Carbon trading: an essential tool in the greenhouse struggle

December 6, 2006

In their article "No to carbon trading: make the polluters pay" (GLW #691), Tim Stewart and Pip Hinman argue against the use of carbon pricing in general, and emissions trading in particular, as an important tool for reducing Australia's greenhouse gas emissions.

Their argument against carbon pricing is that the costs will be passed on to consumers. This is inevitable and, I suggest, essential. Without a price signal, how can renewable energy sources compete with dirty coal? Without pricing that reflects the true environmental and health costs of greenhouse pollution, industries will continue to choose the cheapest and dirtiest energy sources and members of the public will continue to live in a state of illusion and waste energy by using plasma TVs, air conditioners, SUVs and electric hot water systems.

State governments can protect low-income earners from the price increases resulting from carbon pricing by introducing regulations and standards for buildings, appliances and equipment and schemes to assist people to reduce energy wastage. With a combination of higher energy prices and less energy consumption, there is no reason why energy bills would increase at all.

There are two principal types of carbon pricing: carbon taxes and emissions trading schemes. Carbon taxes set a price for carbon, while creating some uncertainty about the amount of emissions reduction those prices (together with other measures) will achieve. They are administratively simple.

The most effective kinds of emissions trading schemes cap emissions at a level below the actual emissions, allocate only sufficient emissions permits to meet that cap, and then allow industries to trade in permits. They are not simply licences to pollute. Emissions trading has been very effective in reducing some air pollutants in the US. Emissions should be monitored and enforced, and the size of the cap reduced in steps every few years, thus ensuring that the value of permits, and hence their price, gradually increase until cleaner alternatives become cost-effective.

With emissions trading, there is certainty about the quantity of emissions and uncertainty about the future price of permits. Emissions trading schemes are a combination of regulation and market mechanisms, and are administratively complex. Therefore, they offer more opportunities for cheating than a carbon tax. The key foci for political battles are the size of the cap and the method of allocating permits.

In the first phase of the European Union's emissions trading scheme, all permits were allocated to existing greenhouse polluters and this, together with the over-allocation of permits by some governments, has led to teething problems. In my view, initially at least, one quarter of the emissions permits should be auctioned, and this fraction should be increased in steps each time the cap is reduced. This will allow cleaner energy industries to enter the market and compete with the dirty industries.

To reduce greenhouse gas emissions substantially, we need a combination of different measures: carbon pricing, directed government funding of alternatives, regulations and standards, organisational change, education and information. Each of these elements is necessary, but not sufficient. Emissions trading schemes, properly constructed, are neither a licence to pollute nor a means of "unnecessarily prolonging the world's dependence on coal, oil and gas". Climate change is accelerating and we cannot afford to delay our response until the fall of capitalism.

[Dr Mark Diesendorf teaches at the Institute of Environmental Studies at the University of New South Wales.]

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