Cap and trade: one way to put a price on carbon

Looks like the government read my post last week about why we need a price on carbon – the afternoon of the day I posted it they formed a committee to talk about it! They’re still figuring out exactly who’s on it, but there’s strong representation from the Greens and the independents, which I think is a good sign.

There’s a few different ways to price carbon, each with it’s own pros and cons. Today I wanted to share what I’ve learned so far about emissions trading schemes, or cap and trade, which is what’s already set up in Europe and New Zealand.

What’s cap and trade?

Cap and trade systems put a limit (the cap) on how much carbon dioxide is allowed to be emitted and let companies buy and sell their share of the total, trading their rights at a price they feel reflects the value of that pollution. They can pay a lot to get a bigger share of the emissions pie, or they can save money by reducing their emissions to fit their allocated amount, or they can make money by reducing below their allocated amount and selling off the excess to other companies.

A cap and trade setup acheives greenhouse gas reductions by lowering the cap each year. So the emissions allowed are set and reduced, and we let businesses argue among themselves about how much they want to pay for a share of those emissions.

It acts as an incentive for reducing pollution, rather than a punishment for actual pollution made. It’s also apparently easier to co-ordinate national trading systems into a global trading system than it is to co-ordinate pollution taxes across the different exchange rates of nations.

So what’s the catch?

The major problem is that cap and trade systems guarantee a set reduction, and no more: individuals who voluntarily reduce their emissions leave more permits free for corporations. For example, if you switch from driving to cycling to work, that means you buy less petrol, which allows the oil company another few permits to sell.

Other important issues are that it takes a long time to set up a proper trading system, and that it’s quite difficult for the general public to understand how the system applies to their everyday life.

Potential problems include governments give away the permits to companies instead of selling them (as Rudd’s CPRS was going to do), the cap not being set low enough, or the cap not being reduced regularly. Revenue from the scheme goes to either corporations or the government, rather than being returned to the public. And it’s possible for there to be corruption in the trading, as there is with any sort of financial market.

But it’s possible to pair a cap and trade scheme with tax cuts for individuals, or investment in fossil fuel alternatives, and a well-planned system would avoid many of these problems.  To me, these are design issues that are up to each country to solve, rather than real problems with cap and trade as a theory. So far, existing ETSs haven’t been ‘gamed’, and good regulations can prevent it in the future.

Who’s in favour of cap and trade?

Governments generally prefer cap and trade to other systems, as they’ve seen them work for acid rain, and emissions are falling by 2% per year in Europe already. Businesses who expect they’d be able to make reductions in their pollution and therefore make a profit by selling their permits are generally keen. Cap and trade is also popular with economists who prefer market-based solutions to regulation when it comes to dealing with ‘externalities’ like pollution.

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I’m still reading up on carbon taxes and other ideas for how to price carbon, so although I think a cap and trade system could work well for Australia, I’m not sure yet if it’s my preferred option. I’ll keep posting as I find out more, and would love it if you left links in the comments to anything interesting you’ve read on the topic. If you’ve got any questions, I’m not an expert, but I’d be happy to try to figure them out along with you

Long weekend

Here in WA we’ve just had a long weekend. I spent Friday through Sunday getting over the last of this damned cold, which meant I missed out on a Grand Final party, a picnic with friends and my niece’s birthday party. Luckily, the Grand Final and the picnic were able to be rescheduled

Today I spent catching up with various greenie friends! Helmut and Eugenie from The Green Swing in the morning, and Tricia from Little Eco Footprints in the afternoon. It really is a treat to chat with like-minded people about issues you’re passionate about.

Meanwhile, Dave was hard at work in the garden while I was recuperating. He keeps expanding the vegie patch by stealth, digging up a bit more lawn each time new plants go in. I don’t miss the lawn, but it’s getting a little higgledy-piggeldy out there these days.

To think we started with just this:

And now we’re up to this:

I think we’re getting better with succession planting, so we don’t have all our food ready to harvest at once. And we also switch between seasons better now, without such a big gap between harvests.

Seriously, if you’ve ever had the slightest desire to try vegie gardening but have been intimidated by some of the huge patches you’ve seen – don’t be. We started with the tiniest little experiment, and added things only as we felt confident. Pop something in the ground now and you could be eating fresh, homegrown vegies by Christmas.

