Not a carbon tax, an emissions trading scheme

Anna Skarbek

Anna Skarbek

By Anna Skarbek, Executive Director, ClimateWorks Australia

 

Last week’s announcement of the carbon price mechanism preferred by the Australian Government is a welcome step forward. The debate can now focus on ‘how’ not ‘if’ we achieve the transition to a low carbon economy. Importantly, we have confirmation that an emissions trading scheme will be introduced to put a price on carbon pollution.

The initial fixed price period has been described as a carbon tax, but in fact there will be one system introduced into Parliament for legislation and it will be an emissions trading scheme, with a transitional period for the first 3-5 years in which the permits will be sold at a fixed price. It means that all the rules underpinning the system from the start will be those of the permanent market-based trading scheme.

There are many benefits of an emissions trading scheme, also known as a cap-and-trade scheme, because it puts a cap on the level of polluting emissions allowed and companies then trade the permits to pollute if they are below or above the cap. The cap and trade elements are why it is the superior carbon pricing mechanism.

The cap provides certainty of limiting the pollution, the primary policy objective. It also provides certainty of the future framework for investors. Investors seek ‘certainty of rules’ rather than ‘certainty of price’.  A cap on carbon pollution in 2020 creates certainty of the future trajectory of prices of permits to pollute, provided that the rules regarding supply of permits over that trajectory period are known. This allows the market to estimate supply and demand of permits and make price forecasts accordingly, just as occurs in other markets. 

The trade provides the incentive and ability to keep costs as low as possible. Evidence from the Grattan Institute and others, and my own experience gained working in London’s carbon markets, show me that market participants will discover new and cheaper solutions, and will be encouraged to invest more in new low carbon solutions when  carbon emission prices are expected to continue rising.

These market responses provide us all with choices. Companies can compete to offer us more attractive low carbon options. We can choose to avoid the higher prices of carbon intensive goods by favouring lower emitting actions. Given the Government’s commitment to offer assistance to affected industries and households, we can choose to spend the assistance funding on more efficient equipment that permanently lowers our future energy costs.

ClimateWorks Australia’s research in the Low Carbon Growth Plan for Australia in 2010 identifies 54 greenhouse gas reduction opportunities across the Australian economy. Together, they can reduce Australia’s emissions by 25% (below 2000 levels) by 2020, at a net cost across society of less than $4 per household per week. We are excited about the potential for Australia to improve its energy productivity and prosper in a future low emitting world.  We support policy reform that combines emissions trading with energy efficiency measures to ensure we achieve the transition in time to help avoid dangerous climate change.

 

ClimateWorks Australia is a partnership between Monash University and the Myer Foundation.

For more information please visit: http://www.climateworksaustralia.org/