Rudd's plans to float carbon price a sham

Beck Pearse and Julia Dehm

Almost immediately after the reappointment of Kevin Rudd as Prime Minister he was asked about the vexed issue of carbon pricing. In response he mooted the possibility of moving from a fixed price on carbon to an emission trading scheme one year earlier than anticipated. The proposal was meet by support from business groups and condemnation from the Greens. But what does it all mean?

Gillard's Clean Energy Future package (like Rudd's Carbon Pollution Reduction Scheme before it) established an emission trading scheme for carbon in Australia (measured in equivalent tonnes of carbon dioxide CO2e) with an initial fixed price or 'tax' on carbon as a transitional measure. A price on carbon of $23 per tonne CO2e was introduced one year ago on 1 July 2012, and was to remain in place for the first three years (increasing by 2.5% per year).

It was anticipated that on 1 July 2015 the scheme would shift to having a market-determined fluctuating price and be linked to the European Union emission trading scheme. What Rudd is proposing is to accelerate this shift from the fixed price to a internationally linked market-determined fluctuating price by one year.

Why is this a problem?

Accelerating this shift to an internationally linked market-determined price is a problem for climate action because the current international carbon price, trading at between $4−6 tonne CO2e, is much lower than the current fixed price on carbon. When the Clean Energy Future package was initially passed it was recognised that there were foreseeable risks that the market price of carbon might be either low or extremely volatile. Therefore a 'floor' and a 'ceiling' on the price of carbon was included for at least the first three years (1 July 2015 – 1 July 2018) to make sure market-set prices would not drop below A$15 pre tonne CO2e (increasingly by 4% annually) and therefore not be too low to be environmentally effective.

On 28 August 2012, the Australian government and the European Commission announced their intention to link the Australian emissions trading scheme (ETS) with the European Emissions trading scheme (EU ETS) by 2015. In order to facilitate the link two significant changes were made to the Australian ETS. The first of these was scrapping the legislative guarantee of a minimum or 'floor' carbon price. The second change was further restriction on the use of international offsets in the scheme so that between 2015 and 2020, only 12.5% of emission reductions can come from Kyoto offsets units from the Clean Development Mechanism and Joint Implementation. However, 37.5% of each company's obligations can come from EU Allowance units. There is a huge glut of EU Allowance units in the EU ETS market system currently. Australian firms will be buying the free permits allocated to polluters in the EU.

Multiple reasons to scrap rather than speed up a move to an internationally linked emission trading scheme

There are good reasons to oppose the plans to link two fundamentally flawed schemes, and even more reasons to oppose accelerating this link as Kevin Rudd proposes.

If the scheme transitions to a market-determined carbon price linked to the EU scheme, the price on carbon in Australia will be determined by wider trends in international carbon markets. International carbon prices have been continuously unstable and declining since 2008, reaching a historically low price of 4.15 euros per tonne CO2e in January.

According to market analysts, there is no prospect of prices reaching levels that would encourage any changes in energy-generating capacity.[1] Carbon analysts RepuTex expect that the price of EU Allowance units will be trading at around A$11.50 per tonne CO2e between 2015 and 2020, much lower than our current fixed price. Even if predictable high prices could somehow be engineered – which is the opposite of what the ETS is designed to deliver – they would be insufficient to drive the structural changes needed to address climate change in the absence of other measures. As it stands, accelerating the shift to an internationally linked market-based scheme will allow businesses to meet their liabilities at a much cheaper rate.

More generally there are serious problems with relying on market-based models to address the serious social, economic and moral challenges climate change presents. The solution is not to expand and complicate the ETS by linking it to more countries, but rather to scrap the schemes in favour of progressive and more effective regulation to reduce emissions and transition away from fossil fuel dependence.

1. The EU ETS has not reduced emissions.

The EU ETS has not reduced emissions across its first two phases (2005-2007; 2008-2012). Due to over-allocation of free permits (EU Allowance units) to firms participating in the EU ETS in phase I, carbon prices dropped to nearly zero in December 2007. Prices have stayed incredibly low in the phase II. Since 2008, any emissions reductions that occurred are attributable to the financial crisis, not the carbon price mechanism.[2]

The EU ETS relied on international offsets from the Kyoto Protocol's Joint Implementation and Clean Development Mechanisms. The offset projects have resulted in an increase of emissions worldwide: even conservative sources estimate that between one-third and two-thirds of carbon credits bought into the ETS 'do not represent real carbon reductions'.[3] At May 2012, industrial gas projects made up 84% of Clean Development Mechanism offset credits in the EU ETS.[4] The EU Climate Change Commissioner Connie Hedegaard said: "There are too many examples of projects with industrial gases, primarily HFC-23, where if you dig into it you can find there is a total lack of environmental integrity." Whilst industrial gas offsets have been discredited, the European Commission has been incredibly slow to remove these offsets from the scheme.

2. The EU ETS is characterized by volatile and declining carbon prices.

3. The EU ETS is a subsidy for polluters.

Whilst companies with obligations to participate in the EU ETS have been allocated more free permits than they need, almost all of the costs were passed on to consumers. Heavily compensated energy-intensive industries (iron and steel, refineries and (petro-)chemical utilities) enjoyed windfall profits of 14 billion euros between 2005 and 2008.[5] Electricity producers, too, are free to pass on to consumers the full 'opportunity cost' of compliance by increasing electricity prices, resulting in windfall profits of anywhere between 23−71 billion euros in the second phase.[6]

4. Linking to the EU ETS means linking to an accumulated glut of excess emissions currently causing regulatory headaches in the EU.

