An Emissions Trading Scheme, or ETS, is a market-based mechanism that aims to reduce greenhouse gas emissions. It is sometimes called a "cap and trade" system because the scheme sets an overall limit (cap) on the amount of greenhouse gas (mainly carbon dioxide) emissions from all businesses in the scheme. This cap is reduced each year until the desired reduction in greenhouse gases is achieved.

Once the cap is decided, businesses in the scheme are given permits to emit greenhouse gases. The total number of permits adds up to the total amount of emissions allowed. These permits can either be allocated to businesses for free, or auctioned.

   If a business emits more than they have permits for, they must buy additional permits from other businesses who have not used their full quota. These spare permits are tradable in a carbon market – if they are in short supply, their price will rise. This means that companies who make greater emissions cuts will be rewarded. As long as the overall level of emissions is reduced each year, it doesn’t matter who makes the reductions.

Exclusions

Companies or industries may be excluded from a scheme for three reasons:
a) in some cases it is simply too hard to calculate the emissions.
b) For export businesses, the cost of buying permits might make them unable to compete with overseas rivals who do not have to buy emissions permits.
c) if the effect of price rises is felt to be unacceptable (economically and politically) – for instance if a government fears of a backlash from rising petrol prices at the bowser.

Key features of an Emissions Trading Scheme

1. Overall cap on emissions, reduced each year until target level achieved. This cap should guarantee emissions reductions.
2. Within the scheme, permits to the total value of the cap are either allocated to participants or auctioned to participating businesses.
3. Each company must not exceed the permits they have been allocated or have purchased. If they do, they must buy extra permits from firms who have used less than their quota. This encourages individual firms to switch to energy efficiency and clean energy alternatives.
4. Cap on emissions forces an oveost Some industries may be excluded.
5. Costs of permits likely to be passed on to consumer in higher prices, encouraging consumer to choose energy efficient and clean energy products and making low-emissions products and services (such as solar panels) more competitive.

Australia's Emissions Trading Scheme

Australia's scheme is still in development. But the draft Garnaut Report calls for a cap and trade system with permits auctioned (rather than allocated for free) to industry and energy suppliers. The cost of buying the permits, or of switching to clean energy to reduce emissions, will be passed on to the consumer in the form of increased prices.

PM Kevin Rudd has said the scheme will start in 2010. The opposition wants a later start date of 2012.

Garnaut proposes that half the income from the sale of permits should go to low income earners to cushion them from rising prices, 20 per cent should go towards developing clean energy technology, and 30 per cent to helping industry reduce emissions. 

The Australian scheme would eventually be linked to international schemes so Australian companies could trade permits in an international market.

Garnaut calculated that unchecked climate change will cost the Australian economy $425 billion a year and reduce wages by 8 per cent. (Such calculations necessarily involve a lot of assumptions and estimates.)  

Timeline

2008
April: PM Kevin Rudd appoints Prof Ross Garnaut to report on Australia's climate change policy
July: draft Garnaut Report released
July 16: Federal Government White Paper to outline structure of ETS released
August 30: Treasury modelling of climate change impacts released 
September 30: final Garnaut Report released 
December: Federal Government releases draft ETS legislation

2009
March-June: ETS legislation goes through Parliament
September: ETS regulator created

2010
Emissions trading scheme starts. 

Difficulties

1. Measuring emissions: this requires close monitoring of a company’s activities. Even then, it's often not easy to calculate greenhouse gas emissions accurately. After all, we're talking about measuring hot air.
2. Penalties: rules only work if the penalty for breaking them is sufficiently tough. Would the Government be prepared to enforce the rules? Would it shut down an electricity supplier, which could lead to power shortages?
3. Gaming: if the scheme contains flaws, you can bet speculators will quickly work them out and make a killing trading permits, possibly undermining the scheme.

Issues

1. Price of permit: if the price for a permit is too low, it won’t push up prices much and therefore won’t change people’s purchasing habits or encourage them to save energy. On the other hand, if the price for permits is very high, it might cause a major shock to the economy as prices of all sorts of goods shoot up. It might also cause voters to reject the scheme and vote for a political party offering to water it down.
2. Going it alone: Should Australia go ahead if other nations, such as China, the US and India, don’t introduce similar schemes? Rising energy prices in Australia will drive up the cost of Australian goods, making them less competitive on a world market against nations that do not have emissions trading.
3. Should permits be allocated (for free) or auctioned? In the European scheme, free permits were allocated to energy supplies, who sold them for a huge windfall profit. On the other hand, auctioning permits brings in revenue for the Government, which can then be used to fund renewable energy or to cushion the poor from the impact of rising prices. Auctioning permits, however, costs industry more and therefore could lead to higher prices for consumers.
4. Exemptions: many industries are lobbying furiously to be exempt from the scheme. For instance, energy-intensive export industries argue they will become less competitive (see 2. Above) and won’t survive if they have to buy permits. However, if some industries that are excluded from the scheme, then those industries that are included will have to make bigger cuts to meet a national target.
5. What to do with income from permits: if permits are auctioned the Government will get billions of dollars of revenue. Should this be returned to consumers to cushion them from the impact of rising prices, or invested in clean energy research or energy-efficiency? Cushioning the impact of rising prices, though, might remove consumers' motivation to change their behaviour.
6. Start date: is 2010 too rushed to set up such a vast, complex scheme. The Federal Opposition is arguing that 2012 is more realistic.

Alternatives

1. Different trading systems: the emissions trading scheme essentially involves formulating a set of rules to create an artificial market in carbon permits. These rules can be formulated in many ways. One alternative has been proposed by economist Warren McKibben, who argues for permits to be issued to consumers and end-users rather than industry and energy suppliers. One reason for adopting the scheme currently proposed by Garnaut and the Federal Government is it looks likely to be similar to the model adopted internationally, meaning it will be easier to link the Australian system with overseas emissions trading schemes in future.
2. Carbon tax: instead of creating a market, a tax would simply increase the price of anything emitting greenhouse gases, encouraging people to become more energy efficient or switch to clean sources of energy. The income from the tax could be used to encourage energy saving and the development of renewable energy, and as rebates or tax breaks to protect the poorest in society from price rises. However, a tax on carbon would only send a market signal; it would not guarantee a reduction in emissions. (For instance, it’s not at all obvious that taxing alcohol has reduced consumption.)
3. Non-market mechanisms: a government could simply legislate to reduce carbon emissions and/or encourage people to reduce emissions. For instance, it could simply ban the use of coal and oil. Less drastically, a government could compel homeowners to improve insulation, raise minimum energy-efficiency standards for cars and appliances, require energy suppliers to source more energy from renewable sources, increase rebates for solar hot water and solar panels, invest more in research into clean energy, invest in better public transport and so on.

© Mark Mann / EcoDirectory