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Practical realities of carbon trading

By Des Moore - posted Friday, 27 April 2007


One projection of the outlook for total world emissions to 2030 might arguably be to assume that OECD Europe would by then have cut its emissions of CO2 by 30 per cent (compared with 1990), that developing countries would continue on BAU, and that OECD North America and OECD Asia would have halved their current projected rates of growth. In that event the world total in 2030 would still be over 50 per cent higher than in 2003.

All this suggests that, for international competitiveness reasons alone, most individual countries which decide to adopt or further pursue policies to reduce their own emissions are likely to set any overall targets at relatively low levels and increase them slowly over a period.

The Productivity Commission has specified this and other reasons for adopting such an approach and the terms of reference of the joint government-business Task Group state specifically that, in assessing Australia’s further contribution to reducing greenhouse gas emissions, Australia’s “major competitive advantage through the possession of large reserves of fossil fuels and uranium … must be preserved”.

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If this is the case it will be another reason for expecting the potential size of any carbon market to be limited. In this context, the announcement of targets set to be reached in say 2050, such as the 60 per cent reduction postulated by Stern and others, seem largely irrelevant. The issue that existing political leaders have to face is what targets might be set now and over the next few years because they will determine reactions from the electorate.

Possible adverse electorate reactions to higher electricity and petrol prices may also limit the overt use of carbon pricing through either trading or higher taxes. Notwithstanding advice from economists that market pricing of carbon is a more efficient method of reducing emissions, governments may well decide to obtain a significant proportion of such reductions by further increasing subsidies for renewables through government budgets. That would in turn also limit the size of any carbon trading market. However, if experience with wind power is any guide, the cost of such subsidies is likely to be substantial.

A further reason for expecting limited carbon trading, at least initially, is that if the reduction target is set too high, there will be nobody who would want to sell any credits, and lots of firms who would want to buy. That means that the permit price (effectively an indirect carbon tax) would settle at a very high level, and many firms would simply shut down.

The European Union realised this and the limits they initially set on emissions turned out to be higher than actual emissions, effectively creating a lot of carbon credits for businesses with emissions below the set limit. However, although this created a market, it caused the initial price to fall to such a low level that it would not have induced the affected businesses to adopt emission-reducing technology.

While tighter limits have now been set for next year, the consequent jump in the forward price has led to many complaints from adversely affected businesses. This illustrates the difficulty all governments face in trying to establish an artificial market that sets a carbon price that allows businesses time to adjust and at the same time encourages them to do so.

A further significant difficulty is the problem of determining what actually constitutes a genuine reduction in emissions and/or a carbon credit and what institutional process would exist for certifying claims in that regard. The obvious scope for cheating could itself limit the resort to an international trading scheme.

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Overall, the various difficulties involved, not least being measurement and certification, make it unlikely that an international emissions trading scheme can be developed and that such trading as does develop is likely to play only a limited role in reducing emissions. The extent of other approaches taken will depend importantly on assessments of scientific uncertainty. There are many, viz:

  • temperature levels have been as high if not higher in periods in the past and this did not then have adverse effects on societies;
  • scientific records suggest the overall size of the ice sheets of Antarctica and Greenland is, if anything, stable;
  • although carbon dioxide emissions have grown strongly since the 1960s as industrialization and economic growth generally have spread around the globe, since the mid-nineteenth century there appears to be little or no direct connection between emission and temperature increases. For example, between 1940 and 1975, average temperatures fell slightly. Moreover, evidence has now emerged suggesting that any warming effect from carbon dioxide emissions diminishes progressively, while historical analyses of ice cores show that past temperature increases preceded increases in carbon dioxide by 800 years or so; and
  • some leading scientists have pointed out that variations in sunspot activity are closely co-related with variations in temperature.

Given the extent of dissent amongst scientists and others, there is no credibility in the claim that there is a “scientific consensus” on human activity being the principal cause of global warming.

The reality is that the certainty thesis has no substantive basis. Even if increases in temperature were to continue at about the same rate as in the past century, the normal operations of market economies and governments should be able to handle problems that might emerge.

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This is an edited version of a speech delivered to the Annual Conference of APEC Centres on Melbourne 18-20 April. The full text is available here.



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About the Author

Des Moore is Director, Institute for Private Enterprise and a former Deputy Secretary, Treasury. He authored Schooling Victorians, 1992, Institute of Public Affairs as part of the Project Victoria series which contributed to the educational and other reforms instituted by the Kennett Government. The views are his own.

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