In this post I do something I very rarely do: agree with Tony Abbott, leader of the (conservative) Liberal Party of Australia. Regular readers may be wondering if I have gone crazy, but bear with me for a moment. I don’t believe anything the Liberals say is particularly sincere; it’s more that a stopped clock is right twice a day.
Abbott said on Monday about the Labor government’s planned emissions trading scheme (ETS):
Just ask yourself what an emissions trading scheme is all about. [It’s] a so-called market in the non-delivery of an invisible substance to no one.
Abbott has made the same argument before. He has been mocked for taking his line from an opinion column in the UK Daily Telegraph by Jeremy Warner. However, nobody seems to have noticed that opinion column is based on an article from the Citizens’ Climate Lobby, a climate activist group. (Besides, Rudd took his metaphor that “[Abbott is] the boxing blue, I’m the glasses-wearing kid in the library” from a 2009 opinion column by ABC political commentator Annabel Crabb, and nobody has criticized him for doing that. Strangely, political commentators who have for years been heavily biased against Labor now seem to have swung abruptly against the Liberals, but that’s another story.)
Anyway, Abbott’s comment has been roundly denounced as further evidence of his climate change denialism (not that any further evidence was required). I agree the exact words that Abbott used were silly and possibly a dog-whistle to deniers who argue carbon dioxide (CO2) is harmless (and when making the same point on a previous occasion it was even sillier of him to describe CO2 as “weightless”). However, there is a legitimate question mark over whether an ETS is an effective way to cut greenhouse gas emissions. I think the point Abbott is trying to make is not that CO2 itself is intangible, but: how can we be sure the carbon permits being traded will actually represent what is claimed? (The Liberals’ policy has similar problems, but we’ll get to that later.)
Australia presently has a fixed carbon price of $24.15/tonne, which until recently was scheduled to become an ETS in July 2015, as agreed by Labor and the Greens in 2011. It is largely based on the advice of its climate policy advisor Ross Garnaut that Labor has chosen to rely on an ETS. Last week Labor announced an election policy of bringing the ETS forward to July 2014. I’ve always had reservations about the Greens’ agreeing to a policy that would eventually become an ETS, but I’ve been willing to overlook these doubts while we had a fixed carbon price. Now the ETS is drawing nearer (whether it begins in 2014 or 2015), I’m increasingly concerned we will end up with a weak ETS that actively prevents climate action in Australia, and we’ll have wasted years arguing about it. It is time to start seriously reassessing whether an ETS will work.
Labor argues that market mechanisms are better than regulatory ones because they can achieve Australia’s emissions target at the lowest possible cost, and that an ETS is inherently the best way to cut emissions because it is such a mechanism. But it seems to me very unwise to leave too many climate-related decisions to markets, because it is a market failure driving climate change in the first place. A mix of markets and regulations can be used to cut emissions, but I suspect a climate policy with more limited markets and more restrictive regulations is more likely to be effective.
An ETS, sometimes called a cap-and-trade scheme, consists of an annually capped number of tradeable permits allowing companies to emit greenhouse gas pollution. Permits are auctioned by the government (or in some cases provided for free as “compensation”), then polluting companies can buy or sell their permits according to their emissions levels. The price of permits is determined by the market (ie. supply of and demand for carbon permits). As the cap reduces each year, emissions are supposed to fall over time.
It is important to understand the “trade” element of cap-and-trade is not intended to actually cut emissions, but to (in theory) minimize the cost by ensuring emissions cuts are made by the companies who can do so most cheaply (notice this is the trumpeted market-based aspect of the policy). The thing which is supposed to cut emissions is the “cap” or target (which, notice, is a regulatory measure). But I fear the cap won’t be effective if it’s either too weak or compromised by a badly-designed trading system, both of which are probably true of Australia’s planned ETS.
When carbon trading enthusiasts talk about minimizing the cost of cutting emissions, they gloss over the fact that the “cost” is mainly paid by polluting companies. Yet few would argue, for example, that anti-smoking legislation should be “least-cost” for tobacco companies. Actions that are cheaper for polluters are likely to be less effective at contributing to the urgently required rapid structural decarbonisation of the economy. Thus a source of emissions cuts may appear cheap because it is dodgy, and policy measures intended to reduce costs may actually reduce effectiveness. In any case, maximizing the scale, pace, and effectiveness of climate action is far more important than limiting the costs. Effective climate policies that mitigate enormous costs from climate change are preferable to climate policies that are cheap and ineffective.
