Just as they say, there's more than one way to skin a cat, so there
are a lot of ways to reduce greenhouse gas emissions and "decarbonise"
the economy. We've tried three ways so far, and now we may try a fourth.
The
Rudd government tried to introduce an emissions trading scheme in 2009,
but it was blocked in the Senate when the Greens joined the Tony
Abbott-led opposition in voting it down.
When the Greens came to their senses, the Gillard government
introduced a carbon tax in 2012, which it preferred to refer to
euphemistically as "a price on carbon".
When Abbott came to power
in 2013, he abolished the carbon tax and replaced it with "direct
action" - using an emissions reduction fund to pay farmers and others to
cut their greenhouse gas emissions.
But this week the government's Climate Change Authority recommended
that the fund be supplemented by imposing an "emissions intensity
scheme" on the nation's generators of electricity, so we could be sure
of achieving the commitments the Abbott government made at the Paris
climate conference last year.
Confused? Let me explain how an
emissions intensity scheme would work and how it differs from its three
predecessors. I think, given all the circumstances, it would be an
improvement.
All four approaches are "economic instruments" which seek to use
prices - rather than simple government laws about what we may and may
not do - to encourage people to change their behaviour in ways the
government desires.
Direct action just involves paying people to
do things, whereas the other three are more sophisticated schemes,
designed years ago by economists, to change market prices in ways that
discourage some activities and encourage others.
Historically,
economists have debated the relative merits of carbon taxes and
emissions trading schemes, even though they are close relations.
If
you look closely, however, you find that Julia Gillard's "price on
carbon" was actually a hybrid of the two. It started out as a carbon tax
because the government fixed the initial price at $23 a tonne.
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| Illustration: Glen LeLievre |
But the plan was that after a couple of years, the price would be set
free to be determined by the market, thus turning it into a trading
scheme.
An emissions trading scheme - also called a "cap and
trade" scheme - involves the government setting a limit on the total
quantity of carbon emissions it's prepared to let producers emit, then
requiring individual producers to acquire a permit for each tonne of
carbon they let loose.
Producers who discover they're holding more
permits than they need are allowed to sell them to (trade them with)
producers who discover they're not holding enough.
The government
would slowly reduce the number of permits it issued each year. This
reduction in the supply of permits relative to the demand for them would
force up their price.
The higher cost would be reflected in the
retail prices of emissions-intensive goods and services, but
particularly the prices of electricity and natural gas.
This, in
turn, would encourage businesses and households to use energy less
wastefully, as well as encouraging producers to find ways of reducing
emissions during the production process.
The third scheme
economists have invented, the emissions intensity scheme (a class of
"baseline and credit" schemes), has similarities with emissions trading
schemes.
The government takes the total emissions of an industry -
in this case, the electricity industry - during a year and divides it
by the industry's total production of electricity during the year,
measured in megawatt hours, to give the industry's average "emissions
intensity" - C0₂ per MWh.
Those producers within the industry
whose emissions intensity exceeds this "baseline" must buy "credits" to
offset their excess emissions, from those producers whose intensity is
below the baseline, or face government penalties.
In practice,
this would mean brown and black coal generators having to buy offset
credits from combined-cycle gas, wind and solar generators, benefiting
the latter at the expense of the former.
The Climate Change
Authority recommends that the intensity baseline be reduced each year by
a fixed percentage until it reaches zero "well before" 2050.
If
the scheme began in 2018 and was to reach zero by, say, 2040, the
baseline would have to be reduced by 4.5 per cent a year (100 divided by
22).
So the absolute size of the reduction in emissions required would be high in the early years, but get smaller over time.
A great political attraction is, whereas the other schemes raise the price of
every unit
of electricity, the intensity scheme just shifts costs between
different parts of the industry, meaning the average price increase
should be small.
There would be some price rise, however, because
the production costs of renewable generators are higher than those for
fossil-fuel generators, and the scheme would increase the proportion of
renewable energy in total production.
Just how high the price had
to go would depend to a big extent on the effects of further economies
of scale and further advances in technology in reducing the average cost
of producing renewable energy.
An economic advantage of the
intensity scheme is that it wouldn't be open to trading permits with
other countries' emissions trading schemes (especially the European
Union's, where the carbon price has collapsed) nor to dodgy emissions
credits from developing countries.
The main economic drawback of
an intensity scheme is that, by not doing a lot to raise the price of
electricity, it wouldn't do much to encourage businesses and
households to reduce their
demand for electricity.
To
counter this, the authority proposes that generators needing to buy
offset credits be allowed to meet their requirements by purchasing
"white certificates" from existing state government schemes which offer
incentives to firms that do things to reduce their power use.
Let's hope the new approach brings some action.
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