New Zealand forest (image by: Southern Forests Ltd.)

New Zealand’s Conservative government has released its first annual report on its New Zealand Emissions Trading Scheme (NZ ETS), and the general assessment is that it is working well. In the report, released August 1^st, climate minister Nick Smith implied that he was pleased with how smoothly the scheme is progressing in achieving its twin goals of reducing emissions and promoting low carbon investment in forestry and cleantech. “This report shows the ETS is working as intended, that the implementation has gone smoothly, and that New Zealand is now on target to meet its Kyoto obligations,” said Smith.

Going forward, however, the New Zealand government faces significant challenges surrounding its openness to international carbon trading. The NZ ETS also requires an increased political commitment before it has any discernable impact on low carbon investment decisions in New Zealand.

With the review panel due to release its recommendations over the coming weeks; it seems timely to look at how successful the NZ ETS has been since its inception. Before proceeding, it is important to clarify which issues were up for review. These issues include:

• The tightening of the scheme post-2012;
• The inclusion of waste-and-refrigerant and agricultural sectors from 2013 and 2015 respectively; and
• Whether New Zealand is acting too aggressively or too timidly on emission cuts.

So Far So Good

The abovementioned report released on Monday revealed a marked increase in business support of the NZ ETS, with submissions to the review panel showing 63% of businesses were now in favour of it, compared to 78% being opposed to the scheme two years ago. The skepticism towards emissions trading is somewhat understandable in light of some bad press from Europe’s established scheme.

The champions of emissions trading have had to contend with somewhat chequered outcomes: oversupply of allowances, accusations of windfall profits and instances of criminality (in the form of VAT fraud and sophisticated phishing scams) have left many proponents of the European Emissions Trading System (EU ETS) feeling a little bewildered and let down. To date, New Zealand has avoided these problems.

The Challenges of International Trading

The government’s glowing appraisal fails to include all the challenges that their tiny trading system will face. Perhaps the most critical problem concerning the NZ ETS is its willingness to partake in the international trading regime.

The decisions from both the and the European Commission on industrial gas Clean Development Mechanism (CDM) projects involving reductions of hydrofluorocarbon-23 (HFC-23) and nitrous oxide from adipic acid plants are set to radically reconfigure the global market for offsets. The European Commission has proposed a ban to come into force from January 1^st 2013.

The Meth Panel (a group of technical experts who give strategic advice to the CDM Executive Board) recently met and made recommendations regarding methodology AM0001 for HFC-23 projects. If these recommendations are ratified it will lead to a 50% reduction in Credit Emission Reductions (CERs) originating from HFC-23 projects post-2012. According to the Meth Panel this will reduce the total issuance of HFC-23 CERs to 634 million for the renewed crediting periods (see chart below). None of this output would be eligible for use in the EU ETS. New Zealand is currently the only established market place for these decreasingly relevant CERs.

Industrial gases currently comprise 68.4% of CER output to date. Disturbingly, regulated entities within the NZ ETS are allowed virtually unlimited use of CERs to meet their compliance. These industrial gas CERs could soon overshadow the New Zealand market, since post-2012 it will be the only established marketplace for industrial gas CERs. If the review panel ignores this issue and does not ban industrial gas CERs in-line with the EU ETS, the effects could be disastrous. Considering the review panel has limited trading experience, one can only hope they listen to NZ ETS market participants.

A Victim of Short-termism

Moreover, of fundamental concern is the short-termism of their governance. The purported success of the NZ ETS needs to be tempered. The NZ ETS in its current form is largely immaterial: the successes are a result of their renewable energy standards and booming logging prices from Chinese demand (which has caused a forestry boom in New Zealand), rather than their price on carbon.

New Zealand has made it clear that it has no intention of leading on emission cuts, but rather it has advocated a “follow the leader” approach. The country’s position is somewhat understandable considering their reliance on agriculture – the country’s mainstay revenue generator – which faces huge technological barriers to reducing methane emissions and is subject to intense international competition. However, there needs to be a paradigm shift in regulatory efforts if New Zealand is to incentivize and ensure the development of cleantech. To achieve this, the NZ ETS needs to be linked to federally regulated carbon budgets.

