Can ETS reverse climate change?
Climate change is already here. The Arctic is melting and scientists now believe that within only five years it will become ice free during the summer months. Experts believe we are at risk of reaching a “tipping point” where various feedback loops kick in and warming is liable to spiral out of control. Unfortunately, nobody knows with any certainty what atmospheric concentration of carbon dioxide is low enough to ensure the planet stays on the rails.
Currently we are at 385 parts per million (ppm) and this level is rising annually. Many governments and the Intergovernmental Panel on Climate Change have been looking at scenarios involving stabilisation of CO2 levels at 450ppm, or double pre-Industrial Revolution levels at 550ppm.
Among the scientific community, until recently there was a broad consensus that we will be relatively safe if the temperature rise from climate change is kept below two degrees Celsius. Now, new findings indicate that a two-degree rise is probably too risky. In June 2008, Sweden’s Tällberg Foundation issued a statement, supported by several prominent climatologists including James Hansen at NASA, calling for a stabilisation of CO2 levels at a far lower level of 350ppm. Such a drop can only be achieved through radical changes to our energy use patterns, or by removing large quantities of CO2 from the atmosphere.
The need for leadership
The Australian government’s current emissions reduction goal is for a 60 per cent cut below 2000 levels by 2050. If applied globally, this roughly equates to a stabilisation of atmospheric CO2 somewhere in the region of 550ppm and a temperature rise of around three degrees. The Greens’ policy in Australia is for an 80 per cent drop by this date, and other individuals and groups are calling for even steeper moves towards decarbonisation.
One of the most effective means of reducing pollution into the atmosphere is by attaching a dollar value to it. After the soft-pedalling of climate change during the Howard era, Kevin Rudd came to power in Australia in November 2007 with a pre-election promise to introduce an emissions trading scheme (ETS) as soon as was feasible.
This scheme is set to commence in 2010, although it faces a bumpy passage through Parliament next year. The Opposition would like to see its provisions watered down, and if they choose to vote against it in the Senate, the Greens may hold the balance of power, enabling them to negotiate for some tougher provisions.
At present, the world’s largest ETS is running among the 27 countries in the European Union. New Zealand began its cap and trade system earlier this year and emissions trading is being considered in Japan and numerous US and Canadian states and provinces.
Australia’s emissions trading scheme
While for many people the mention of emissions trading is about as attention-grabbing as tax accounting, the introduction of what is known as the Carbon Pollution Reduction Scheme (CPRS) will have some important ramifications.
Despite its name, the CPRS is intended to extend beyond carbon to take in six greenhouse gases covered under the Kyoto Protocol (CO2, methane, nitrous oxides, sulphur hexafluoride, hydrofluorocarbons and perfluorocarbons.) These are to be factored in together via the concept of CO2 equivalence, where each greenhouse chemical is adjusted for its global warming potential (GWP) relative to CO2. Methane, for example, has a GWP of 21.
CPRS rules will apply to Australia’s largest 900 companies ranked in energy terms, which taken as a whole are responsible for around 80 per cent of domestic emissions. Households and the other 7.6 million businesses will feel its effects indirectly in the form of some increased costs.
Like most emissions trading schemes, this will utilise the “cap and trade” system. Initially, a number of carbon pollution permits will be created to make up the cap, with one permit per tonne of CO2-equivalent pollution. Companies will be required to purchase these via auction or buy them from other businesses that have a surplus. Permits will have to be surrendered at the end of every year in proportion to the company’s greenhouse pollution.
Businesses will inevitably carry out abatement activities if these are cheaper than paying for permits. The intended purpose of this market-based approach is to ensure that the most cost-effective means of tackling emissions are implemented first.
Each year, some of the permits that make up the cap will be removed from circulation, facilitating progress towards the national carbon emissions reduction target. As the CPRS continues running, the price of carbon will inevitably rise according to supply-and-demand forces as the permits grow increasingly scarce. This trend is to be restrained by a carbon price cap running until 2015.
At this point, the big remaining variable is the initial carbon price. This is expected to start low in order to minimise the effect of shocks to the economy; the recent Green Paper uses for its calculations $20 per tonne of CO2-equivalent.
CASE STUDY: NEW ZEALAND
Earlier in 2008, New Zealand started its own ETS, which was the first national cap-and-trade scheme to operate anywhere outside Europe. It replaces an earlier carbon tax proposal that was abandoned last year.
