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.

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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.

Could ‘nitrogen trading’ help the Great Barrier Reef?


Jim Smart, Griffith University; Adrian Volders, Griffith University; Chris Fleming, Griffith University, and Syezlin Hasan, Griffith University

Among the increasing sums of money being pledged to help save the Great Barrier Reef is a federal government pledge to spend A$40 million on improving water quality. The Queensland government has promised another A$33.5 million for the same purpose.

One of the biggest water-quality concerns is nitrogen runoff from fertiliser use. It is a concern all along the reef coast, and particularly in the sugar-cane regions of the Wet Tropics and the Burdekin. The government’s Reef 2050 Long Term Sustainability Plan calls for an 80% reduction in dissolved inorganic nitrogen flowing out onto the reef by 2025.

Our recent research suggests that “nitrogen trading” might be worth considering as a flexible economic mechanism to help farmers deliver these much-needed reductions in fertiliser use.

What is nitrogen trading?

You probably already know about carbon trading, which allows polluters to buy the right to emit greenhouse gases from those with spare carbon credits. Nitrogen trading would work in a similar way, but for fertiliser use.

A nitrogen market could offer a flexible way of encouraging farmers to use fertiliser more efficiently, as well as rewarding innovations in farming practice. It could be a useful addition to existing fertiliser-reduction schemes such as the industry-led Smart Cane Best Management Practice. These are making headway but evidently not enough.

A nitrogen market isn’t going to happen tomorrow, but it could be part of a future in which an annual limit (called a cap) is set on the total amount of nitrogen flowing out from river catchments to the reef.

One way to enforce this cap would be to set a limit on fertiliser applications per hectare. Cane farmers would have to manage the best they could with that fixed amount of nitrogen.

But nitrogen trading would offer more flexibility, while still staying under the same total nitrogen cap. Instead of a fixed limit, farmers would receive a certain number of “nitrogen permits” per hectare of cane. Then, if they wanted or needed to, they could buy or sell these permits through a centralised online “smart market”.

How would it work?

Imagine you’re a farmer with a property that sits on good soil. The amount of fertiliser you can apply to your crop must match the number of nitrogen permits you hold. But you know that, on your good land, you would get more profits if you could apply more fertiliser.

To do this you would have to buy extra permits through the nitrogen market. These extra permits would be worth buying as long as they deliver more than enough extra profit to cover the cost.

The total number of permits is limited by the cap – so buyers can only buy extra permits if other farmers are selling them. So who’s selling?

Putting fertiliser onto a field with poor soil won’t increase your profits as much, because a lot of that fertiliser will just run off before the crop can use it. On a bad paddock, nitrogen permits aren’t worth much in terms of extra crop yield, so you might make more money by just selling them to other farmers with good paddocks. That is why trading happens.

The overall effect of this trading would be to switch a significant amount of nitrogen fertiliser away from less profitable, leaky soils, and onto more profitable, less leaky land. As a result, the total nitrogen cap would be distributed more efficiently across the farming landscape.

For individual farmers, the reward for low-nitrogen farming practice is the opportunity to sell unused permits at a profit. This incentive will help to drive ongoing improvement and innovation.

Our simulations suggest that overall sugar cane profits and production would be higher with trading than they would under a fixed per-hectare nitrogen limit – with the same overall cap on the amount of nitrogen hitting the Great Barrier Reef.

Opportunity for the future?

Will it just mean more expensive regulation, green tape and hassle for farmers? Farmers are already signing up to calculate and record actual fertiliser applications paddock by paddock under the Six Easy Steps nutrient management program.

If we’re in a future where the government is monitoring and managing a fixed nitrogen cap anyway, then not much extra work is needed to set up an online trading market.

So could nitrogen trading help the Great Barrier Reef? Maybe. There’s more thinking still to be done, but nitrogen trading schemes are already operating in New Zealand and the United States.

A firm overall limit on fertiliser use seems to be essential for the reef’s survival. The incentives provided by a nitrogen market could give Queensland’s farmers the flexibility they need to thrive in this nitrogen-constrained future.

Graeme Curwen and
Michele Burford of the Australian Rivers Institute at Griffith University contributed to the research on which this article is based.