Although New Zealand does not intend to lead on the international stage, this does not negate the need for long-term low carbon development. Until New Zealand adopts a green growth strategy, like that articulated by the recently formed lobby group Pure Advantage, New Zealand’s economic and environmental performance will continue to slide, and with it a great opportunity to generate wealth worth having.

Grounded? (Source: David Jones)

The EU’s commitment to taking serious action on aviation emissions has been courting controversy of late due to its proposed inclusion of the international transport sector in the EU ETS. From 2012 all arriving and departing flights in the EU will have to be covered by corresponding emissions allowances (EUAs).

Regulating flight operators will be entrusted to individual Member States. This raises the issue of effective enforcement by countries who have a less than satisfactory track record in preventing fraud in the emissions market. Added to this is the problem of increased administration costs as levels of EUA allocations will have to be decided for a substantial number of airlines. International operators have been left feeling alienated and sceptical of the EU’s ability to direct resulting funds towards pursuing environmental goals.

Monitoring and enforcement

Each of the 27 Member States will be responsible for administering the application of the EU ETS to a number of designated operators. Once the EU Commission has decided how many EUAs will be allocated to each country, the Member States will be charged with calculating and allocating the appropriate levels of allowances to the airlines.

The number of operators within each Member State’s jurisdiction is significantly higher now that international operators are also included. While some countries have a good history of administering the allocation and trading of EUAs, in the past others have been hit by incidents of theft of EUAs from national registries and large-scale VAT fraud. The emissions market was brought to a standstill following attacks in early 2011. Competent registration and monitoring of EUAs is therefore paramount if the EU ETS is to work in its extended format.

Only time will tell if we can trust the Member States to live up to their task. The introduction of a new, centralised emissions registry at EU level from 2012 will hopefully address this concern, as managing the emissions market will no longer be within the ambit of individual Member States. However, this in turn may create its own problems of increased bureaucracy. The EU Commission could be in danger of spreading itself too thin in an attempt to regulate an overly challenging number of aviation operators.

Increased administration costs

Since Member States will have to decide on the levels of allocation to each operator, they will need to expend significant resources on analysing large amounts of unfamiliar emissions data from operators. This information is likely to be in a non-standardised format which may well differ between airlines and thus increase the administrative burden. To what extent the Member States will have the capacity to verify the accuracy of the data is also something that remains unclear.

How to achieve real results?

International operators have been complaining about the lack of transparency prevalent in the EU regarding the destination of the income raised from auctioning allowances. They are particularly worried that the revenues raised will simply be absorbed by individual Member States rather than spent on green technology R&D or emissions reductions. This is in addition to general opposition to the application of the EU ETS in a way which is perceived as illegal in its disregard for non-EU states’ sovereignty.

The combination of mistrust on the part of operators and the questionable capacity of the EU mechanisms to adequately police the extension of the EU ETS outside its territorial remit is a potentially toxic one. In reality, is it really likely that the EU will apply the ultimate sanction of excluding non-compliant operators from its airspace? Without the possibility of effective enforcement, the expansion of the EU ETS may only serve to antagonise instead of achieving environmental results.

Polluting away (Source: Alex E. Proimos)

A recent report by Sandbag, a leading emissions trading think tank, has revealed that under the EU ETS leading industrial firms have amassed a surplus of 240m emissions allowances (EUAs) between them during the 2008-2010 period. The surplus is estimated to be worth €4.1bn in the market, and is due to the combined effects of over-allocation and the economic downturn.

The crux of the EU ETS is the tradability of EUAs; firms can supplement or divest of their initial allocation in the market. The risk is that they can profit from over-allocation without making any real efforts to cut emissions. If the EU wants to act fast to reduce the surplus, it may have to cancel already allocated EUAs, something which is not addressed by the EU ETS legal framework.

The goal of the EU ETS

The purpose of the EU ETS is to allow firms whose levels of emissions fall below the number of allocated EUAs to sell spare ones in the market. However, the EU ETS envisages that this reduction in emissions levels would occur as installations develop greener, more innovative technologies of production which would pave the way towards low carbon economies in the Member States.

It is questionable whether selling surplus EUAs on a large scale complies with the environmental goals and spirit of the EU ETS. The long-term goal of emissions trading is not limited to trying to achieve reductions wherever possible without a concerted strategy and in reliance upon incidental decreases in industrial production. A recent report by the UK Committee on Climate Change highlighted the risk that reduced production caused by the economic recession would reduce the price of EUAs. This may disincentivise investment in green technologies by making it more attractive to continue purchasing EUAs without any effort to improve the environmental credentials of production.

