This is a final version submitted for publication. Minor editorial changes may have subsequently been made.
Australians elected the Rudd government in the hope it would protect the environment and take action on global warming, DR SHARON BEDER notes, but instead it is promoting an emissions trading scheme, despite evidence this will achieve little apart from higher prices for consumers.
When Australians went to the polls in November 2007 they voted for the party willing to acknowledge the threat of global warming and promising to do something about it. However the Rudd government seems to be interested in little more than symbolic gestures to appease the electorate. The first of these was to ratify the Kyoto Protocol, in which Australia was committed to keeping its greenhouse emissions to within an 8 percent increase on 1992 levels.
The centre piece of the Rudd’s government efforts to reduce greenhouse gases is its emissions trading scheme, entitled a “Carbon Pollution Reduction Scheme.” Emissions trading is a system that aims at keeping costs to Australian industries to a minimum rather than achieving the rapid and significant changes necessary to prevent further global warming. From the beginning the government has discussed this scheme in terms of how much it would hurt and how necessary it is. Yet the no- pain no-gain message is really just window dressing for a scheme that will cost very little and achieve even less.
The federal and state governments commissioned neoliberal economist Ross Garnaut to review the likely impacts of climate change and recommend policy responses. Garnaut is a professor at ANU as well as chair of mining company Lihir Gold Co and a director of Ok Tedi Mining Limited, both of which operate in PNG with considerable adverse environmental impacts. Earlier in his career Garnaut was an influential economic advisor to the Hawke government (in the 1980s) promoting a raft of neoliberal policies including free trade, financial deregulation and floating of the dollar. Later he became an advisor to Exxon. (He is also a member of the Trilateral Commission.)
The choice of Garnaut to head the climate change review was clearly aimed at ensuring business interests were given prime consideration, as well as ensuring his policy recommendations were going to be market-based. It was therefore not surprising Garnaut recommended an emissions trading scheme to reduce greenhouse gases in Australia, despite its lack of success in Europe.
When the EU emissions trading system was introduced in 2005 analysts believed many governments had been too generous in allocating permits to local firms because they feared their local industries would be at a competitive disadvantage if they had to buy extra permits. A study by Ilex Energy Consulting for WWF examining six EU countries found none of them had set caps that went beyond business as usual and so they wouldn’t meet their agreed Kyoto obligations.1 Because allowances were not in great demand, the market opened at 8 euros per tonne and settled around 23 euros a few months later, far less than necessary to provide an incentive to reduce emissions.2 Yet Garnaut recommended permits be sold in Australia in 2010 for only A$20 per tonne rising each year by only 4 percent.3
It has been argued that one of the reasons emissions trading was unsuccessful in Europe was that initial allocations of permits were free, and so Garnaut recommended against giving free permits. But, following heavy lobbying on the part of Industry some 45 percent of permits in the Australian scheme will be given free to energy-intensive ‘trade exposed’ companies.
Industry lobbying has also ensured the cap on emissions will be so small as to be laughable. The government originally decided on a 5 percent cap on 2000 levels by 2020 if no international agreement is reached and 15 percent if one is negotiated in Copenhagen later this year. It has since, as a result of industry pressure, delayed the start of the scheme till 2011, kept the 5 percent cap and increased the 15 percent to 25 percent as a supposed compensation for the late start. Further compromises include a low fixed price for carbon permits of $10 per ton to begin with as well as the handout of more free permits.
An editorial in The Economist magazine, with reference to the US proposed emissions trading scheme, applies equally well to Australia’s scheme: “The weakening of this bill illustrates one of the central problems with cap-and-trade systems. They are complex, obscure and therefore susceptible to horse-trading. A chuck of allowances can be handed out to one lobby, a sliver to another, and soon the system's effectiveness has been sliced away.”4
If there is an extended recession, emissions could well decline by more than 5 percent without emissions trading, meaning emissions trading won’t achieve anything. Garnaut pointed out that even if an international agreement is reached, it would only aim for global emissions to stabilise at 550 ppm, with current emissions now at 455ppm of CO2 equivalents for all greenhouse gases. Stabilisation at the 550 ppm level is is likely to result in 44-87 percent mortality of coral, 8-39 percent species at risk of extinction, and 12-77 percent likelihood of irreversible melting of the Greenland ice sheet.5
Even with a 25 percent cap, an emission trading scheme is likely to be ineffective. Emissions trading is based on the idea that it’s cheaper for some firms to reduce their emissions than others and therefore more cost effective to allow the market to decide where emission reductions will be made than for governments to require uniform reductions across an industry. Firms that find it expensive to reduce emissions are able to buy up emission permits instead. Those that can reduce emissions cheaply can sell on their unwanted permits.
This might be acceptable if only limited pollution reductions are required – that is if reductions can be limited to what can be done cheaply. However emissions trading makes little sense if substantial reductions are required. If more expensive reductions have to be made then there is little point in setting up markets that enable some firms to avoid making those expensive reductions so as to minimise overall costs.
