Australian Financial Review
25/08/2006 Page: 11
Martijn Wilder and Nick Rowley put the case for a carbon trading system.
Last week Australia's states and territories issued a discussion paper on a national greenhouse gas emissions trading scheme. Their proposal would build on the Kyoto Protocol and the European Union's trading system to establish a carbon price signal for Australia.
Yet in a major policy speech in July, the Prime Minister, John Howard, declared carbon trading systems to be "fatally flawed".
Since that speech a great deal has been said and written about the weaknesses of emissions trading in general and the European Union Emissions Trading Scheme in particular. Howard has criticised the EU scheme as a "wildly fluctuating" market, yet anyone with an understanding of markets be they sharemarkets or electricity markets knows that flexibility is their strength. In the EU case, the price movements were expected by those operating in the market and were relatively easy to track For many the scheme has provided a real opportunity to acquire allowances when the price is low and to hedge against price fluctuation. The states' proposed regime is to a large degree modelled on the EU's efforts. Teething problems experienced in Europe seem to have been addressed in the scheme which also takes account of Australian circumstances.
We have one of the world's most carbon intensive economies. As the international regulatory environment takes shape in coming years, and economies operate in a more carbon constrained world, Australia must be part of framing the global system for tackling this issue. If it isn't, the system that does emerge is unlikely to pay more than scant attention to the effects on our national interests.
Already the US has active pollution trading systems and is developing carbon trading systems such as the so called "Regional greenhouse gas Initiative" in the high emitting eastern states. California, long a leader in energy efficiency, is also committed to establishing a carbon trading system.
And this is despite a president and vice-president seen as wedded to the fossil fuel industry. George Bush's home state of Texas is second only to California is recognising the benefits of low carbon energy with 1995 megawatts of installed wind capacity. WalMart, the world's largest retailer, has committed itself to purchasing all of its energy from renewables. General Electric, the world's second largest company, last year launched "ecomagination", a program to make products that will help develop low carbon energy, including wind power, hybrid locomotives and photovoltaic cells. In the US Senate, the McCain Lieberman climate stewardship bill would regulate greenhouse gas emissions in the US economy, limiting them to 2000 levels by the year 2010. All regulated sources would receive emissions permits based on historic levels, and they could trade in these permits to ensure their compliance.
So, despite the vacuum in the Oval Office, in the world's richest economy with the world's highest emissions, political and business leaders are showing the way. Yet in Australia Howard is in denial about the severity of the problem and all too eager to criticise markets as an efficient tool to help reduce greenhouse emissions.
Criticism of the EU scheme has been based on a misunderstanding of how the system was established and how it works. It has no sunset date. The first phase (2005-2007) was always intended to be a trial. Despite this it has become the cornerstone of a multi billion dollar global carbon market where trades this year will exceed €22 billion. The real and much expanded market which implements the first Kyoto Protocol commitment period will begin in 2008. It will build on the lessons learnt from phase one and will cover more greenhouse emissions and industries. The inclusion of aviation will place a direct compliance obligation on Qantas, yet the government has done little to explore how the EU scheme will affect Australian industry.
Voluntary agreements and processes such as the Asia Pacific Partnership on Clean Development and Climate, heralded with such fanfare earlier this year in Sydney, have so far amounted to little. There is no clear sense of how this grouping of countries will engage in more than talks about talks about future technologies. The states' proposed regime would do far more to promote the use of clean coal technology and carbon capture and storage in Australia.
The key to successful government policy on climate change is to engage business: low carbon technology and less carbon intensive economies offer the solution to the emissions problem and business must deliver it. But history shows that new industrial technologies do not simply materialise; and that those technologies nurtured under generous government R&D programs often produce little result In the 1980s the US synthetic fuels program spent billions of dollars before being shut down without a single commercial operation being established. That doesn't mean that the government shouldn't continue with substantial investment into clean coal technology. But it should be only one element of a broader political and economic strategy, not an alternative to it.
Plenty of low carbon energy supply and consumer technologies already exist Climate change policy and action is obstructed by those who await the perfect solution, unwilling to adopt the merely good. There is no perfect energy technology: coal, nuclear, solar, wind and wave power all have strengths and weaknesses. But with growing evidence of an unstable climate system and of significant change within our lifetimes, there is an urgent need to adopt low carbon energy as the primary criteria of what is developed and used.
The market is the most powerful lever to bring these new technologies on stream quickly and with minimal economic disruption. Emissions trading is more than a means to avoid taxation. By creating scarcity and allowing a market to operate, it creates real incentives to invest in low carbon energy technology. From fisheries and water rights in Australia and sulphur dioxide emissions in Chinese power plants to nitrogen-oxide emissions in Los Angeles, harnessing markets to improve the environment has yielded greater results at lower costs than traditional regulatory approaches.
Designing these new markets is a complex task It requires setting an aggregate emissions quota, allocating this quota to firms in the form of permits, allowing these firms to trade among themselves, and then ensuring all firms in the market submit sufficient permits to the regulating authority at the end of each compliance period. Firms with low compliance costs will sell unused permits to those with higher costs, and this trading will ensure the lowest possible cost for achieving the aggregate emissions quota.
Well developed and implemented cap and trade systems provide a powerful stimulus to private sector innovation and investment and deter investment in high carbon infrastructure. Already billion dollar standalone carbon deals have been done under the Kyoto Protocol's clean development mechanism; deals under which technology transfers to reduce emissions in China have been funded by selling the resultant carbon reductions to leading financial institutions in Europe. Our exports of LNG could have been structured in such a manner.
International emissions trading is the defining characteristic of the Kyoto Protocol and was explicitly argued for by the US and Australia. And despite the US rejection of the Kyoto Protocol, several proposals to limit aggregate emissions have been gaining attention, significantly this month's agreement between California governor Arnold Schwarzenegger and British Prime Minister Tony Blair to share know how and to explore ways of linking national and state carbon trading systems.
In the vacuum left by the federal government's inaction we should not underestimate the importance of state leadership. It is the states that have significant responsibility for energy, transport and planning policy and already they are showing how to develop policies that help tackle climate change most notably NSW, Victoria and South Australia And we shouldn't forget there are many examples of limited forums being the basis for international agreements. The WTO began with a limited set of participants as did the successful Montreal Protocol on Ozone Depletion. And the UN charter itself was initially drawn up by only four participants: the US, Britain, the USSR and China.
The world will spend trillions of dollars on new energy infrastructure over the coming decades. This investment will determine the scale of climate change, the security of the world we inhabit and the energy systems that will power economic growth. Too much of that investment is now contributing to making the climate problem worse. Low carbon technologies offer the solution, but they will remain in the laboratory unless governments create market based incentives to make them valuable private sector investments.
It seems tactical short term thinking rather than any appreciation of the broader policy and political context of decisions has led the Howard government to criticise market based incentives for low carbon energy investment If Howard is so adamantly against a domestic emissions trading scheme, then what is he for? More taxpayer funding for a few technologies? A carbon tax? We doubt it.
Martijn Wilder heads Baker and McKenzie's global environmental markets practice. Nick Rowley was a senior adviser to British Prime Minister Tony Blair and worked on climate change issues during Britain's 2005 G8 presidency.
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