Effects of the surplus on the emissions market

The EU emissions market has grown from $7.9bn in 2005 to $119.8bn in 2010 and now makes up over 80% of the worldwide carbon market value. Selling the considerable EUA surplus on the open market would increase the supply of EUAs and potentially drive down the market price without corresponding improvements in technology. Without a viable market, the very premise of the EU ETS, the entire regime would collapse.

What can the EU do?

The EU is faced with increased pressure to reform the EU ETS and remove at least some of the excess EUAs from the market. However, the EU Parliament has recently voted against an increased level of reductions from 20% to 30% from 1990 levels by 2020.

The EU ETS Directive is silent on whether EUAs, once allocated, can be cancelled despite their validity. It may well be that the EU wishes to retain the discretion to cancel EUAs if environmental policy so dictates. This is concerning for those firms that have been stockpiling EUAs which they are not using to cover their emissions. Cancelling valid EUAs at will could effectively amount to setting more stringent emissions targets through the back door. The effects of this uncertainty on the workability of the emissions market remain yet to be seen.

Does it matter how emissions reductions are attained, so long as they are attained? Arguably, yes. The danger posed by the EU ETS as it currently stands is that it may be disincentivising polluters from self-scrutiny and technological innovation in favour of taking the easy way out. Absent genuine emissions reductions through the development of green technologies, the effectiveness of the EU’s environmental policy in the fight against climate change could be seriously called into doubt.

Image by: Greenpeace / Nigel Marple

Article by Guest Contributor: David Hall

New Zealanders are not usually known as passionately political. So when tens of thousands of protesters marched through downtown Auckland, as they did on 1^st May this year, it was obvious a nerve had been struck.

The issue was environmental. The centre-right National Government had proposed opening 7058 hectares of premium conservation land to mining, including beloved areas such as Great Barrier Island and the Coromandel Peninsula. Public opposition was formidable and the Government officially abandoned the review in late July. It recalled the 2004 backdown of the previous National Party Leader, Don Brash, after suggesting a review of the nation’s nuclear-free policy to increase the chances of a free-trade agreement with the United States.

In New Zealand, such issues are simply non-negotiable, part of the national identity. Financial incentives have little sway against these environmental passions.

So why has the issue of climate change not been embraced by this green ideological streak?

Some reasons are the same wherever you go. Mistrust of climate science is common in New Zealand as elsewhere—although it’s always difficult to tell if this is the cause of public cynicism or a form of post hoc rationalization. Apathy is also easy when New Zealand’s greenhouse gas emissions account for only 0.2% of the global total (perhaps though the more morally relevant figure is emissions per capita, for which New Zealand is fifth highest amongst industrialized countries).

National politics haven’t helped either. New Zealand’s Emissions Trading Scheme was borne out of fractious politicking, an uninspiring sight from the sidelines. The final product is a messy melange of concessions that is, understandably, beyond the comprehension of most New Zealanders. In addition, the burden of emissions costs is being carried largely by households and small businesses, not large-scale polluters. No matter what your views on climate change, it is difficult legislation to like.

Yet certain aspects of New Zealand’s situation are uniquely challenging.

For instance, New Zealand is unable to reduce emissions by cleaning up the energy sector because two-thirds of energy production already comes from renewable sources, largely hydro and geothermal. While other countries have cut emissions by switching from coal and gas stations to renewables or nuclear energy, New Zealand has little room to move.

Similarly, reducing transport emissions is difficult in a country that is slightly larger than the United Kingdom yet has only 6.5 per cent of the population (4 million). While there is great scope to improve public transport in urban areas, a comparable national network of rail and buses is economically implausible.

New Zealand’s geographical isolation also makes it especially vulnerable to increased costs of long-haul transport. Given that the tourism and export industries constitute the bulk of the national economy (not to the average New Zealander’s love of travel), this is a sensitive issue with no simple solution. It is also an issue that New Zealand faces with the rest of the global south, looking to international trade as an engine for development.