This became evident in Germany when it considered implementing an acid rain emissions programme. The aim of the German programme was a 90 percent reduction in SO2 between 1983 and 1998. In comparison, the aim of the US emissions trading program for SO2 permits was only a 50 percent reduction by 2010. This meant that in the US there was much more scope for power stations to find cheaper ways to reduce their emissions, whereas in Germany, every power station had little choice but to retrofit their plants with flue gas desulphurisation and selective catalytic reduction for nitrogen oxides. This meant that there was no scope for trading in Germany.6
The US Acid Rain Cap and Trade scheme is consistently cited as a success because it achieved emissions reductions at minimal cost but how do those reductions compare with what can be achieved with traditional regulation? The UK Environmental Agency noted in 2003 that sulphur emissions in the US exceeded those from the EU Member States by 150%.7
An emissions trading scheme in Australia may see the price of electricity and manufactured goods go up but this is no guarantee the market will invest in carbon-free alternatives. This is especially the case given many polluters will get permits for free and others can pass on the extra cost to consumers many of whom will be compensated by the government for the higher cost of living caused by the emissions trading scheme.
Another reason companies are unlikely to invest in production changes and renewable energy is that the Rudd emissions trading scheme allows companies to buy unlimited offsets from within Australia and overseas. Companies will therefore be able to offset any emissions they do not have permits for, by paying for carbon reductions elsewhere. These might include tree plantations which are supposed to soak up carbon, renewable energy generation projects (unlikely since these would be more expensive than emission permits), landfill gas extraction and the closing down of old, dirty plants. These carbon reductions are supposed to be additional to what would otherwise have occurred.
Until now Europeans companies have been the major buyer of carbon offsets internationally because they have been part of an emissions trading scheme. Such offsets have been much cheaper than carbon permits at home and have mainly been generated in China, India, Brazil and Chile.
However there are many questions about how effectively carbon offset schemes reduce greenhouse gases in the long-term. It is up to those claiming carbon credits to explain how they are reducing greenhouse gas emissions and why these reductions would not have occurred without their investment. This means the carbon offsets can be rather debatable and often would have occurred anyway. An example is the Esti Dam in Panama which was more than half complete when the Dutch government applied for offset credits for it.8
A company can argue that a gas-fired power plant it is investing in is reducing carbon emissions because otherwise a coal-fired power plant would have been built. There is no onus on the company to prove the coal plant would have been built nor that the gas-fired plant would not have been built without the carbon credits. Nor does it matter that a wind farm would have reduced CO2 emissions far more. Using the credits gained with ‘imagined’ reductions, the company can increase its emissions back home. However the overall benefit to the environment is doubtful.
Offset projects favour cheap methods of reducing carbon emissions rather than renewable energy projects in developing countries. One of the easiest ways to earn carbon reduction credits is to pump methane out of a waste dump. This is because renewable energy is more expensive for investors, even though it offers more benefits to the local community and the nation.
The use of tree plantations as carbon offsets are particularly problematic. Firstly there is no accepted method for calculating how much carbon is temporarily taken up by growing trees. Such trees may release their carbon early as a result of fires, disease or illegal logging but the necessary long-term monitoring is often not carried out.
In many situations plantations are not sustainable. Generally plantations are made up of single species, such as eucalyptus or pine, which grow quickly, have high fibre yield and can be easily logged. They suck up all the water in an area leaving wells dry, and the land around desiccated and unable to support crops. The trees are planted in rows of trees of the same age and species that require heavy use of agri-chemicals, including fertilisers, chemical weeding, herbicides that pollute remaining waterways. Such plantations reduce soil fertility, increase erosion and compaction of the soil, and increase the risk of fire. In addition they may lead to a loss of biodiversity because they are monocultures and because their densely packed uniform rows do not provide the variations of form and structure found in a forest.9
It is often argued by economists that markets are more efficient than centralised government decision-making because they automatically gather information and ensure supply and demand are balanced and resources allocated efficiently. But this sort of argument cannot be applied to artificial markets such as those created for emissions trading since the need for monitoring and enforcement remains and is, in fact, arguably greater. For emissions trading to work properly, the regulator needs to know what emissions a company is making so as to check it has sufficient permits. Too often inspection and verification does not happen.
In the Australian scheme, firms will estimate their own emissions and very large emitters will have their reported emissions audited by a third party.10 Elsewhere, auditing is often done by transnational corporations such as PricewaterhouseCoopers that are also consultants and accountants to companies whose emissions they are auditing. According to Heidi Bachram and her colleagues from Carbon Trade Watch, ‘This can only lead to a severe conflict of interests, resulting in fraud and ultimately little guarantee of actual emissions reductions.’11 It is particularly easy to cook the books when offsets from around the world are included.
Emissions trading tends to protect very polluting or dirty industries by allowing them to buy emission permits or cheap offsets rather than meet environmental standards. In this way, Rudd’s emission trading scheme will not put any pressure on companies to change production processes and introduce other measures to reduce their emissions.