Analysts from Barclays have estimated that there is currently a 1.68 gigatonnes oversupply of emissions in the EU ETS, an oversupply almost equivalent to Europe's predicted emissions for 2012 (1.95 gigatonnes). The European Parliament has just voted to address this problem by 'back-loading' excess emissions; that is, postponing the auction of 900 million tonnes of extra allowances from 2013−2015 until 2016−2020. Even the European Commission recognises 'back-loading' is only a short term fix.[7] This problem simply defers rather than addresses the crisis of excess permits.

5. The Australian ETS repeats the EU ETS flaws.

The Australian ETS has repeated, rather than learned from, the failures of the EU ETS, particularly in regard to compensation and carbon offset rules.

Compensation: Generous compensation in the form of free permits has been extended to the most polluting firms in Australia. The most polluting power stations stand to receive windfall profits of approximately A$2.3−5.4 billion, whilst passing on the costs to households nonetheless.

Offsets: The Australian ETS rules effectively put no limits on the amount of emissions reductions that can be replaced by carbon offsets. There is a 50% limit on international offsets and under the EU-Australia ETS linking agreement, 37.5% of international offsets will be EU Allowance units – the same free permits that were heavily over-allocated to polluters in Europe in the first and second phases of the EU ETS! There are no limits on the number of offset credits from controversial land-based and forestry programs under the Carbon Farming Initiative offsets. Land carbon should not be used to compensate for burning fossil carbon – carbon embedded in land-water-atmosphere ecosystems are much more dynamic than fossil carbon contained within effectively inert fossil fuels underground.

6. The Australian ETS locks-in a fossil-fuel economy.

A reliance on international offsets is promoted based on the assumption that it is 'inefficient to meet the whole abatement task through domestic action'.[8] The Treasury modeling assuming international offsets (434 Mt CO2e ) will account for 94% of recorded emissions reductions by 2050. The 2012 Energy White Paper has the same assumption that emissions reductions will be outsourced overseas and coal and gas industries expanded domestically.

7. The ETS closes the door to other, genuinely effective climate policies.

Carbon markets cannot address the challenge of climate change in an effective or a just way. If we are serious about tackling climate change we need to take action to transform our energy infrastructure and to shift away from fossil fuels, especially coal.

We need direct regulation on climate change

There are effective and progressive policy options available now.

• Supporting the roll out of 100% renewable energy, especially government-funded, community-run renewable energy projects
• Transitions toward zero carbon in stationary energy, building, land use and transport.
• Hypothecated carbon income and corporate taxes could be imposed to fund renewables, to finance just transitions in coal-dependent communities, and to meet international obligations. These taxes would have a progressive effect on income distribution.
• Stop using taxpayers' money to provide handouts to big coal and gas corporations and make the miners pay their fair share in taxes.
• Reject current development proposals for coal ports, mega-mines, dams and unconventional gas wells in significant areas.
• Put in place an urgent moratorium on coal seam gas and other unconventional gas mining.
• Full phase out the Australian coal export industry
• Decommissioning coal-fired power stations
• Create no-go zones to protect productive agricultural land, national tourism icons and all residential dwellings from coal and gas mining.
• Strengthen federal environment laws to exclude coal and gas mining from important water sources, cultural heritage sites and sensitive environment areas.
• Put in place national standards on coal and gas pollution and enforce compliance.

Given the urgency of a just transition away from fossil fuel dependence, we are calling for the Australian and EU governments to scrap their carbon markets in order to make way for progressive climate policy. The struggle against emissions trading is the struggle for social, environmental and climate justice. It is a struggle for transforming our energy, transport, agricultural, production, consumption, distribution, disposal and financing systems. We call on civil society organisations and movements to endorse this call and join the fight to abolish the ETS.

Beck Pearse and Julia Dehm work on the FoE Australia Climate Justice campaign focused on forest carbon offsets and carbon trading. beck.pearse@archive.foe.org.au, juliadehm@yahoo.com

References:

1. François Joubert, Head of EDF Trading told Risk.net stated that "A price above €45/tonne would currently be required to switch from coal to gas in the UK. Needless to say, these levels are currently out of sight." Joubert in Maroo, Jay, "EU ETS faces back-loading test," Risk.net, 26 February 2013.

[2] EEA, "Greenhouse Gas Emission Trends and Projections in Europe 2012: Tracking Progress Towards Kyoto and 2020 Targets," (Copenhagen: European Environment Agency, 2013).

[3] Wara, M and Victor, David G, "A Realistic Policy on International Carbon Offsets", in Program on Energy and Sustainable Development Working Paper (Stanford University, 2008).

[4] Point Carbon, "Use of offsets for compliance within EU ETS up 86% on 2011," Point Carbon, http://www.pointcarbon.com/aboutus/pressroom/pressreleases/1.1902674.

[5] de Bruyn, S et al., "Does the Energy Intensive Industry Obtain Windfall Profits through the EU ETS?," (Den Haag: CE Delft for European Climate Foundation, 2010).

[6] Point Carbon, "EU ETS Phase II – The Potential and Scale of Windfall Profits in the Power Sector," (WWF and Point Carbon Advisory Services, 2008).

[7] EC, "Report From the Commission to the European Parliament and the Council," in COM(2012) 652 (Brussels: European Commission, 2012).

[8] Commonwealth of Australia, "Strong Growth, Low Pollution: Modelling a Carbon Price," in Update, September (Canberra: Treasury, 2011), 96.