So what are the potential problems with emissions trading? There are several ways in which relatively expensive emissions cuts can be more important than the cheaper actions favored by a carbon market. Perhaps the most fundamental problem is equivocation of non-equivalent types of emissions and action.
Firstly, Australia’s planned ETS (like its international counterparts) will equate CO2 emissions with emissions of other greenhouse gases, based on a misapplication of climate science. Greenhouse gases other than CO2 are more powerful at trapping heat, but do not linger in the atmosphere for as long. This means CO2 emissions accumulate in the atmosphere in a way that other greenhouse gas emissions do not. While it is important to cut emissions of non-CO2 gases to prevent rapid near-term warming, this should not be considered a substitute for phasing out fossil fuel CO2 emissions to limit long-term warming. Yet the ETS compares the impact of different gases over a 100-year timeframe to create a fictitious (indeed weightless) entity called “carbon dioxide equivalent” (CO2e). Each permit represents a tonne of CO2e, but not all tonnes of CO2e have equivalent effects on the climate.
Secondly, not even all sources of CO2 are equivalent. CO2 emissions from fossil fuels and CO2 emissions from land use play a different role in the carbon cycle. On human timescales carbon easily moves between the atmosphere, ocean, and land. It is only over geological timescales that these “surface reservoirs” exchange carbon with deeper, larger reservoirs. The most important thing humans are doing is mining and burning fossil carbon that has been buried for millions of years, thus emitting carbon at a pace many orders of magnitude greater than the rate of the processes which remove carbon from surface reservoirs. While storing more carbon in the land is a necessary part of climate action, it is far from sufficient and not nearly as urgent as eliminating fossil fuel emissions. A proportion of the fossil carbon will stay aboveground for millennia, and the land is a climate feedback so cannot store carbon permanently. Finally, from a practical perspective, land carbon is harder to measure. (Although the Australian ETS will not cover land carbon, it will allow unlimited Australian land carbon offsets from the Carbon Farming Initiative (CFI), similar to the international offsets described below.)
Although all emissions are important, it is of most importance and urgency to phase out fossil fuel CO2 emissions because they are the largest and longest-lived cause of anthropogenic global warming. If the world fails to phase out fossil fuels in a reasonable timeframe, all other efforts to mitigate climate change will matter little.
Thirdly, although every tonne of emissions avoided (“abated”) looks identical on paper, in the real world different actions contribute very differently to long-term systemic decarbonization of the economy. The latter is affected by factors such as whether the action locks in or prevents lock-in of fossil fuel infrastructure, whether it changes relative technology prices, whether the emissions reductions are permanent, and whether the emissions reductions will continue beyond the start year. By choosing apparently least-cost short-term abatement, the carbon market may fail to account for these matters. For example, the government expects the market to favor investment in gas-fired electricity generation, which would lock in fossil fuel infrastructure that will last decades.
Another problem is the government hands out large volumes of free carbon permits to industries it defines as emissions intensive trade-exposed (EITE), which in at least some cases are making them more profitable. This is a disincentive for those industries to cut their emissions, meaning emissions cuts must come from somewhere else.
Yet another problem is the government will allow polluters to “bank” present carbon permits to use in the future, and “borrow” future permits to use in the present. This defies common sense, unnecessarily creates uncertainty in Australia’s emissions trajectory, and could result in a surplus of permits.
As if all this wasn’t dubious enough, the government will also allow offsets from outside the Australian scheme, supposedly to further reduce the cost of meeting the target. These international offsets come in two types: those from linked cap-and-trade schemes like the EU ETS, and those from baseline-and-credit offset schemes like the Kyoto Protocol Clean Development Mechanism (CDM). The credibility of the latter type depends on estimates of “additionality”, how much a carbon credit supposedly lowers emissions relative to a business-as-usual baseline, a breeding ground for creative accounting. I say this based not on an irrational distrust of foreigners, but on skepticism about the ability of governments to accurately estimate additionality in the face of industry lobbying, as well as real-world evidence on how such schemes have fared. The most common type of CDM offset comes from Asian companies who produce gratuitous pollution so they can be paid to stop.
Linking distinct cap-and-trade schemes allows failing or flawed schemes to contaminate each other. The EU ETS is failing by any standard, and so far Poland has vetoed all attempts to fix the scheme. It has already reached its 2020 emissions target, mostly due to short-term recession rather than long-term structural economic change, which means European polluters will not need to cut emissions for the next eight years. The system is flooded with surplus permits that potentially could prevent action until 2045, as well as overallocated free permits for manufacturing industries and fraudulent international offsets which companies are buying up before new restrictions come into force. With no floor price, the carbon price has plummeted to a depth where it no longer provides any incentive to cut emissions, contributing to a resurgence of coal-fired power in Europe. Carbon trading thinktank Sandbag predicts the EU ETS will cancel out the effects of other policies like renewable energy subsidies. The volume of European surplus permits is so large that Australian polluters would be able to live off them for six years without buying a single Australian carbon permit.
