 June 2017, and complete it within five months”.

Meanwhile, the Labor Party will have to come up with its own specifics for how it would hit the Paris targets. It’s hard to see the Liberal and National parties changing their minds on this issue, having somewhat painted themselves into a corner (it was not always so).

Ten years ago, after successfully fending off action, John Howard finally had to do a U-turn, but it was too little too late. The pressures are now building again. It will be interesting to see if Labor is capable of capitalising on them, and if social movements are more able than they were to keep Labor to its rhetoric this time around.

Ten years from now, will we be charting another ten tempestuous and wasted years?

The Conversation

Marc Hudson, PhD Candidate, Sustainable Consumption Institute, University of Manchester

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

Climate Change Authority suggests emissions trading but no new climate targets


Michael Hopkin, The Conversation

An “intensity-based” emissions trading scheme for the electricity sector, to begin in 2018, is among a “toolkit” of policies recommended by the Climate Change Authority in a report setting out how Australia can meet its obligations under the Paris climate treaty.

The scheme, similar to a plan proposed by Labor at the last federal election, would set “baselines” for greenhouse emissions per unit of electricity generation, awarding credits to generators who emit less. The report recommended that these baselines be steadily reduced to zero “well before 2050”.

But it stopped short of recommending a planned phase-out of the most polluting power sources such as brown coal power stations, concluding that this will not be a cost-effective way to decarbonise the sector.

“The final composition of the electricity sector would be a matter for various electricity companies,” said Climate Change Authority chair Wendy Craik, although she added that the new scheme would help to incentivise renewable energy.

The report also recommended applying baselines to other emissions-intensive industries such as cement, steel and natural gas, under the government’s existing “safeguard mechanism” which penalises emitters who overshoot these limits.

The report also calls for five-yearly reviews of Australia’s climate policies, beginning in 2022 – a similar timetable to the five-year reviews under which nations are required to review and strengthen their climate pledges under the Paris agreement. The government is already set to review the effectiveness of its existing climate policies next year.

The report does not recommend any strengthening of Australia’s current emissions target, which calls for a 26-28% reduction in greenhouse emissions on 2005 levels by 2030, or of the Renewable Energy Target, which was scaled back last year.

It also recommends continuing with the government’s A$2.55 billion Emissions Reduction Fund, which “reverse-auctions” taxpayer funds for emissions-reducing projects.

Craik said that Australia needs a wide range of policies to drive down emissions in different sectors of the economy.

But the report has revealed divisions within the Authority, with members Clive Hamilton and David Karoly reportedly planning to issue their own dissenting report in the coming days.

Last July, the Authority recommended much deeper emissions cuts of 40-60% on 2000 levels by 2030. But in December Australia’s more modest target was enshrined in the Paris agreement.

Craik said the Authority stands by its earlier report, despite it having been ignored by the government, and that the new report is “focused on the policies the government might use to hit its targets”.

She said that talk of ramping up Australia’s emissions targets is premature while the Intergovernmental Panel on Climate Change is still working to calculate the carbon budget associated with the Paris agreement’s most ambitious goal of restricting global warming to 1.5℃. But she added that the policies recommended are designed to be “scalable” in future.

Climate Institute chief executive John Connor said the report’s recommendations “neglect a key fundamental of climate science” by failing to endorse deeper emissions cuts before 2030.

“If we emit more now, we have to emit much less later in order to keep within the overall temperature limits of 1.5-2℃ that the government agreed to in Paris,” he said.

The Climate Council also criticised the recommendations as “woefully inadequate”.

“Accepting Australia’s current 2030 emissions-reduction targets rather than the action required to limit global warming to less than 2℃ means the report’s recommendations will not protect Australians from dangerous climate change,” said council member Will Steffen.

The current targets would use up 84% of Australia’s overall carbon budget to meet the 2℃ target by 2030, he said.

Hitting the target?

Dylan McConnell, a research fellow at the Melbourne Energy Institute, said the suggestion of a baseline-and-credit scheme was unsurprising, as “that’s the direction everyone has been rowing in for the past 18 months or so”.

He said the report outlines ways in which the electricity sector can significantly cut its emissions by 2050, but none that is in line with meeting the Paris agreement’s goal of keeping global warming below 2℃.

To do that, Australia would need to emit less than 15g of CO₂ per kilowatt hour of electricity in 2050 – compared with 800g today. But the scenarios outlined in the report would fall well short of this, he said.

A baseline-and-credit scheme, unlike a carbon tax, would avoid passing on significant costs to consumers. But that would also mean consumers will be less likely to change their own behaviour and try to use less electricity, McConnell said.

He added that Australia’s current emissions targets, like those of many other nations, are not consistent with the 2℃ warming goal, and that any delay to strengthening these targets will make the job tougher still. “Kicking the can down the road always makes it harder,” he said.

RMIT University energy researcher Alan Pears said the gap between the politics and the science is “enormous and widening”.

“All we can hope for really in the next few years, regardless of who is in power, is to put in place the mechanisms for carbon pricing or trading, and see the beginnings with very low carbon prices and lots of generous exemptions,” he said.

The Conversation

Michael Hopkin, Environment + Energy Editor, The Conversation

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