A plain man’s guide to an emissions trading scheme

By Ad astra

George Megalogenis has criticized the Rudd Government for not making it sufficiently clear what it has in mind for a carbon emissions trading scheme. He says: “OK, it’s a complex topic, but the job of leadership is to translate and educate. An ETS is how governments place a price on carbon pollution. It takes two steps to explain, which is why politicians can get tongue-tied. The Government sets a limit on how much carbon that industry can belch into the atmosphere, and sells permits for the right to pollute. But it leaves it to the market to sort out which firms continue emitting greenhouse gases at that higher cost, while the rest switch to cleaner energy sources.” The Weekend Australian 12-13 July. So there it is. But how many punters would get the gist of ETS from that ‘word bite’? Nicholson’s cartoon in The Weekend Australian 19-20 July captures the teething troubles in explaining the scheme.

I thought it might be interesting to fashion an uncomplicated statement for the typical voter, who eventually will have to pass judgement on the ETS. This is my first try. Respondents are invited to hack it about, improve it, or substitute their own. Let’s agree to a limit of around 1,000 words.

A plain man’s guide to an ETS

All political parties in Australia believe a carbon emissions trading scheme has become necessary to control the amount of carbon in the earth’s atmosphere. The Government’s Green Paper has now changed the name to a Carbon Pollution Reduction Scheme.
Greenhouse gases

Most climate scientists are convinced that the earth is warming because of an increase in carbon in the atmosphere, which is mostly in the form of a gas, carbon dioxide. This gas traps heat close to the earth, just like a greenhouse traps heat inside. This is why it’s called a ‘greenhouse gas’. Another greenhouse gas is methane, which is generated largely in the agricultural sector.

Carbon dioxide

Carbon dioxide has one atom of carbon and two atoms of oxygen, and so is called CO2. It is produced whenever something containing carbon is burned – the carbon atom is joined to two oxygen atoms from the air. Some substances produce much more than others when burned – coal, particularly brown coal, emit large amounts of CO2, and are therefore called ‘heavy emitters’. Sometimes it’s said they have a large ‘carbon footprint’.

For centuries carbon has been emitted into the atmosphere, especially since the start of the industrial revolution. CO2 is also emitted from animals and plants, but plants also soak it up, so plants are called ‘carbon sinks’. Cutting down forests means that less CO2 can be soaked up.

The amount of CO2 in the atmosphere has grown steadily over hundreds of years and is now around 387 parts per million (ppm). Its growth is accelerating. Climate scientists believe that there should be a limit of between 450 and 550 ppm by mid century, otherwise the earth will heat by more than 2 degrees Centigrade, and if that happened there would be severe effects that would change our way of living and reduce the chances of survival of many living things. Already we are seeing the effects of increasing temperatures in the Arctic and Antarctic where ice is melting. As glacial ice melts into the sea, sea levels rise. Already some Pacific islands are being flooded; eventually coastal dwellers in Australia and other countries will suffer the same fate unless the CO2 level is controlled.

So curbing greenhouse gases is considered by all political parties in this country to be essential. The way of doing this proposed by the Government is called a ‘cap and trade’ system.

‘Cap and trade’

The term ‘cap’ means that the total amount of carbon emitted each year by Australia will be limited, or ‘capped’. As the agricultural sector is not included in the scheme at present, it is CO2 emissions that will be limited. Let’s say that the limit or cap will be a million tonnes of CO2 per year. This is not the real figure. All industries that emit CO2 will have to fit within that limit. The term ‘trade’ means that any industry that needs to emit CO2, say to produce electricity, has to buy a permit to do so. The Government will create and auction these carbon pollution permits. In the beginning it will give some away free, but eventually all will be auctioned. Those who buy a permit can sell or trade it to someone else. Suppose a coal-burning electricity generator buys from the Government a permit to emit a thousand tonnes a year, but because it was able to develop a way of producing the same amount of electricity with less CO2 emitted into the atmosphere through, let’s say, storing it underground (carbon capture and storage), that electricity company would be able to sell or trade some of its permit to another company that emits CO2. This would reduce the cost of production to the electricity company, which could make its electricity less costly, and thereby more attractive to customers. Therein is the incentive to companies to develop methods of making their products in a way that results in less CO2 being emitted.

The Government believes that rather than it trying to regulate the system, ‘market forces’ would be the best way to govern the purchase and sale of permits to emit CO2. Eventually the market would become international. The cost of the permits has not been set, but is likely to range from $20 to $100 per tonne of CO2. It will probably start low and increase slowly.

Who’s included?

All agree that the more sectors of the economy that are included in the scheme, the less the burden will be on each individual sector. The Government has proposed that apart from the agricultural sector, all other sectors will be included at the outset. Some say that fuel used by motor vehicles, which emit CO2 while their motors are running, should not be included as this would increase the cost of fuel. But if fuel is excluded, the others that emit CO2, for example coal-burning electricity generators, would have to bear a greater cost burden, and the cost of electricity would be higher. So what might be saved by excluding fuel would be made up by higher electricity costs.

Compensating those affected

Because even the poorest in the community pay the same price for fuel and electricity as the better off, the Government proposes to compensate those on lower or fixed incomes for the extra cost to them. It also proposes to support industries unintentionally affected, such as those, while not polluting much themselves, rely on heavy emitters for their electricity, such as aluminium producers.

In a nutshell

To sum up, most see the need for limiting CO2 emissions. There is less agreement about the best way of doing it and how fast it should be done. The Government shares the sense of urgency expressed by most climate scientists and therefore has decided to act sooner rather than later by introducing a ‘cap and trade’ scheme to cover as many sectors as feasible by 2010, and compensate those on lower incomes and industries unfairly affected. The aim is not just to reduce emissions while minimizing the effect on the economy, but to encourage innovation towards ‘cleaner’ energy technology, with a view to profitably exporting this technology to high emission economies.

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