Fresh green links

Just a few quick links today, as I’m still a bit sick from having a cold (isn’t it spring already? shouldn’t I have moved on from colds to hayfever by now?).

Permablitz ACT – Ever wondered what it’s like to go to a Permablitz day? Dixiebelle’s been to one and tells us all about it.

A White House road trip with a solar rock star – interesting story from a guy from 350.org who took some wildlife services students with him to return one of the Jimmy Carter solar panels to the USA’s White House, in the hopes Obama would take it as a historical artifact and promise to put new ones on. It didn’t go well, and it’s worth reading to see how they interpreted that.

The real cost of carbon pricing – as a bit of a follow-up to my post on carbon pricing earlier this week. Turns out that a carbon price won’t cause much of a problem to most Aussie businesses. The exceptions are steel and aluminium manufacturing, which aren’t huge employers or contributors to GDP anyway.

Why we need a price on carbon ASAP

Back in 2007, we were promised a price on carbon emissions. Three years on? We’re still waiting. I still don’t understand the ins and outs of the politics that prevented it, and I’m not sure anyone except Kevin Rudd does. But that hasn’t lessened the need for this essential part of the solution to climate change.

I know that the economics side of greening our future is a bit on the dull side, but bear with me for a bit. I think it’s really important that we put pressure on the new goverment to get a carbon price happening as soon as possible. Here’s why:

1. We won’t be taken seriously in international climate negotiations until we put a price on carbon. Australia and USA are the only developed nations who have yet to make a proper commitment to fighting climate change. When we go to negotiations (and they haven’t stopped since Copenhagen), having made no progress since 2007 will undermine any promises we make. The EU has had a carbon price for 5 years, New Zealand started one a few months ago, and Japan and Taiwan are in the process of sorting their own out now. Why should they make concessions to us when we haven’t lifted a finger yet? And why on earth would still-developing nations believe we’d help them, when we haven’t even stopped making the situation worse? This is a global problem: we need a global agreement to fix it.

2. We can’t get large emissions cuts without getting businesses on board with the plan, and carbon pricing has broad support in the Australian business community. It allows business and investors to find their own way of reducing emissions in order to avoid the cost. And the expense is a more predictable one than that of adapting to rising sea levels or resources costs. Businesses can (and probably will) pass on costs to consumers – but then we can reduce our use of any product that’s too expensive because it’s too polluting, or find a competing business which has lower prices because they’ve cleaned up their act.

3. Direct action and regulations can help us cut emissions, but they’re more expensive than a carbon price. Voluntary action is cheaper, but unless you convert 95% of Australia to green living overnight, it can’t get deep reductions in emissions anywhere near fast enough. Other methods are doable, but expensive.

4. It can be used to make polluters pay for the other environmental work that needs to be done, like the direct action and regulations mentioned above. Ending deforestation and ocean pollution won’t be cheap, and neither will researching new energy sources and improvements to energy efficiency. The companies who made a profit by degrading and wasting our shared resources can pay to clean them up again.

Of course, it’s possible to have a carbon pricing system that doesn’t acheive any cuts in emissions, or can be gamed by corporations. I’ll take a look next week at what a well-designed system would look like.

But the possibility of politicians messing it up doesn’t change the fact that it needs to be done. And since it must be done, it’s better that we start paying attention while politicians and businesses sort it out, so we can hold them to account.

The Julie G Daily

I’ve been out of action with a cold so far this week – sorry for the lack of updates. To keep you entertained in the meanwhile, take a quick peek at my Paper.li page. It’s a summary of the interesting things that have been posted by the people I follow on Twitter, plus any videos and photos they’ve shared. It gets updated on weekdays, much like a newspaper website.

I use my GoGreenerOz account on Twitter to follow interesting environmentalists like Alex Steffen from Worldchanging, and David Roberts from Grist. I also chat with local green businesses and activist groups like Greenpeace, the ACF, and Environment Victoria, as well as a bunch of politicians. Finally, there’s a few people in there just for fun, like Doctor Karl (always good for science trivia) and some comedians. When they post interesting stuff on Twitter, my Paper.li page gives a quick summary of it, a little like a newspaper.

If you’ve never had time for Twitter, paper.li is a good way to get quick updates of what’s on people’s minds on any given subject. You’ll see on my page that there are links to other pages built around topics like “climate” and “environment”, which are also good for finding out what’s in the news.