Global get-out clause

Australia's five per cent reduction target has caused alarm on both sides of the carbon debate, for differing reasons. But what does it mean in terms of actual reduced emissions? The structure of Australia's emissions trading scheme, and the decision to allow unlimited imports of Kyoto carbon credits means that, in theory at least, Australia could meet its targets without cutting a single tonne of its own emissions. It would work like this. Under the UN Clean Development Mechanism, credits are generated for projects in developing countries – mostly China – that reduce carbon pollution, such as a mini-hydro scheme or methane gas capture. These credits, known as certified emission reductions, or CERs, currently attract a price of around €10-€12, with the secondary market trading at €15-€16. Australian companies might figure that it is cheaper to buy CERs than it is to implement schemes to cut their own emissions. The fact that the allowance of imported credits is unlimited means that there is effectively no cap on Australia's emissions. It is theoretically possible that Australia's emissions will grow if the available abatement opportunities can be secured more cheaply in other countries. In that case it would be not so much a carbon pollution reduction scheme as a carbon pollution offset scheme. Deutsche Bank economist David Plank says some will no doubt see this as a failure of the Australian scheme, particularly in light of the EU ruling that strictly limits the number of imported credits. Plank argues that unlimited imports is not a bad thing, and is inherent in the design of an emissions trading scheme. “The whole point of putting a market price on carbon emissions is that producers will then seek to offset their emissions in the cheapest way possible,” he says. “In many instances this will be through reduction of their own carbon emissions. But there will also be many occasions when it is cheaper to buy the carbon permits from someone else. “If the cheapest abatement opportunities are in other countries then it is entirely possible for Australia's emissions to increase from current levels but for the scheme to be successful in reducing the total amount of carbon emissions in the world.” In practice though, it is unlikely to work like that. As the global movement to reduce carbon emissions accelerates, the price of the CERs is likely to increase. And in any case, Panda argues, there is a lot of “low hanging fruit” for Australian carbon reductions, energy efficiency being the foremost. Indeed, for many Australian companies, the initial cost of emissions will be lower than the current price of CDM units. It is quite likely that most Australian companies will simply dust off their “to do” lists under carbon reductions and implement a scheme they have considered for some time, just as Orica has an option to do to reduce its nitrous oxide emissions from its production of ammonia, and make a profit from it (A brilliant performance, December 18). With a price cap of $40, there is still some room for Australian companies to seek offsets overseas if it is cheaper than cutting their own emissions. But if that cap stays in place until 2014/15, as is planned under the CPRS, and the price of CERs developed through the CDM increases – as it is expected to do if a successor to Kyoto is successfully negotiated – then Australian companies will no longer have that option. The White Paper reveals that some parties, including NAB and Hydro Tasmania, argued for a limit on international credits to allow a genuine focus on domestic abatement, while others, mostly environmental groups, raised concerns about the quality of some CDM projects, and the broader environmental credentials of credits produced from large hydropower projects. Naturally enough, the international emissions trading association, keen to establish as many trading opportunities as possible, and the Australian Industry Greenhouse Network, a lobby group representing heavy emitters that wants the lowest possible carbon price, argued for no limits. 19 Dec 2008 1:48 PM