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What price 'comparable effort' on emissions trading?

By Geoff Carmody - posted Thursday, 22 October 2009


What would happen if we actually got a global deal on emissions reduction in Copenhagen? Much of the commentary has been on reasons why we won’t. But suspend disbelief just for a moment and consider the implications of “success”.

We’d need to have sorted out who should bear what emissions abatement burden, and how such burdens should be measured (the “comparable effort” debate).

The deal would be national target-based.

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On measurement of adjustment burdens, all sorts of emissions reduction metrics have been proposed: reductions relative to some baseline year, reductions relative to “business-as-usual” (BAU) in future, per capita emissions reductions, and others.

There’s been no consensus so far. This has helped prevent an effective global deal on climate policy. But let’s dream on. Even if all countries actually cut a “comparable effort” deal in December, there’s one small problem. It wouldn’t work. Especially if an emissions trading scheme (ETS), a market-based option, is pursued to deliver emissions abatement burden sharing, any “comparable effort” deal will be (an unlikely) Pyrrhic victory.

Do a simple thought experiment. Assume a global deal allocates precise emissions reductions to every country. Assume every country introduces an ETS-based emissions “cap” sufficient to deliver these reductions. Every country faces significant greenhouse gas emissions prices. However, there’s zero chance these prices will be the same in every country.

Targets have been negotiated based on the quantity-focused measures noted above. They’ve probably ignored emissions intensities of national resource endowments. Even if they try to allow for these, they aren’t designed to equalise emissions prices globally.

Now, under this hypothetical agreement, ETS models (for example, the CPRS) go to work.

Global trade in emissions permits drives “carbon arbitrage” between countries. Permit buyers go to lowest-price markets first. Prices there rise. Sellers move to highest-price markets. The high prices in countries with the toughest targets (mainly developed economies) fall.

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Countries with above-average emissions prices don’t meet their emissions targets, “importing” emissions permits from low-price countries. The latter exceed agreed emissions reductions. In the former, emissions prices settle lower than targets warrant. In the latter group, they end up higher.

Compliance with agreed national targets is undermined as national allocations of permits shift through “carbon arbitrage” trading between countries. A globally uniform emissions price is established as a result of this arbitrage. The actual distribution of emissions reductions shifts to reflect this.

Market forces, working through the ETS itself, undermine national emissions reduction targets negotiated in ignorance of their market implications.

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First published in the Australian Financial Review on October 15, 2009.



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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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