Even if the offsets imported to Australia are 100% genuine, they will displace (and thereby prevent) decarbonization in Australia. There are limits on the amount of international offsets companies can buy, but they are so meaningless they allow Australian polluters to emit up to twice the national cap. In other words, Australia will have effectively no mandatory absolute domestic emissions reduction unless its target is deeper than 50% below present levels. Also, offsets mean Australia’s carbon price will be largely determined by international carbon prices. Based on present rock-bottom prices, Australia would be flooded by cheap imported permits and the Australian carbon price would plummet to around $6/tonne. Such a low price would undermine any incentive for investment in zero-carbon technology and energy efficiency (especially considering that a proposed carbon floor price that could have acted as a brake has been cancelled). Even if international prices eventually recover, much damage will already have been done, as Australian polluters are allowed to buy international permits now at the current price and use them later.
Failure to cut emissions domestically is a problem for several reasons. Firstly, we urgently need all countries to decarbonize their economies at home, and this requires real structural change in the Australian economy. Secondly, Australia’s high wealth and responsibility for emissions mean we have a responsibility to lead the world. International offsets unfairly shift the burden of meeting Australia’s target to other countries, which are often poorer and less carbon-intensive. Thirdly, the public rightly expects Australia to cut its own emissions, where we can verify, control, and take full responsibility for it.
The cap itself could be counterproductive even without being compromised by all the above. The level at which caps should be set is presently being reviewed by the independent Climate Change Authority (CCA) in its Caps and Targets Review. But Labor’s existing emissions reduction target is a meaninglessly weak 5% below 2000 by 2020, with even slight increases in ambition dependent on a long list of conditions relating to international action. Under present policy, once emissions caps are set they will be locked in through to 2019-20, the end of what the Climate Commission has rightly described as the Critical Decade for climate action. It is unclear whether it would be constitutionally possible to later reduce the number of emissions permits to strengthen the target; any attempt to do so might be legally challenged as an acquisition of property. Unless CCA recommends a much more ambitious target which is approved by the government, this lock-in will create certainty of an undesirable outcome. (The same goes for the proposal by some business groups that the government set “gateways”, emissions target ranges extending years or decades into the future.)
If the cap cannot be tightened, then it is effectively an emissions floor, which in a sense counteracts other policies and actions to reduce emissions. All federal, state, local, and individual actions to cut emissions (though they do at least ensure action occurs domestically) free up permits for polluters to pollute more. Although the government claims it will attempt to account for voluntary action when setting caps, if caps are locked in for five years into the future then voluntary actions can only be accounted for years after they occur.
Australia’s planned ETS is disaster piled upon disaster. Its flaws are policy time-bombs set to explode when the fixed carbon price becomes an ETS. Unless the time-bombs are defused before the ETS begins they will actively prevent emissions cuts, stopping the present emissions reduction trend in its tracks and allowing emissions to rise instead. According to government projections, Australia’s domestic emissions will actually increase 11% by 2020, and fossil fuels will still provide ~60% of Australia’s electricity in 2030. This suggests Labor intends to allow electricity companies to milk every last dollar out of aging coal power plants.
We urgently need ambitious climate action now; we don’t have time to mess around with dubious accounting and mechanisms that may not work. The ETS time-bombs are like a genie in a bottle: once the lid is off, it will be extremely difficult if not impossible to put the genie back in the bottle. Meaningless targets will have been locked in for years and dodgy carbon permits will have flooded the Australian market. The problems would be difficult, if not impossible, to correct until the end of the Critical Decade or beyond. Instead of rushing to take the lid off the bottle, we should be considering very carefully whether we want to open that bottle and how to prevent the genie wreaking havoc. If the government insists on using a market mechanism, then it needs much stronger regulatory aspects to ensure it is effective at driving domestic decarbonization. The following steps should be taken:
- Set much deeper emissions targets, unconditional on international action.
- Enforce emissions caps in a way that does not preclude raising ambition.
- Design a clear mechanism to immediately tighten emissions caps to account for verifiable voluntary emissions cuts, including emissions cuts from other federal, state, and local policies.