There is also the not unreasonable suspicion that the concept of ‘food miles’ is being used to unfairly exclude New Zealand produce from northern hemisphere markets. Research shows that transport emissions are often amply compensated by New Zealand’s significantly lower emissions in food production—to the extent that New Zealand sheep meat in a British market is four times more energy efficient than British meat, and dairy two times more. Given that almost half of New Zealand’s greenhouse gas emissions come from agriculture, the nation could drastically reduce its emissions by lowering production to subsistence levels, but how would that pan out for countries like the United Kingdom that consume far more than they produce?

It is these complexities that make New Zealanders more ambivalent about climate change policy—if not climate change itself. Nuclear bans and natural landscapes stir the New Zealand soul, to the extent that many New Zealanders are happy to make an economic sacrifice. Yet the implications of climate change policy, as it presently stands, are more difficult to fathom, even for those committed to reducing emissions. Ultimately, both environment and livelihood are vital for any nation, but the latter looks more precarious when you live at the edge of the world.

New Zealand (Image by: niko)

Article by Guest Contributor: David Hall

On July 1^st this year, New Zealand’s Emissions Trading Scheme (ETS) began to turn the screw on its greenhouse gas emissions. With forestry liable since 2008, the energy and industrial sectors finally entered the carbon era.

Fuel and power companies immediately displaced the cost of greenhouse gas emissions onto consumers, raising petrol prices by roughly 3 cents a litre and the price of electricity by over 3%. Government estimates put the average annual cost at $165 per household, rising to $330 by 2012. Not much, perhaps, but enough to cause some grumbling, especially given that electricity prices had already risen 72% in the last eight years.

Unfortunately for the New Zealand public, this is only the beginning. Analysts have warned that in the first five years of the ETS, 52% of its costs will be carried by households, despite their accounting for only 19% of total emissions. Including road users and small to medium businesses, this group is expected to shoulder 90% of emissions costs while producing only 30% of emissions.

Where do these additional costs come from?

To begin with, agriculture is exempt from any costs until 2015, even though the sector accounts for 49% of the country’s greenhouse gas emissions. Until then, the Government will pick up the tab—on behalf of present and future taxpayers.

Next, the ETS employs an intensity-based allocation of emissions units (known as NZUs) which means that NZUs are allocated to companies as long as their greenhouse gas emissions do not exceed the industry average, measured in tonnes of greenhouse gases per million dollars of sales. These NZUs are eventually surrendered to Government, along with any additional credits needed to cover an excess of emissions.

As such, there is no cap on individual emissions, nor any fixed volume that total emissions cannot exceed. If the nation’s total emissions exceed its Kyoto target by 2012—presently they are 24% above 1990 levels and rising—then the Government will have to buy credits on the international carbon market. How much this will cost taxpayers will depend on market price, but Treasury has put its net Kyoto liability at $1.1 billion, with warnings that it could be as high as $5.7 billion.

Finally, the ETS provides a transition phase for export industries exposed to international competitors. Thus, until the end of 2012, each NZU is capped at $25 a tonne. Not only does this mean that any shortfall on the international carbon credit market must be met by the Government, it also dampens the price signal of emissions, removing another incentive to adopt cleaner technologies. Furthermore, during the transition phase, polluters are only required to surrender one NZU for every two tonnes of carbon. Only in 2013 will this revert to a ratio of one-for-one, yet even then industries will be gifted NZUs equivalent to 90% of 2005 emission levels, phased out at only -1.3% per annum.

Little wonder that public attitude toward the ETS is decidedly ambivalent, a combination of confusion, resignation and discontent. Politically, this is a major problem, because it fosters public hostility toward an area of policy that desperately needs its support. Widespread resentment toward an unjust distribution of emissions costs could easily mutate into (or be interpreted as) a popular unwillingness to do anything at all.

Furthermore, the over-protection of industry and agriculture from emissions costs removes any strong incentive to evolve. And that, ostensibly, is what the ETS is for. When government protections are removed, these sectors may find themselves in a world that has moved on without them—their international competitors cleaner, and their key markets less tolerant of carbon-intensive products.

This is especially frustrating in agriculture where technological solutions are both available and affordable. With half of all greenhouse gas emissions produced by agriculture, mostly from dairying, any reduction will have a significant impact on New Zealand’s overall emissions. As it stands, however, the will to adapt must come from farmers themselves, many of whom seem instinctively hostile to change. Federated Farmers’ stubborn resistance to past policy proposals is evidence of that.