New Zealand’s scheme is to be phased in over a period of five years. All sectors of the economy will be affected, including forestry, power generation (2010), industrial emissions (2010), transport fuel (2011), agriculture (2013) and waste (2013).
A broad range of greenhouse gases is to be included and the largest emitters are expected to receive free permits covering up to 90 per cent of their emissions, pegged to 2005 figures. Agriculture (especially methane from livestock) makes up about half of the country’s total emissions while about 60 per cent of the power comes from hydroelectricity.
The ETS had a difficult passage through parliament, the government spending months negotiating with the Greens and New Zealand First parties in order to obtain their support. The legislation and the effects of the scheme are certain to be closely studied in Australia as it finalises its own ETS design.
Impacts on industry
Shortly after the emissions trading plan announcement, large and energy-intensive industries started lobbying hard to escape its grasp. Their efforts have so far been fairly successful, with the Green Paper proposing the issue of free permits to a limited number of industrial sectors. Depending on CO2-equivalent pollution per unit of revenue, these free allocations are expected to range from 60-90 per cent of the total, and industries likely to benefit include aluminium, lime and cement.
The rationale behind these free permits is that where certain export-orientated industries are subject to prices set by an international market, they could be financially disadvantaged if competing against similar energy-intensive companies in countries without emissions trading. If sufficiently impacted, there is a risk of these “trade-exposed” industries relocating overseas in a phenomenon known as “carbon leakage”.
Although environment groups broadly support the idea of an ETS, they are strongly critical of the proposal to greatly soften its impact on the largest polluters. Greenpeace has described the CPRS as a “carbon polluters reward scheme” and believes that market forces alone will not bring about the desired result: we also need regulation coupled with broader business and government investment that extends beyond the least-cost options.
Taking the opposite view, the Business Council of Australia believes that unless the proposed compensation to industry is increased, it expects job losses, profit downturns and some closures.
Since the cut-off for free permits was drawn up, it has emerged that Australia’s liquid natural gas (LNG) industry, centred on the North West Shelf off the coast of Western Australia, will not be eligible for free permits. LNG is a relatively low-carbon fuel that substitutes for coal in China, one of its major export destinations. Some government assistance has been promised, but no further details are currently available.
Direct compensation payments will also be made to the carbon-intensive electricity-generating sector which, as most people are aware, is heavily dominated by coal. Some of these payments under the Electricity Sector Adjustment Scheme are earmarked towards “clean-coal” carbon sequestration projects.
Hydrofluorocarbons, which are commonly used in Australian refrigeration, have a comparative GWP ranging from 140 to 11,700. From 2010, the permit costs attached to their import may become a major incentive for industry to make the switch to more environmentally friendly alternatives such as hydrocarbons.
Farming and forestry: opportunities & risks
Professor Ross Garnaut is the Australian government’s climate change adviser and author of a green paper on the subject released in July 2008. On Garnaut’s recommendation, agriculture will not be included in the CPRS until 2015 at the earliest, with a final decision to be made in 2013. Before agriculture comes on board, it will first be necessary to develop a methodology for measuring soil carbon content as well as methane emissions from animals and their wastes.
If agriculture is included, farmers will hopefully be able to benefit financially from adopting a couple of environmentally sound carbon sequestration practices. This depends on whether the whole-farm system is a net carbon sink, as opposed to a net carbon source.
Biochar is a fine-grained charcoal made using low-temperature combustion in an oxygen-free environment to ensure no carbon is released. Buried in the soil, it is very stable and greatly enhances soil fertility. In addition to removing carbon from the atmosphere, it minimises requirements for energy-intensive chemical fertilisers and reduces soil emissions of the greenhouse gases methane and nitrous oxide by between 50 and 80 per cent.
Soils are estimated to hold an incredible 82 per cent of all terrestrial carbon and there is scope for many to increase their soil carbon content. “Carbon farming” adherents are convinced that through humus formation the world’s soils could fully absorb the six gigatonnes of carbon emissions currently in the atmosphere.
Carbon farming embraces such sustainable practices as minimum tillage, regenerative grazing and revegetation using perennial grasses. In contrast, forests require 10 years to reach their carbon sequestration peak, which in the opinion of many experts will be too late to decisively tackle climate change. Pasture sequesters more carbon than an equivalent area of forest and does so far more quickly.
