Carbon trading scheme is a logical policy shift

The most contentious issue in Australian politics over recent years has been the Labor government’s Carbon Tax. When Kevin Rudd returned to the ALP leadership, one of his first moves was to dump the tax and shift to an Emissions Trading Scheme. So what does this mean?

The proposed shift shouldn’t be seen as a monumental change in Australia’s environmental policy. All that happened was a change from a Carbon Tax to an Emissions Trading Scheme (ETS) a year ahead of schedule. In the long term, this is hardly something to get excited about. Most people who work in the area of environmental policy and believe in putting a cost on carbon feel an ETS is the best long-term strategy. In effect, a trading scheme lets the market put a value on the price of carbon based on the agreed carbon reduction targets. Both the Labor and Liberal sides of politics have signed off on these targets.

The Carbon Tax was first introduced as an interim measure to allow the Australian market to settle into a carbon-based economy. The aim was to avoid the problems that occurred in Europe when the carbon trading scheme was introduced. The Brussels central government wanted a market-based scheme to sell carbon credits among big companies. To help protect large firms from suffering a financial shock, the EU government issued “free credits” to companies to cushion the costs over the first few years. Companies used free credits based on the amount of CO2 they claimed to produce. But some firms were not honest about their emissions, overstating their emission and receiving large bundles of credits.

When the carbon price was eventually floated, there were so many credits the market collapsed from about €30 down to just a few euros over several months. It was a market-induced failure because of the lack of honesty in setting the market parameters.

The idea behind the Australian plan was to set a fixed price so that the first few years of “trading” would allow the market to establish its correct level. Left to its own devices, the market would manipulate the system in its own favour and achieve nothing. The Carbon Tax has reduced CO2 emissions by around 8%, which is well in the target range. However, the economic downturn has also added to the reduction in CO2.

The ETS has one key fault. Being tied to the European scheme means the local scheme is impacted by the EU carbon price, which at the moment is very low. It will be low for some time yet due to the economic malaise in Europe.

Australian businesses will see a tiny reduction in their costs in the shift from a carbon tax to an emissions trading scheme. The energy sector, being the largest emitter of CO2, is the direct target of the Carbon Tax and the ETS. Energy prices have increased by about 90% over the past few years and are likely to increase more in the future. Perhaps the Carbon Tax has added less than 10% to the increases. Nearly all increases in energy prices have come from grid upgrades and repairs. Thus, any reduction in energy prices attributed to a change in the Federal carbon policy will hardly impact on future energy price increases.

Australia’s energy prices are rising and have been for some time. It’s the same story around the world as national grids have to upgrade equipment and prepare for renewable energy such as solar, wind, geothermal and wave. Grids were designed to be one-way, sending electricity out. Now they are bi-directional, sending electricity out and taking some in. This brings a range of new challenges to the energy sector, much bigger than the Carbon Tax or ETS.

Phillip Lawrence is a PhD scholar, consultant and speaker who specialises in print and the environment

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