The Conversation

Jim Smart, Senior Lecturer, Griffith School of Environment, Griffith University; Adrian Volders, Adjunct Professor, Griffith University; Chris Fleming, Associate Professor, Griffith University, and Syezlin Hasan, Research Assistant, Australian Rivers Institute, Griffith University

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

James Hansen: emissions trading won’t work, but my global ‘carbon fee’ will


Michael Hopkin, The Conversation

Former NASA climate scientist James Hansen has called for a global “carbon fee” in which fossil fuels are taxed when they are produced or imported, rather than when they are consumed.

Under his proposal, countries would collect a fee when fossil fuels are mined or imported, and distribute the revenue to their citizens, while charging extra border duties to countries without a similar scheme.

Attending a United Nations climate summit for the first time, Hansen – widely credited as the first scientist to raise mainstream political concerns about climate change – says he has little faith in the climate targets and emissions trading schemes currently on the table in Paris.


What would be ideal outcome here in Paris given the scope of what countries can potentially promise?

The ideal outcome would have been if [US President Barack] Obama and the Chinese president [Xi Jinping] said we need a carbon price. But as long as they are letting local ground rules [be set up in other countries] then we’re screwed. They are screwing our children.

You’ve talked about the idea of having a fee that applies to markets worldwide, but that raises the question of how it’s going to get off the ground to begin with.

All it requires is two players: United States, China, European Union – two out of the three. They would say we’re going to have a fee and we’re going to put border duties on products from countries that don’t have it. The other party would join immediately, and so would most countries, because they would rather collect the money themselves.

You suggest that the money collected would be paid to citizens of the country that collects it – how crucial is that to your idea?

It would be up to each country. But if you want the fee to continue to go up, if you want public endorsement, you want public buy-in, you’d better give it to them. Now I can imagine in some countries where there’s not a democracy you would worry that some leaders are going to steal the money, but then that’s a problem we have now in many countries that are being ripped off by their leaders. It would be so transparent – you will know exactly how much money is collected, then where’s it going? I think there’s less chance [of this] if we just have some champion at a high enough level.

It sounds like you don’t have much confidence in the idea of countries setting their own climate goals and ambitions.

Of course it’s useful for that to happen – it’s better than nothing. But it’s not going to solve the problem, it’s not even going to reduce global emissions. You’ll reduce the demand for the fuel, to the extent that it’s successful, but that just makes it cheaper for someone else to burn it. Fossil fuels are cheap – there are parts of the world where you can pull oil off the ground for a couple of dollars a barrel.

So if the Paris talks are heading towards a deal based largely on each country’s individual climate pledges, is that letting the world down?

Yeah. That’s their scheme for coming out of here and looking good to the public. And they’ll be saying “we’re making progress”. To the extent that there are more things like Bill Gates throwing in a few billion dollars for research and development, these are positive things, so you don’t want to say they’ve done nothing. But it’s not going to solve the problem, that’s for sure.

The Conversation

Michael Hopkin, Environment + Energy Editor, The Conversation

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

Australia’s new cap on emissions is a trading scheme in all but name


Gujji Muthuswamy, Monash University

The Australian government has released its final draft for a cap on greenhouse gas emissions. The “safeguard mechanism” will form part of the government’s central climate policy, and will fine large businesses for exceeding emissions baselines.

Businesses that produce over 100,000 tonnes of greenhouse gases each year will have their emissions capped. The scheme makes some allowances for power generators and landfill (which produces greenhouse gases as rubbish breaks down), as well as those that expand production while improving their emissions efficiency.

The annual cap for the future will be based on the annual greenhouse gases emitted between 2010 and 2014. A final decision on the scheme will be made in late 2015 before starting in July 2016.

In effect, Australia’s climate policy armoury will include aspects of a “baseline and credit” emissions trading scheme.

Lower cost to business

An emissions trading scheme is a way of making businesses pay for the greenhouse gas emissions released from their business operations.

In a “baseline and credit” scheme each company must keep its emissions below a government-mandated level, for example, below the average of its previous five years’ emissions.

Let’s assume that the company’s “baseline emissions” had been set at 28,000 tonnes for a year. Also assume that the business emitted 30,000 tonnes of greenhouse in a year.

The company then has to pay for emissions that exceed the baseline, in this case 2,000 tonnes. They can pay for it by buying carbon credits locally or on the international market. Assuming a carbon price of A$10, the company’s cash outflow will be a modest A$20,000.

