How Labor can improve the carbon pricing scheme

The government was wrong to have virtually no constraint on the use of international carbon credits in the Australian carbon trading scheme. But hopefully it is now looking at ways to address this deficiency.

On Friday the Australian Financial Review carried a report that the government is considering scrapping the $15 carbon price floor (operational in 2015), but also implementing greater restrictions on the use of international carbon credits, currently trading at $A3.40.

Placing some meaningful restrictions on the use of international carbon credits will improve the durability and effectiveness of the Australian carbon pricing scheme.

The present scheme design does impose a restriction over the use of international carbon credits – organisations cannot meet greater than 50 per cent of their carbon emissions liability through international credits (sourced primarily through the United Nations Clean Development Mechanism).  However this allows such a large amount of international credits to be used that the constraint would never bind until well beyond 2020.

In effect this provision allows the Australian government to issue Australian carbon permits up to the emissions cap required to meet the 5 per cent reduction target, and then firms could emit double that amount through also acquiring international carbon credits. This would be entirely consistent with the requirement that firms can meet their liability with 50 per cent Australian carbon permits and 50 per cent international credits.

The large allowance for international carbon credits or Certified Emission Reductions means Australia’s carbon price, without the floor in place, would plunge to the price of CERs, expected to remain below $5 for the foreseeable future. This is precisely what happens under the New Zealand emissions trading scheme, which places little restriction on the use of international carbon credits.

The money generated from carbon credits through the Clean Development Mechanism has supported some fantastic projects. At its best the Clean Development Mechanism helps to alleviate some of the worst effects of poverty, while at the same time making genuine reductions in carbon emissions. An example was detailed in a Climate Spectator article run on Thursday where kerosene lamps are being replaced with solar-powered LED lighting.

But the CDM has also been incredibly badly rorted. The New York Times recently ran a good summary of the rort that occurred with the creation of carbon credits from destruction of synthetic refrigerant gases. The other major rort occurred with destruction of nitrous oxide in manufacture of adipic acid detailed by the Stockholm Environment Institute.

Both of these rorts have since been closed down, but it took a long time and a large amount of questionable carbon credits are now in circulation and won’t be annulled.    

These rorts provide a cautionary tale about placing too much reliance on reducing emissions through schemes that seek to pay for imputed abatement, rather than placing a cost on actual emissions. Such abatement incentive schemes face an inherent challenge around identifying what actions constitute a genuine reduction in greenhouse gases that should be eligible for government support. This is actually far less straightforward than you might think. That’s because abatement is not a physical molecule of CO2, CH4, N2O etc (CO2-equivalent or CO2-e), but rather the absence of these molecules.

A pure emissions cap and trade scheme largely avoids this problem because it only concerns itself with what molecules of greenhouse gases are actually emitted, which can be quantified through chemistry. If you actually emit you’re required to obtain a permit. Whereas the Clean Development Mechanism (and the Coalition’s Direct Action scheme) has to determine what might have been emitted were it not for carbon credit income, which can’t be measured in any objective physical sense. This is because it is an assessment of what might have happened in the future, rather than what has actually happened.

This doesn’t mean that abatement crediting schemes are therefore a waste of time. But they need to be employed with caution and good controls. Experience with not just the Clean Development Mechanism but also the NSW Greenhouse Gas Abatement Scheme and the Renewable Energy Target shows that identifying, investigating and then closing down abatement project loopholes unavoidably takes time. This can lead to the figurative horse bolting well before the gate can be closed.

Unfortunately when it comes to linking Australia’s emissions trading scheme with schemes overseas, Australia is very much not in control. It was a reckless decision by the government to have virtually no constraint on the use of international carbon credits in the Australian carbon trading scheme. Hopefully the government has realised its mistake.

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