- Allow zero international offsets.
- Ban banking and borrowing.
- Reinstate the carbon floor price.
- If possible, compartmentalize the ETS by sector and/or greenhouse gas, to ensure apples will not be exchanged for oranges, and prioritize fossil fuel CO2 emissions cuts.
- Redesign the CFI as a separate cap-and-trade scheme, instead of an offset scheme connected to the ETS.
- Introduce new complementary policies (eg. an increased Renewable Energy Target) to help ensure emissions cuts occur domestically and where they are most important.
Yet Labor remains obsessed with the ETS as its central climate policy. Instead of accelerating decarbonization and restricting emissions trading, the government is going in the opposite direction, backflipping on promises of a fixed carbon price until 2015, a floor carbon price from 2015, contracts for closure of coal power plants, and energy efficiency measures, while state governments gradually erode various pre-existing climate policies. Having introduced the carbon price, Labor thinks its job is done, and its climate policy focus has become getting to an ETS and linking it with international ones.
The specific flaws in Australia’s ETS and the ongoing failure of international carbon markets are illustrative of a general problem with emissions trading schemes. An ETS that is anything less than perfect can actively prevent climate action, because it leaves so many decisions to the market. A perfect policy is difficult to achieve due to the sabotaging influence of the fossil fuel lobby. Therefore emissions trading is a very risky policy pathway for Australia to continue along.
There is a simple alternative: extend the fixed carbon price beyond 2015, until and unless the fatal policy flaws in the planned ETS can be rectified, and focus on introducing other more direct measures. The price should increase much faster than the present rate of a few percent per year, to strengthen the signal to investors and because $24.15/tonne is likely far less than the true external cost of CO2 emissions. Unlike an ETS, a fixed carbon price does not need to be perfect because it places no limit on emissions cuts, cannot be compromised by external offsets, sends a stable price signal which cannot crash due to recession or bad policy design, and can easily complement other policies like renewable energy subsidies.
The Liberals, who want to abolish the carbon price altogether, have a climate policy that is no better than Labor’s and in some ways worse. Although the Liberals oppose emissions trading and international offsets, their description of their own policy as “direct action” is mere spin. Their proposed Emissions Reduction Fund would reward polluting companies who voluntarily reduce their emissions relative to projected business-as-usual growth. It’s a policy even more market-friendly than cap-and-trade – essentially a baseline-and-credit scheme through which the government would purchase domestic carbon offsets, albeit non-tradeable ones. Similar voluntary programs were tried under the previous Liberal government and failed to achieve much. Yet the Liberals’ climate spokesperson Greg Hunt recently said they want Australian climate policy to be based on voluntary incentives for the next 20 years (interestingly the same period during which Labor intends to rely on international offsets).
The Liberals share Labor’s ludicrous 5%-by-2020 emissions reduction target, but it is far from certain whether the Emission Reduction Fund would achieve even that. There would be no requirement for companies to participate and no penalty for continuing along a business-as-usual trajectory that, if followed worldwide, will cause an unimaginably catastrophic ~6°C of global warming by 2100. The Fund would have the exact same additionality issues as the CDM, especially considering many details remain to be determined through consultation with polluters. It would have only around $1 billion per year to spend, and would not be allowed to go over budget. Payments would be made only post-delivery, so there would be no upfront incentive to cut emissions. And although the Liberals claim the market would determine which projects are funded, they have budgeted for 60% of the target to be met by sequestering carbon in soils, rather than cutting Australia’s fossil fuel CO2 emissions.
Finally, I don’t trust the Liberals to even implement their policy, especially since they keep contradicting themselves on how it would work. There are forces within the party that oppose any climate policy. For all we know their budget audit might conclude it’s all too expensive. They have also hinted they might sabotage the Renewable Energy Target by reducing it to account for falling electricity demand, leaving Australia with no effective climate policy.
One final comment: another way some have mocked Abbott for his “invisible carbon” remark has been to point out that financial markets have similar characteristics to those he ascribes to carbon markets. But this argument can be turned around: the global financial crisis was caused by the trading of intangible commodities that turned out to be not really what they were represented to be. Even former US Federal Reserve chair Alan Greenspan, lifelong advocate of Ayn Rand’s right-wing libertarian ideology and one of the architects of the financial deregulation which led to the GFC, was forced to admit he had been mistaken to trust unregulated markets. We don’t want to find in 2020 that events have brought Ross Garnaut to a similar realization.
Oh, and full disclosure: I copied that analogy from a 2011 opinion column by Xavier Rizos.