A coalition to support Australia's carbon price

To get the most out of the carbon pricing scheme Australia must embrace its neighbours on climate policy.

The Climate Institute

Carbon markets are the forefront of domestic climate policy in Australia. They are now also becoming a core question of diplomacy, as Australia looks to link its emissions trading scheme to that of trading underway in the European Union (EU) and New Zealand. This is happening in parallel to the ongoing UN framework negotiations towards a new legal agreement covering all major emitters and as a growing number of countries and regions institute domestic emissions trading and set pollution targets.

Australia – currently facing a choice on how it interacts with international carbon markets – has a unique opportunity to act strategically in our neighbourhood and boost domestic and international efforts to reduce emissions.

Linking Australia’s emissions trading scheme into those of New Zealand and the EU is important. The real opportunity however, lays in building a regional emissions trading coalition that draws in developing countries and helps boost global ambition.

Regional emissions trading coalitions (ETCs) are arrangements that bring together a set of countries that agree to implement a joint emission reduction market.

The Pacific region is well positioned for such arrangements, given that emissions trading schemes are underway or under development in Australia, New Zealand, China, South Korea, California, Mexico and Chile. Countries like Indonesia have also committed internationally to reduce emissions and set ambitious pollution reduction targets.

Developed countries tend to have high emissions reduction costs ($/tonne) at the margin relative to many developing countries. Trading across developed countries therefore provides only limited potential for economic gains from trade. Linking with countries like the EU and New Zealand also offers little opportunity to increase the level of global ambition.

Regional emission trading coalitions would connect emerging emission trading schemes and the targets developing countries are setting. These arrangements would allow countries with emission trading schemes to buy credits from countries like Indonesia if they cut emissions more than the targets they have committed internationally.

Such arrangements would be similar to regional and bilateral trade agreements that have risen largely from the lack of pace in global trade reform. These would operationalise a trading based ‘flexibility mechanism’ in the lead up to a comprehensive binding global agreement timetabled for completion for 2015.

Most importantly, ETCs can provide better incentives for developed countries to pledge and exceed their emission targets. Such arrangements would also allow a greater range of emissions reduction initiatives from developing countries to be eligible for sale to developed countries, thus enhancing developing countries’ ability to use efficient mitigation policy tools such as reducing fossil fuel subsides or implementing broad-based carbon pricing.

In short, ETCs have the potential to accelerate progress towards the mitigation required to avoid dangerous levels of climate change. This is because:

--  An increasing number of developing countries are taking significant action and pledging their own emissions reduction targets. ETCs provide options to use the export opportunities that could come from reducing emissions to further encourage such actions. They could also show how workable and mutually beneficial arrangements can be put in place to support a comprehensive multilateral trading system.

-- ETCs could enhance participating countries’ levels of ambition by enabling emissions reductions at less cost in developed countries and by encouraging developing countries to pledge targets in order to take advantage of export opportunities. Ambition could be enhanced even further by ensuring that importing countries like Australia extend their targets by the number of credits imported.

-- To be credible, in the short-term ETCs should focus on sectors where emission reductions can be more easily measured and verified. This would exclude reducing emissions from deforestation in developing countries for the time being.

-- If designed carefully to manage the potential for fragmentation in the multilateral system that may follow the proliferation of bi or plurilateral arrangements that are not under the UNFCCC system, emissions trading coalitions may provide a stepping-stone to more comprehensive multilateral arrangements. They may provide examples of workable solutions to the many design difficulties and uncertainties that will face policy makers in achieving a comprehensive agreement.

Carbon markets are not perfect. But if well designed, carbon markets can very effectively encourage greater levels of global emissions reductions. Regional ETCs are a concrete example of where Australia could show initiative to economic and diplomatic gains. It is in Australia’s national interest as an advanced economy very vulnerable to the impacts of climate change to act. It is in its further interest to lead on initiatives such as emissions trading coalitions.

Erwin Jackson is deputy CEO of The Climate Institute.

This is a summary of a The Climate Institute report – ‘Emissions Trading Coalitions – Leveraging Emissions Trading to Achieve Greater Levels of Global Mitigation Ambition’ – written by Salim Mazouz and Erwin Jackson. The full report can be found here.