brace for carbon tightening

Yep, I had the full head gear too. Ouch!

I used to wear braces. I still wince at the memory of regular trips to the orthodontist to have them tightened. Aaargh. It hurts even now. After a few days my teeth would eventually settle into their new place, only to earn yet another trip to the orthodontist for tightening.

A carbon emissions trading scheme is like a set of braces for the economy. The ultimate goal is to rearrange industries so that they are energy-efficient and low-polluting. To do this, the government builds a framework to sit on top of the existing industry structure, a set of braces, if you will.

This new framework requires businesses to buy permits to pollute. To start, there are lots of permits, ensuring the price is kept relatively low. Then, every year, the government (about as popular as a dentist) intervenes to tighten up on the amount of emissions permitted, raising their price. It hurts. Business must change. High-polluting industries feel the pinch the hardest.

Then, once things have settled in place, the government tightens the screws again, cutting the level of emissions permitted again, and so on.

Along the way businesses must make a decision. Will they keep buying ever more expensive permits to pollute, or will they change their behaviour to be more energy-efficient and burn less fossil fuel? If one business is able to reduce its emissions intensity, it can sell its unused permits to businesses that need them, albeit for a price. The price of the permits is ultimately determined by this balance of supply and demand for them.

Slowly but surely, the entire structure of industry changes to be more energy-efficient.

A carbon tax, in theory, is different. It is levied as a fixed charge per tonne of carbon emitted. Businesses report their emissions to the government and receive a tax bill in return.

If the tax is set too high, it may hurt businesses unnecessarily. If the tax is to low, there will not be enough incentive for business to change behaviour and emissions reduction targets will be missed.

But here’s a riddle: when is a carbon tax not a carbon tax? Answer: when it’s a fixed-price emissions trading scheme. The Prime Minister, Julia Gillard, has promised that after a certain period, three to five years, her carbon emissions tax will morph into an emissions trading scheme.

How exactly that will happen is not clear. Reading between the lines, it appears this could involve putting the braces on, creating the framework for emissions trading but just not tightening the screws for a few years.

I suspect this is what Gillard, means when she argues it is “semantics” whether she is proposing a carbon tax or not, and hence whether she has broken an election commitment.

If it all sounds rather familiar, it’s because, in the long run, that’s pretty much what Kevin Rudd was proposing and, before him, John Howard. The only difference is a longer transition period to a trading scheme. Anyone who is surprised by the overall thrust of the Gillard plan just hasn’t been listening for the past five years.

THE IRVINE INDEX 5/3/2011

$12.2b
Federal government subsidies and tax breaks for fossil fuel industries this financial year, according to the Australian Conservation Foundation.

$1.1 billion
Amount spent on climate change programs.

124%
Likely level of Australian carbon emissions in 2020 compared with 2000 levels if no further action is taken.

95%
Target that both the Coalition and Labor have promised to achieve.

30+
Number of countries with emissions trading schemes.

10
Number of states in the US with emissions trading schemes.

14
Number of times the radio host Alan Jones addressed the PM as Julia in their heated carbon tax interview (not including ‘‘Ju-liar’’).

9
Number of times he addressed Julia Gillard as Prime Minister or PM.

2006
Year John Howard established his emissions trading task group. In 2007 he adopted its recommendation to have a trading scheme.

Sources: pm.gov.au, climatechange.gov.au, Australian Conservation Foundation, garnautreview.org.au.

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8 Responses to brace for carbon tightening

  1. Richard says:

    Those 10 US states you mentioned that have emissions trading schemes you mentioned, guess what level they price carbon at? under $2 per tonne.

  2. dk.au says:

    It’s an interesting analogy.

    If the CPRS proposals, EU ETS and American experience is any guide, the braces will only ever go on the top teeth, leaving the bottom teeth to continue their unappealing trajectories (through international and domestic offset clauses that ensure a supply of cheap credits)

  3. econogirl says:

    Hi Richard, I’d love to get a source for that if you have one. It’s hard to find definitive data… cheers.

  4. Magpie says:

    Don’t get me wrong: I believe something must be done about greenhouse gas emissions.

    But I’m not sure an emissions trading scheme is the solution.

    For one, it could encourage rent-seeking behaviour. Say, cashed-up investors could purchase emission permits in excess of what they really need, just to re-sell them later, surcharge included, to EMS.

    Further, who’s to say that producers won’t simply pass on the extra cost to consumers? Say, big miners?

  5. Sean says:

    Getting definitive data is difficult but the Chicago Climate Exchange is an interesting place to look for the effects of a voluntary exchange. http://www.chicagoclimatex.com/ and http://21stcenturywire.com/2010/08/27/the-great-collapse-of-the-chicago-climate-exchange/

  6. Sean says:

    Sorry, forgot to add this regarding the mandatory trading program between 10 US states – http://www.rggi.org/docs/Auction_11_Release_Report.pdf and http://www.rggi.org/home

    This may provide additional context regarding the mandatory emissions trading scheme.

    • econogirl says:

      thanks for the links Sean. I notice it says the price for carbon dioxide in the 10 US state is $1.89 “per allowance”. I presume, but am not sure, that means “per tonne”, ie does one allowance = one tonne. Anyone know?

  7. Peter says:

    Here is the definition and link.

    CO2 allowance. A limited authorization by the REGULATORY AGENCY or a participating state under the CO2 Budget Trading Program to emit up to one ton of CO2, subject to all applicable limitations contained in this Part

    http://www.rggi.org/docs/Model%20Rule%20Revised%2012.31.08.pdf

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