A whole new level of crazy

If Australia is left to itself, and to judge from the various reports produced by the government’s advisor on these matters, Professor Ross Garnaut, there is little doubt this country will be able to put together a decent Emissions Trading System (ETS).

Our own ETS is likely to start off better than the established European system, although that is not saying much, and may even reduce Australian emissions, which the European system arguably has yet to do. Just how much it will reduce emissions will depend on the settings the government opts for, and the political pain it is prepared to inflict on the electorate - all in the name of the environment.

The problem is that the Australian ETS will not be in isolation. If it is anything like the European ETS, emitters here should be able to buy offsets or permits of Certified Emission Reductions (CERs) from overseas under a program called the Clean Development Mechanism.

The people behind the CDM have the best of intentions - and with a name like that, how could it be wrong - but one notable, and widely reported result of the program is to give windfall profits to Chinese dam developers.

This is another strange twist to a bizarre tale in which the world is spending untold billions of dollars on little more than a suspicion that because the earth is in a high part of a well recognised climate cycle, human activity must have something to do with it, and a bunch of dodgy computer models that have failed to forecast anything much.

But it seems this madness must continue, we are to be dragged deeper into it, and we must pay for the privilege. As can be seen from the payments to dam developers, the next level of madness is likely to be even stranger.

Although the characteristics of the local ETS have yet to be announced, it is widely expected that the Government will sell or auction permits to major carbon emitters, to gain a multi-billion dollar windfall.

Industries that are exposed to major international competition are likely to get an easy ride, at first, so most of the burden is likely to fall on major power stations, and perhaps on fuel consumers. The power stations will have to push up electricity prices; and service stations will have to further increase petrol prices (if the Government is prepared to take that step, given present complaints over prices).

The amount by which prices will increase is anyone’s guess at the moment, but the end result will be that consumers will pay out and that the government will suddenly have an additional pot of money.

The bizarre point about this is that the government will be instrumental in setting the underlying price of the carbon market, and setting it by political considerations, and will then have to decide what to do with the funds gained through its decisions.

That money should be used to alleviate the pain of higher energy prices for consumers perhaps through lower taxes - always a nice thought - but whenever a pot of money is opened, lobbyists swarm in. And in the current ideological climate (pun intended), those lobbyists will want money for every crack pot green energy scheme ever devised - from burning wood pulp in Melbourne, through to harnessing wave energy in the Gulf of Carpentaria. Some of those schemes may be of use, although there is a lot to be said for letting the market sort through them. But even if the government avoids the temptation of flinging billions of dollars at alternative energy projects, there are plenty of other bright, socially-responsible ideas that will cost only a few billion.

While this lobbyist feeding frenzy is going on the corporate sector will be striving to meet its commitments including buying CERs, or whatever they will be called in the Australian system. If there are not enough carbon permits in Australia, or they company wants to get them more cheaply, they may be able to buy them overseas through the UN-run CDM program.

Just what that will do to prices on the local market remains to be seen but, as noted in the Garnaut report “Emissions Trading Discussion Paper” (PDF 480KB) released in March, there is the problem of “additionality”. That is, how can we be sure that a carbon credit bought from an overseas project helped bring that program into being. To put it another way, has the payment for the carbon credit made any difference, or has it proved to be simply additional money for the developer of the alternative project?

Late last year, a US non-government organisation International Rivers issued a report noting that by the end of 2007, hydro projects were expected to make up 15 per cent of CERs. The bulk of those dam projects are in China, the world’s most prolific dam builder, with an astonishing 25,000 plus major dams.

As of late last year, says International Rivers, about 650 projects had gained, or were set to gain, carbon credits from the CDM for sale. Further, the recent influx of money from the CDM made no difference to the number of dams being built - the report notes that developers just seem to keep rolling them out.

China has considerably more scope for hydroelectric power than Australia, but there almost certainly is no overall energy strategy, or any assessment of what the dams may do to local ecology, or even the people they displace, and there have been suggestions that government officials are too closely involved in those projects.

As Australia’s ETS has yet to start, our money is not being thrust into the pockets of dam developers in China, at least not yet. However, if there are doubtful projects in China, then there are bound to be doubtful projects in Indonesia, or the Philippines, or any other country where taking down the foreign devils, with their odd fetishes about carbon, is a national sport.

Even if we find a host of honest, carbon-reducing projects in which to sink money, there are other problems. For if less carbon is being used in one project in one part of a foreign economy, how do we know there has been any overall saving? Investment in a dam or a windfarm may have diverted funds needed to make an old coal-fired electricity plant more efficient.

Perhaps it is not too late to consider a straight tax on carbon and be done with all these complications. But one not-incidental result of having a carbon market is to create a whole class of carbon traders, brokers, advisors and consultants of all stripes - all of whom would have a vested interest in ensuring that nothing is allowed to weaken the trading system (buying credits overseas may not be useful, but it is exciting) or the orthodoxy that industrial gases are contributing to climate change.

Temperatures may continue to fall, but still this new class of carbon-worker will loudly insist that there is nothing wrong with the theory. We need only wait a few more years and temperatures will finally start increasing.

And Australia’s ETS is just one, tiny piece, of the overall effort now being made to keep carbon emissions down - a colossal effort that may turn out to be a complete waste of time, if India and China refuse to take a hand. Developers and officials in both countries are unlikely to bother themselves too much about the Western obsession with carbon, when the CDM is prepared to hand them money for projects that they were going to do anyway. But that is a whole other level of crazy.