Australian Emissions Trading Scheme - Case Study Example

Introduction Climate change is currently attracting much business attention around the world (Preston & Jones 2007), with increased activity by government and other stakeholders since the adoption of the Kyoto Protocol in 1997 (Pinkse 2007). The Kyoto Protocol recognises emissions trading as a key instrument in mitigating the effects of greenhouse gases, resulting in an explosion of trading regimes and proposals (Grubb, Vrolijk & Brack 1999). Most notably, the European Union launched its own emissions trading scheme (ETS) in January 2005 (Baldwin 2008). In 2004, Australian state and territory governments established the National Emissions Trading Taskforce (NETT) to develop ideas for a multi-jurisdictional ETS. Similarly, in 2006, the former Prime Minister, Mr John Howard, established a joint government-business Task Group on Emissions Trading (TGET) (Garnaut Climate Change Review 2008). There have been a number of concerns related to the implementation of these schemes. These have included debates about their cost as an abatement producer, the costs of electricity, transport and fuel, and most notably, their potentially negative effect on Australia’s competitive advantage through its low-cost energy resources. This essay will consider the issues associated with the ETS concept. These arguments will be discussed and supported by analysis of the relevant costs and benefits. Australian Emissions Trading Scheme To achieve emission reduction targets, the Australian Emissions Trading Scheme (AETS) is being developed, which will require businesses to reduce their carbon emissions (Hasan & Funston 2008). The policy may follow a ‘cap-and-trade’ scheme, which involves the capping of emissions in addition to emissions trading. Under the AETS, the caps must be consistent with reducing national emissions by at least 25 to 40% by 2020 (compared to 1990 levels) (Total Environment Centre Inc. 2008). Initially the AETS will target major polluters; however, some impact will also be seen in small and medium-sized industries. Important issues There are number of issues to consider in relation to the proposed AETS, as outlined below. The AETS prohibits the trading of assigned amount units (AAU). As of now, only Certified Emission Reduction (CERs), Emission Reduction Units (EMUs) and Removal Units (RMUs) from outside would be allowed to trade. AAUs will be allowed to trade only after 2013 when there will be greater certainty on the prospects of a comprehensive international ETS. (Wilson 2009). But the future of international ETS is itself in dark. It is questionable whether the scheme is compatible with international carbon markets. It is also unclear whether the scheme would be flexible enough to account for new climate science discoveries. By requiring emission-intensive industries to buy carbon permits to cover nearly all their business activities, the Australian government may be indirectly expropriating investor businesses and profits (Wilson 2009). The design of the AETS makes it impossible to impose a border measure, notably a carbon tariff; as a result, Australian products will be less competitive in Australian and export markets compared to those of countries that do not price carbon (Wilson 2009). The issue of the use of the new source of revenue from auctioning remains unclear. Even if the permits were initially only allocated to the energy and transport sectors, this would raise some $700 million in public revenue. Existing companies have argued for compensation to the limit of the impact of price pressures on their goods in external markets, to reduce the pressure for increased efficiency (Christoff 2007). Implementation of the AETS will also require the resolution of issues relating to financial accounting standards and tax treatment (Emissions Trading 2007). This will require avoiding distortion between the purchase of emissions permits and other options for meeting emissions targets; that is, pursuing tax neutrality between purchasing a permit, undertaking capital expenditure to reduce or sequester emissions, investing in research and development or reducing production (Garnaut Climate Change Review 2008, p. 14). Costs and benefits of the scheme Costs: Until now, a significant part of Australia’s comparative advantage has been built on its cheap energy. Although it is said that implementing the scheme will reduce the carbon credit price, this will not be able to absorb the increased energy costs. In a study conducted by the Australian Institute of Management, 39% of CEOs and senior executives agreed that this would increase the cost of running their businesses, while 16% agreed that it would reduce their profitability (Hasan & Funston 2008). If businesses are to achieve lower emissions, they must reduce their consumption of emission-intensive products, services and activities, and this means raising their relative prices. Some local industries have estimated that an ETS could cause the price of petrol to increase by 10 cents per litre (Gailey 2008). The only option available to businesses will be to respond in the same way they respond to any increase in costs: to start using energy more