In contrast, under Labor’s “cap and trade” scheme, the government would release a number of permits into the market, based on national emissions reduction targets, such as Australia’s current 2020 5% less than 2000 levels by 2020. There is no limit imposed on individual companies’ emissions as long as they buy (pay for) enough permits, each permit giving them a right (but not an obligation) to emit 1 tonne of greenhouse gas. Assuming a permit price of A$10, then the same business will be paying A$300,000 under a “cap and trade”.

Thus the cost impost on businesses, and on the economy, is much less under the coalition’s safeguard mechanism compared to a cap and trade scheme.

Baseline and credit or cap and trade?

The two types of emissions trading schemes were debated in depth in the early 2000s, before the European Union favoured the cap-and-trade design in 2005 and it became the blueprint for Labor’s emissions trading scheme, introduced (albeit with a fixed initial price) in 2012. California and the Canadian province of Quebec have also adopted cap-and-trade schemes.

The case against the “baseline and credit” schemes back in 2005 included the fact that governments had insufficient information to set credible “baseline emissions” at individual business levels and that it involved more intrusive regulation than cap and trade schemes.

However, Australia has now detailed annual, company-level greenhouse gas emissions data for the large to medium-sized businesses, thanks to the National Greenhouse and Energy Reporting scheme introduced from 2008. Setting “baseline emissions” for each business need not be onerous, particularly if they are linked to individual companies past greenhouse gas emissions and their future plans.

The “baseline and credit” principle has already been used in the NSW Greenhouse Gas Abatement program in the last decade delivering low permit prices. That now-defunct scheme has been reviewed and presumably the lessons learnt would have informed the details the safeguard mechanism.

The actual performance of the European Union’s “cap and trade” scheme over the last 10 years shows its key weakness, namely governments’ inability to release the right number of carbon permits into the market, say for five future years at a time, based on various forecasts.

Random shocks such as the global financial crisis in 2008 impacted EU’s economic growth and greenhouse gas emissions. Demand for permits plummeted and the supply glut resulted in the permit price nose-diving from above 20 to around 5 Euros. So, the EU is now postponing the release of new permits to stabilise the supply demand balance.

Complementing other climate policies

The safeguard mechanism is complementary to the voluntary Emissions Reduction Fund (ERF), where the government pays businesses to reduce greenhouse gas emissions for specific projects.

The government will select only the low-cost emissions reduction projects using a tendering process. Those who get funding will reduce their emissions, but what about those who choose not to apply or do not get the funds? Will they continue to emit as before or more?

The safeguard mechanism is designed to ensure that there are mandatory obligations on greenhouse reductions from large businesses to not exceed their baseline emissions. Without a safeguard in the ERF design, emissions reductions by participants in the ERF could be nullified by emissions increases in other areas and businesses not participating in the ERF.

The safeguard mechanism – a baseline and credit emissions trading scheme – involves a fair degree of regulatory intrusion into the operations of liable businesses by mandating their individual baseline emissions.

While such high-handed regulation may be unwelcome, businesses would appreciate the lower cost of compliance to a baseline and credit scheme and the flexibilities built into the baseline setting process.

On the other hand, a “cap and trade” scheme is more market-based while imposing a higher cost of compliance on liable business.

This article is based on a post published on the Monash University website.

The Conversation

Gujji Muthuswamy is Industry Fellow, Faculty of Business and Economics at Monash University

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

China: Seeks Australia’s Help Building Emissions Trading Scheme


The link below is to an article reporting on China seeking Australia’s assistance in building an emissions trading scheme.

For more visit:
http://www.theage.com.au/federal-politics/political-news/china-seeks-australias-help-building-emissions-trading-scheme-20130711-2prjh.html

Australia: Carbon Price Needed Now


Thirteen of Australia’s leading economists have signed and published an open letter calling for a speedy introduction of a carbon price for carbon polluters. They prefer to have a carbon emissions trading scheme institututed as soon as possible.

The introduction of carbon pricing is designed to accelerate a move to more environmentally friendly production methods, increased reliance on renewable energy sources, etc.

For more visit:
http://theconversation.edu.au/economists-open-letter-calls-for-carbon-price-1639

View the actual letter.