Global sigh after an Aussie carbon cop out

Reuters

Australia's proposal to ditch cap and trade market in favour of a weakened scheme follows reduced or abandoned carbon markets in Europe and the United States and does not bode well for planned schemes around the world.

One advantage of cap and trade was always supposed to be the fact that it is not a tax.

As a complicated policy instrument, it was something that the public would struggle to understand or care about.

The European Union only introduced an emissions trading scheme, in 2005, after failing to agree a carbon tax.

As the carbon trading lobby, the International Emissions Trading Association, says: "The EU tried and failed to implement a carbon tax in the early 1990s. The political stigma of 'another tax' significantly stacks the argument in favour of a trading approach."

It seems that the architects of cap and trade were correct in thinking that something so complicated would not enthuse the public, but not with the intended effect.

In Europe, the European Union Emissions Trading Scheme has handed tens of billions of dollars in windfall profits to electricity utilities, with barely a flicker of interest from energy consumers who footed the bill.

That lack of public engagement has left room for opposition from a combination of industry and conservative politicians, with only self-interested carbon traders and a handful of green NGOs in support.

It is hard to think of a successful scheme, with the European and two regional US markets facing an oversupply of emissions allowances, while US President Barack Obama will not re-introduce federal cap and trade legislation which failed in the Senate four years ago.

It may be time for the leading proponent of carbon trading, the World Bank, to mobilise global support for a carbon tax instead, as a simpler, more transparent alternative.

Repeal

Australia announced plans for a carbon market in 2011.

New Prime Minister Tony Abbott will now do his best to unwind the scheme, due to launch next July.

He has a long way to go, given that he will need the support of newly elected independents in the Senate upper house who do not take their seats until next year.

Nevertheless, the Australian scheme risks extinction.

Harvard University political scientist Theda Skocpol provided the most detailed dissection yet of the failure of cap and trade legislation in the United States, in her analysis, Naming the Problem: What It Will Take to Counter Extremism and Engage Americans in the Fight against Global Warming, published in January.

Skocpol showed how Republican grass roots groups and notably the Tea Party, playing on feared job losses from higher energy prices, out-flanked environmentalists' fragile consensus-building of industry and lawmakers in Washington.

The lesson for environmentalists in the EU and Australia is that only grass roots support can overcome conservative and industry opposition, which may be easier for a carbon tax which voters can at least understand.

In Europe, opposition to cap and trade reform has been led by Germany's economy ministry, Business Europe (Europe's biggest industry lobby) and Poland, voicing similar concerns to the US Tea Party; and in Australia by the mining industry.

Market versus tax

Abbott has proposed a weakened carbon scheme to replace cap and trade, after the previous government – in its death throes – favoured an accelerated switch to cap and trade from an existing carbon tax.

Two separate governments within weeks have proposed to phase out both a carbon tax and cap and trade, the two main options for putting a price on carbon emissions.

Under cap and trade, polluters have to submit carbon allowances equivalent to their annual emissions or face a fine.

The total supply of allowances is capped; polluters may have to buy allowances equivalent to each tonne of emissions, or may get some allowances for free.

Abbott has proposed a less onerous scheme similar to existing project-based carbon markets in developing countries, where companies earn carbon offsets if they cut their emissions below a certain baseline.

A carbon tax is simpler, and is usually applied at a fixed rate to all emissions.

Direct Action

Abbott is still working up his Direct Action Plan.

It seems that polluters would have to stay below a certain baseline of 'business as usual' emissions or face fines.

Meanwhile, the government would invite bids for emissions reductions from project developers including farmers offering to sequester carbon in the soil, by using best grazing practices, and possibly from energy efficiency projects or polluters which undercut their baseline emissions.

The government would purchase least-cost emissions reductions, spending up to a maximum of $300 million ($279 million) in the first year, $500 million in the second and $750 million in the third.

The funding cap implies that the policy is determined first by budgetary discipline and second climate concerns.

This hybrid approach, neither tax nor market, illustrates a familiar squirming of politicians trying to implement modest carbon emissions cuts which keep both voters and industry happy.

Pipeline

Cap and trade is a rather complicated answer to the simple question of how to put a price on carbon emissions.

The central problem has been to forecast correctly demand for allowances, given influences ranging from the weather to economic growth.

There are several proposed cap and trade schemes in the pipeline, notably in South Korea and Chinese cities, and others encouraged by the World Bank's 'Partnership for Market Readiness', but these are delayed or pilots.

The expected bonus of a complicated scheme which bores voters compared with a carbon tax which triggers debate has proved illusory.

The best economic tool for emissions cuts is a carbon tax levied on the extraction of coal, oil and gas.

That will require public engagement and a global political consensus which may be a decade or more off.

Carbon markets have served a purpose in raising money for carbon cuts and establishing a framework for emissions monitoring, but it is difficult to imagine them making much further headway.

Originally published on Reuters. Republished with permission.