efficiently; and to pass higher energy costs on to consumers (households, other businesses and government). If government were to try to force businesses to absorb these costs or limit the amount of cost which can be passed on to customers, this will result in lower investment, fewer jobs and ultimately lower growth of the overall economy. In industries where costs cannot be passed on or there are no options to improve energy efficiency, some businesses, particularly trade-exposed emission-intensive (TEEI) industries, will cease to exist if they cannot obtain a return on investment. Apart from these business costs, if the AETS makes provision to compensate for losses in profits, then it has been estimated that it will cost the Australian economy 1.3% of its GDP (Adams 2007). One study found that the estimated costs are likely to be close to $1.5 billion in 2010-2011 when the AETS or Carbon Pollution Reduction Scheme (CPRS) is planned to come into effect (Richardson & Denniss 2008). Benefits: Advocates of the emissions trading mechanism outline a number of potential benefits from the scheme. Efficiency: The trading of carbon credits minimises the burden of achieving a certain level of pollution reduction. This would encourage low cost abaters to reduce pollution levels and generate additional carbon credits which they can later sell to high cost abaters (Johnson 2007), ensuring that the target emission levels are achieved through low cost methods (Baldwin 2008). Flexibility: Trading schemes allow businesses to assess their mitigation options by investing in new technology, changing their inputs and modifying their outputs, against the cost of buying a carbon permit (Harrison et al. 2008). Innovation: Trading schemes would bring innovation to businesses as they seek new methods and technologies to reduce emissions and garner credits (Tandukar 2007). Trading is said to reduce the dangers of capture by limiting regulatory discretions and by avoiding close relations between regulators and firms, since within trading regimes, markets rather than bureaucrats exert restraint on behaviour. The benefits may seem significant, but their realisation depends on a number of other policy measures in implementing the scheme (Christoff 2007). The efficiency and effectiveness of the scheme will require: the establishment of an independent carbon bank with all the necessary powers to oversee the long-term stability of the scheme; the implementation of a transition period from 2010 to the conclusion of the Kyoto period (the end of 2012) involving fixed-price permits; credits to TEEI industries to address the failure of our trading partners to adopt similar policies; no permits to be freely allocated; no ceilings or floors on the price of permits (beyond the transition period); and a judicious and calibrated approach to linking with international schemes. Dangers of not implementing the scheme The obvious danger of not implementing the ETS would be that Australia has to adopt some other means to achieve the target emissions reduction levels under the Kyoto Protocol. The main choice is between carbon taxes, tradable quota schemes and hybrids such as those proposed by McKibbin and Wilcoxen (2002). These options involve trade-offs regarding risk, efficiency and equity, as well as some complex political issues (Quiggin 2007). Carbon tax would increase the price of energy as in the case of the ETS. With the quota-based scheme, there would be no flexible options available for the businesses. These concerns would hamper the ability of the businesses to achieve the required targets. Apart from these issues, by not implementing the scheme, businesses would be deprived of the significant aforementioned benefits that an ETS can bring to the Australian economy. Conclusions The design and establishment of an ETS in Australia is one of the biggest public policy challenges ever faced by Australia. A number of critical problems can be identified that could beleaguer the scheme in the future. By requiring emission-intensive industries to buy carbon permits without full compensation, the government may be indirectly expropriating businesses and their profits. If any government chose to compensate industries, then it would incur huge costs which may undermine the potential benefits from implementing the scheme. The very design of an ETS limits the capacity of Australia to establish a border measure to respond to the additional costs that would be borne by Australian export industries and industries that compete with imports, and also to directly avoid the possibility of carbon leakage. Despite the challenges, the Emissions Trading Scheme is now a demand of the times in which we currently live. Australia must embrace and modify the scheme in such a way that the many benefits of the ETS can be realised. References: 1. Adams, P. D. (2007). Insurance against Catastrophic Climate Change: How Much Will an Emissions Trading Scheme Cost Australia? Melbourne: Blackwell Publishing Asia Pty Ltd. 2. Baldwin, R. (2008). Regulation Lite: The Rise of Emissions Trading. London: LSE Law, Society and Economy. 3. Christoff, P. (2007). All Smoke and Mirrors? 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