Australia's carbon price anomaly

Could Australian firms be able to offset some of their emissions by financing coal-fired power in developing nations? It appears so, thanks to a CDM rule change.

The Conversation

A recent decision by the executive board of the Clean Development Mechanism creates an incongruous Australian carbon pricing scheme. Companies will be able to offset some of their carbon emissions by financing coal-fired power stations in developing countries.

The CDM is a prescription under the Kyoto protocol, the international agreement which set carbon dioxide emission limits for developed countries. Economists argued at the time that a least-cost solution to the global warming problem would include mechanisms which enable countries with high emission-reduction costs to offset their emissions by reducing emissions in other low-cost countries.

The so-called flexible mechanisms, which include the CDM, were born out of this concern. The CDM allows countries to meet their obligations by buying certified emission reduction credits which are generated from, and help to finance, emission-reduction projects in developing countries. Projects include the creation of renewable energy, reforestation activities, the avoidance of methane emissions, and household projects such as the provision of solar ovens and improved lighting efficiency.

The CDM has been the subject of fierce debate regarding the ‘additionality’ of the projects being funded. Opponents argue that in many cases the project would have gone ahead without the CDM and sale of the CERs. In addition, opponents argue that the baseline emission level of the alternative high-emission technology has been overstated for many projects in which case too many CERs are received.

When these factors are present, a developed country or a company participating in an emission trading scheme could offset their emissions by buying emission reductions elsewhere which never actually occur.

Without diminishing the importance of this debate, the recent decision by the executive board of the CDM, which allows new coal-fired power stations in developing countries to earn CERs, creates an incongruous Australian carbon pricing scheme.

The decision reverses a previous suspension of this rule and goes against the CDM’s own technical advisory panel. It allows more efficient coal-fired power stations to earn credits for the emissions they do not produce in comparison to the business as usual case – the building of less efficient coal-fired power stations.

It is true that, given real additionality and an accurate baseline (which is very much questioned by those who have investigated the issue closely), emissions would be reduced by such projects. In addition, in a global sense, these emissions would have been reduced at least cost.

However, aside from this cost-effectiveness justification, it is beyond the pale of logic, environmental integrity, and long-term efficiency and sustainability to allow a coal-fired power station to offset its emissions in Australia by helping to finance a coal-fired power station elsewhere. This is especially the case when renewable technologies are available.

In the amendment to Australia’s Clean Energy Act 2011, which sets up the link between the Australian and European emission trading schemes and carbon prices, companies in Australia are, from 2015, allowed to offset 12.5 per cent of their emissions using CERs. This 12.5 per cent offsetting is to be expected because CERs are very cheap at roughly $A1.80 per tonne compared to the current EU credit of $9.60.

The issue then is the kind of projects that should be funded from this 12.5 per cent offsetting scheme. At the moment there are no rules governing which CDM projects are allowable under the assumption that a one tonne emission due to one project (for e.g. installing solar energy) is the same as another (for e.g. switching from one coal-generation type to another).

This is obviously not the case and it highlights the problem of establishing a policy along one environmental-impact dimension when multiple environmental and social impacts occur in a dynamically evolving ecological economy. The idea of the CDM and Australia’s carbon pricing scheme must be to encourage projects that, rather than supporting the coal industry, remove the long-run lock-in to a fossil-fuel driven energy system.

The government could act to remove this anomaly as it goes about making regulations which support the amended Clean Energy Act. Under the proposed section 123A which deals with the international offsetting under the CDM, the minister may recommend regulations and these could be used to disallow certain types of international emission-reduction units. In doing so, the minister is to give regard to the “environmental integrity” of the Act.

The CDM rule change threatens the environmental integrity of the Act and the government must stipulate rules which disallow CERs from projects that encourage the further entrenchment of fossil fuels into the world’s future energy supplies.

Neil Perry is Research lecturer at the University of Western Sydney.

This article was originally published by The Conversation. Republished with permission.