Take the example of electricity generation. Currently electricity generators offer quantities of electricity into the National Electricity Market for a particular price for each time period the next day. If they have to pay for emission permits, their offer price will presumably be higher. The system operator choses the cheapest electricity for supplying predicted demand for the next day. It only choses electricity generated by renewable energy if it’s cheaper or if there isn’t enough other electricity available. For any significant switch to renewable energy, carbon credits have to be expensive enough to make coal and gas-based electricity more expensive than renewable energy. Given the lobbying on the part of industry and the resulting low cap, compensation to coal-powered generators, and availability of offsets, this is unlikely to happen.
In contrast, some nations in Europe have a feed-in tariff for renewable energy, whereby any available renewable energy has to be bought for a fixed price. This provides certainty for investors and encourages investment in renewables. As a result, Germany, which has such a system, is now a world leader in wind and solar energy and the costs of producing renewable energy there have fallen dramatically.
Nevertheless there is a limit to what can be achieved in Germany because electricity has been privatised, which precludes direct intervention and investment by government. Consequently renewables still provide only a fraction of Germany’s electricity consumption. The only sure way to ensure alternatives such as solar and wind energy are more rapidly developed is for government to invest in those alternatives.
The oil and fossil fuel dependent companies who want to continue expanding their businesses are the very ones that have promoted emissions trading as the policy of choice (if there has to be one) in the knowledge it will enable them to continue to do this. A price of $20 per ton of emissions is likely to increase the petrol price by only 1 or 2 cents per litre, which is nothing compared with daily market fluctuations in oil prices, and anyway, will be counteracted by a promised reduction in the government fuel levy to offset the rise in petrol prices.
We are fooling ourselves if we think there is a cheap solution to global warming. On the one hand we can pay through taxes for cooperative planned investment and suffer the higher prices that strong government regulation may result in. This way we will be paying directly for the changes we want.
On the other hand we can pay higher prices in the hope the market will come up with the right sort of investments and changes. In the short run the permit prices will be so low that electricity companies will make windfall profits, as they did in Europe, by putting up the price of electricity far more than is necessary to pay for the permits. In the long run we may be paying escalating prices as the price of carbon becomes a market commodity subject to financial speculation, but with minimal and uncertain environmental benefits.
The fact the Rudd government is pushing forward with an emissions trading system, despite evidence it won’t achieve much apart from higher prices for consumers, shows it is not really interested in ensuring environmental protection. It is only interested in being seen to be doing something. This is most evident when we consider the Rudd economic stimulus package. Here was an opportunity to spend government money to restructure national infrastructure in a way that would set-up the nation for a low-emissions future: for example, on public transport and renewable energy sources. Instead the government has paid over $20 billion dollars to consumers in the futile hope their increased shopping will promote economic growth.
1. ILEX Energy Consulting, ‘The Environmental Effectiveness of the EU ETS: Analysis of Caps’, World Wide Fund for Nature, October 2005
2. Fred Pearce, ‘A Most Precious Commodity’, New Scientist, 8 January, 2005a, p. 6.
3.Ross Garnaut, ‘Targets and Trajectories: Supplementary Draft Report’, Canberra, Garnaut Climate Change Review, September 2008, p. 2.
4. Editorial, ‘Weak Medicine’, The Economist, 21 May 2009, http://www.economist.com/opinion/displaystory.cfm?story_id=13697284
5. Garnaut, ‘Targets and Trajectories’, p. 33.
6. Bernd Schärer, ‘Tradable Emission Permits in Germany Clean Air Policy: Considerations on the Efficiency of Environmental Policy Instruments’, in Steve Sorrell and Jim Skea (eds) Pollution for Sale: Emissions Trading and Joint Implementation, Cheltenham, UK, Edward Elgar, 1999, pp. 144-5.
7. Environment Agency, ‘Summary of the Responses to the Discussion Document on the Feasibility of a Trading Scheme for Nox and SO2 Emissions from Large Combustion Plant’, UK Government, May 2003, p. 8.
8.Ben Pearson and Yin Shao Loong, ‘The CDM: Reducing Greenhouse Gas Emissions or Relabelling Business as Usual?’ Third World Network and CDM Watch, March 2003
9.Fred Pearce, ‘Planting Trees Can Create Deserts’, New Scientist, 29 July, 2005b, http://www.newscientist.com/article.ns?id=dn7749&print=true; Jutta Kill and Ben Pearson, ‘Forest Fraud: Say No to Fake Carbon Credits’, Gloucestershire, UK, Fern and Sinks Watch, November 2003p. 3; Jutta Kill, ‘Sinks in the Kyoto Protocol: A Dirty Deal for Forests, Forest Peoples and the Climate’, Brussels, Fern, July 2001pp. 4, 12-3; Larry Lohmann, ‘The Dyson Effect: Carbon "Offset" Forestry and the Privatization of the Atmosphere’, The Corner House Briefing, no 15, 1999.
10.DCC, ‘Carbon Pollution Reduction Scheme: Green Paper’, Canberra, Department of Climate Change, , July 2008, p. 42.
11. Heidi Bachram, et al., ‘The Sky Is Not the Limit: The Emerging Market in Greenhouse Gases’, Amsterdam, Carbon Trade Watch, January 2003, p. 37.