Unlike agriculture, the forestry sector will probably be given the option to participate in the CPRS from its inception. It has an obvious motivation to do so, given the scope for forestry carbon offsets. Like farms, forestry operations will be evaluated on a lifecycle basis, including harvesting operations. In areas such as the Western Australian wheatbelt, combatting salinity via tree planting would become far more financially attractive.
However, environment groups including The Wilderness Society are unhappy about the forestry proposals, which exclude landclearing from the scope of the scheme. Like the Kyoto Protocol, the CPRS treats native forests and plantations equally for the purposes of carbon accounting. Perhaps this approach is overdue for a rethink: a recent Australian National University report indicates that untouched native forests store at least three times as much carbon as previously thought and 60 per cent more than plantation forests.
At the household level
Individuals and households will inevitably feel some effects from the CPRS, in the form of price rises. Electricity companies, for example, are expected to pass on the cost of unsubsidised permits to their customers. The Green Paper suggests that power bills could rise by up to 16 per cent during the scheme’s first year of operation. For Green Power customers, it is possible that over time their bills may come down.
Now would be a good time for people to start to decarbonise their lifestyles in order to minimise any impacts from increased power costs. Carrying out energy efficiency measures is a good way to offset expected increases in electricity bills.
The Green Paper also estimates that the average cost of goods and services will go up by around 0.9 per cent, although carbon-intensive items such as domestic flights and aluminium rods are liable to see a greater hike. To provide some reassurance, the CSIRO envisages that future increases in wages should offset rises in the cost of living and that in the future we are likely to be spending less rather than more of our income on basics.
Following Garnaut’s recommendation, fuel looks likely to be included, but against his advice Labor plans to cut excise cent-for-cent to counterbalance any price increase. Government advisers believe that petrol prices are already at the limit of what the voting public is prepared to tolerate. This cost offset arrangement will remain in place for three years before being reviewed.
The Greens are critical and believe such a step removes any additional price signals from the CPRS that could reduce unnecessary driving or encourage running a more fuel-efficient car. They would also like to see all of the revenue raised to be invested in renewable energy and energy efficiency. At present, this is only one among a checklist of priorities.
Other assistance will be directed to households, especially those in the low- and middle-income brackets, in the form of increased payments and tax breaks.
The green power conundrum
Many people are already making a positive difference to the state of the Earth’s climate by purchasing Green Power generated from renewable sources such as biomass, hydroelectricity, solar and wind.
Alan Pears, an astute commentator with Renew magazine, has pointed out that the benefits of Green Power and voluntary “carbon-neutral” offset schemes could be negated by the CPRS, as both have the potential to take the pressure off power companies to source renewables in response to carbon market forces and may also work to push down the carbon price.
The solution would be to build “additionality” into the system, where Green Power is kept apart from other emissions-reduction initiatives. According to Brad Shone at the Alternative Technology Association, this could be achieved through permits being retired proportional to the volume of Green Power generated. In the future, some carbon-neutral offset companies are likely to purchase and retire permits as a means of creating their offsets.
Economy versus environment
Assuming that the CPRS is successful, a further question is whether the current 60 per cent emissions cut by 2050 is sufficient for Australia to take on its share of the necessary global reduction. This 60 per cent goal will be made steeper as a result of future upward pressure coming from economic growth and population increases, including immigration.
Responsible for 1.4 per cent of global emissions, Australia’s actions will ultimately have no direct effect on the survival of drought-affected farmland and the Great Barrier Reef. That fate will be decided by the world as a whole. Where Australia can influence outcomes is by acknowledging that its per-capita emissions are the highest in the world and, by acting first, pave the way for replication by such large emerging economies as India and China.
Recent proposals seem to represent the greatest steps that could be taken without seriously undermining the economy. Where the path forks between ecology and economy, it seems that there is no choice for decision makers but to follow the economic line. We can hope against the odds that it may soon be possible to bring these two often conflicting goals into alignment.
RESOURCES
Tällberg Foundation www.tallbergfoundation.org
Government emissions trading information www.climatechange.gov.au/emissionstrading/index.html
Garnaut Review www.garnautreview.org.au
Martin Oliver is a writer and researcher based in Lismore (northern NSW
