Thursday, March 20, 2008

Greenhouse Gas Emissions Trading Scheme for Australia

Professor Ross Garnaut has released the latest part of his climate change study commissioned by the Australian state and federal governments. This proposes a n emissions trading scheme. There is a media release, Executive Summary, and full Emissions Trading Scheme Discussion Paper (477kb).

The trading scheme would use an "use an internet auction platform" (on Page 78 of the report). This might be the most significant contribution that ICT makes to the world.

From the Executive Summary:
... The centrepiece of the ETS is a greenhouse gas emissions market. A price on carbon is needed to address the market failure of unpriced greenhouse gas emissions. ...

Target and trajectories: ... Australia should declare the ambitious emissions budgets and target trajectories that it would be prepared to accept in the context of an effective, comprehensive global agreement. Along with the design of the ETS we can announce a set of trajectories of permit releases over time, consistent with our emissions budgets. The trajectories should embody rising degrees of constraint. Any shift in trajectory should only be triggered by movement towards stronger effective international mitigation commitments. ...

Design of an effective ETS: An ETS is established to reduce emissions, but the emissions limit is a decision to be made outside of the scheme itself. In developing the ETS design, the singular objective should be to provide a transactional space that enables the transmission of permits to economic agents for whom they represent the greatest economic value.
A number of guiding principles can be applied in order to achieve this objective, including scarcity, tradability, credibility, simplicity and integration. These principles define a solid framework within which an effective market can be designed.

Intrinsic and extrinsic features: An ETS has two types of design features: those that are essential to the operational efficiency of the scheme, referred to as intrinsic features, (for example the scheme’s coverage, permit allocation rules, compliance rules and governance); and those that are defined outside of the scheme’s operation, but still have considerable influence on the scheme’s economic impact, referred to as extrinsic features (for example, defining the emissions limits and principles for compensation). Both these design feature types exist within a broader context of factors that affect the operation of the scheme but are beyond the influence of policy decisions on ETS design, known as exogenous factors (for example the evolving global environment agreement as well as the evolving scientific and technological knowledge bases).

Permit Allocation: The price of permits, the increase in the price of electricity and other emissions-intensive products, and structural change in the economy in response to the restriction on emissions, will not be affected by the method of permit allocation. Transaction costs will be lowest if they are auctioned; any free allocation of permits will involve elaborate assessment and political processes. ...

International Trade: The costs of abatement can potentially be substantially reduced, and therefore more ambitious targets achieved, by international trade in permits. However, linking with an economy that has a flawed domestic mitigation system will result in the import of those flaws. Variations in the quality of mitigation arrangements across countries mean that the decision to link with particular markets is a matter for fine judgement, but ultimately global mitigation will only be successful if countries can trade in emission permits. Opportunities for international linkage of the Australian ETS should be sought in a judicious and calibrated manner.

Governance: Sound governance arrangements are necessary to issue permits and to ensure that permits are acquitted in line with emissions. In Australia, there is a place for an independent institution playing a central role in administration of the ETS, within policy parameters established by legislation. In this report, we refer to such an institution as the Independent Carbon Bank. ...

Compensation: This is a difficult reform, and a permit price that is high enough to secure levels of emissions within targets and budgets will have major effects on income distribution. The losers from such changes (households, and low-income households in particular, but in some circumstances domestic and foreign shareholders in highly emissions-intensive businesses) may feel that they can make a case for compensatory payments. The case for substantial measures to reduce the impact of the reform on living standards of low-income households is strong, and will affect political support for and perceptions of stability of an efficient ETS. ...

From: Executive Summary, Emissions Trading Scheme Discussion Paper, Garnaut Climate Change Review, Ross Garnaut , March 2008

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