Emissions trading - the report is out

The Prime Minister's Task Group on Emissions Trading has handed down its final report and it is now available.

It recommends an emissions trading scheme based on the following principles:

• a long-term aspirational emissions abatement goal and associated pathways to provide an explicit guide for business investment and community engagement an overall emissions reduction trajectory that commences moderately, progressively stabilises, and then results in deeper emissions reductions over time and:
  · is sufficiently flexible that it can be periodically recalibrated by government to changing international and domestic circumstances through regular and transparent reviews
  · provides markets with the ability to develop a forward carbon price path to guide business investment decisions and help drive longer-term technology development – markets would be expected to establish a low initial carbon price and a forward price curve that rises over time
  

• maximum practical coverage of all sources and sinks, and of all greenhouse gases with permit liability placed on direct emissions from large facilities and on upstream fuel suppliers for other energy emissions with those sectors initially excluded from the emissions trading scheme subject to other policies designed to deliver abatement
  

• initial exclusion of agriculture and land use from the scheme though agricultural emissions should be brought into the scheme as practical issues are resolved
  

• a mixture of free allocation and auctioning of single-year dated emissions permits that:
  · provides an up-front, once-and-for-all, free allocation of permits as compensation to existing businesses identified as likely to suffer a disproportionate loss of value due to the introduction of a carbon price
  · ameliorates, through free allocation, the carbon-related exposures of existing and new investments in trade-exposed, emissions-intensive industries while key international competitors do not face similar carbon constraints, but which also provides ongoing incentives for abatement and adoption of industry best practice allows for the periodic auctioning of remaining permits
  

• a ‘safety valve’ emissions fee designed to limit unanticipated costs to the economy and to business, particularly in the early years of the scheme, while ensuring an ongoing incentive to abate
  

• recognition of a wide range of credible carbon offset regimes, domestically and internationally

• capacity, over time, to link to other comparable national and regional schemes in order to provide the building blocks of a truly global emissions trading scheme
  

• incentives for firms to undertake abatement in the lead-up to the commencement of the scheme, including through the purchase of offset credits from carbon plantations, and potentially from other accredited activities
  

• revenue from permits and fees to be used, in the first instance, to support emergence of low-emissions technologies and energy efficiency initiatives (the focus might shift more toward households and business as the scheme matures).

That mostly sounds pretty good to me but I think the emphasis is clearly on being business-friendly more than being effective (where those two goals conflict).

Will be interesting to delve into some of the detail. Some initial thoughts:

The 'safety valve' fee is potentially worrying

The idea of a cap-and-trade scheme is that the government sets the maximum emissions, issues permits for that level of emissions and then emitters trade the permits. If one emitter can reduce its emissions for less than the market price of the permit, it will do so and sell the excess permits it has. If another emitter wants to expand and that will involve more emissions, it will need to purchase permits. It will then have an incentive to pursue options that involve relatively less emissions so that it doesn't have to buy as many new permits.

If the government stands by ready to charge a 'safety valve' fee to emitters that don't have enough permits, that sets a maximum price on the permits: if it's cheaper just to pay the fee than to buy the permits, you'll just pay the fee, so the permits won't rise above that price.

But that means that the cap on emissions isn't really a cap. If emitters pay the fee rather than buying permits, then the cap will be exceeded. From business's point of view it's a good thing: it means there's a known worst-case-scenario in terms of the costs it will impose. But if it's set too high, the reduction in emissions could be much lower than we anticipate.

The allocation of free permits is controversial

Ideally, you should auction all permits. As Peter Martin says in the Canberra Times:

The best way to distribute permits is to auction them. The firms that need them will pay what they are worth and pass on the costs to consumers in higher electricity prices. The government can use the money it raises from each year’s auction to cut income tax, to cut company tax, or to support the development of low-carbon technologies.

However,

Polluter after polluter that has made a submission to the Prime Minister’s taskforce on emissions trading has said that while it supports the idea of a trading scheme, it wants the price of the permit set low and it wants to be given enough permits - gratis - to cover most of the pollution it already does.As Australia’s most venerable economic modeler and one of the signatories to the economist’s letter Professor Peter Dixon of Monash University told me: “It’s the same as putting a tax on carbon pollution and then instead of doing something useful with the proceeds - like cutting another tax - giving it to the shareholders of the polluting companies”.

It is even better than that for the polluting companies. If they get given for free permits that a would-be competitor would need to buy, they get given a built-in cost advantage. Their would-be competitors might not bother! No wonder they like the idea. (Economists call the idea “grandfathering” and call the result a “barrier to entry”.)

Expect a lot of political argy-bargy over this one.