In the meantime, the ETS is only expected to cut emissions by 2% at best. The policy is a demanding test of the wisdom that anything is better than nothing.

Following five weeks of intense negotiations between the Rudd government and the Opposition, the Australian Senate voted once more, by 41 to 33, against bills that would have established the Carbon Pollution Reduction Scheme (CPRS). The Greens, Independent Senator Nick Xenophon, and Family First Senator Steve Fielding joined the Opposition (Liberals + Nationals) in voting down the scheme (SMH 02/12/09).

 The Minerals Council of Australia and the Australian Chamber of Commerce and Industry welcomed the rejection, while WWF and the Climate Institute, called for a double dissolution and joint sitting of Parliament to get the original bills through (SMH 04/12/09).

 Under Australia’s bicameral parliamentary system, both houses must reach majority agreement on proposed legislation before it can go forward into law. Following a vote against a bill it may, however, subsequently be revived or presented again. That is what happened this autumn following a first rejection of the CPRS by the Australian Senate in August (see my previous post). The legislation had been put on the table again by the government in November, passing without surprise the House of Representative on the 17^th.

 The Senate no vote came after an extraordinary few weeks of drama, in which the Opposition reached a deal to support the legislation with big changes, and then reneged after its change of leadership. Indeed, on Monday, former Opposition leader Malcolm Turnbull (who was backing the passage of the Australian ETS) was challenged within its own party, and was ousted as Liberal party leader by right-wing climate skeptic Tony Abbott. The new Liberal leader, who has been portraying the scheme as Kevin Rudd’s “big new tax”, managed to convince most Liberal Senators who would have supported the CPRS to vote down the scheme (except for two who crossed to floor).

 Mr Abbott insists that he will have a credible climate change policy but is making it clear that his policy will not include an emissions trading scheme any time soon. In particular, he said it would be “folly” for Australia to establish an emissions trading scheme before the United States had settled on its model: “The right time for an emissions trading scheme is when the rest of the world is signed up for one.” (ABC 02/10/09). Abbott plans to fight a climate change election using land management and energy efficiency measures instead of an ETS, and would welcome a debate on nuclear power as an option.

 Despite the fact that Prime minister Rudd now has the option to call for a double dissolution election, which he would without a doubt win, he has played down prospects of pulling this trigger. The government has said that in the next Parliamentary sitting period commencing on 2 February 2010, it will introduce bills to establish the CPRS, inclusive of amendments incorporated following negotiations with the Opposition announced on 24 November 2009, to give Parliament a further opportunity to consider and pass legislation. Hopes to portray Australia as a world leader on the issue have now vanished, putting Kevin Rudd in an incomfortable position as a friend of the chair in Copenhagen next week.

After the Government’s Carbon Pollution Reduction Scheme’s defeat in Senate last August, the Australian Opposition, the Coalition (Liberals + Nationals), had until last Sunday to propose amendments before the reintroduction of the bill in November (for previous developments, see here). After a Party meeting lasting more than four hours yesterday, Mr. Turnbull, the Opposition leader, confirmed the partyroom had endorsed his strategy, backing “commonsense amendments” which, if agreed to, “would save thousands of Australian jobs”(The Australian 19/10/09).

Most provisions intend to provide greater exemptions to key industries. Amendments include exemptions for the coal industry, greater assistance to power generators, a permanent exemption for agriculture, greater exemptions for energy intensive industries, and protection for food processing. The detailed list is available on the Liberals’ website. The Coalition won early support for its position last night, with the Minerals Council of Australia backing its amendments. “The proposed amendments will better align the CPRS with other emissions trading schemes around the world, promote investment in low-emissions technologies and provide the necessary flexibility to adjust to the outcome of the United Nations climate change talks in Copenhagen in December,” chief executive officer Mitchell Hooke said. (SMH 20/10/09)

Prime Minister Kevin Rudd, set a six-week timetable for negotiation and debate before a vote in November. The bill will be introduced to the House of Representatives this week, and should reach the Senate by mid-November. The government will push very hard for the passage of the bill by Copenhagen and may extend Senate sittings if necessary (SMH 18/10/09). However, the Nationals and some key Liberals strongly oppose the ETS, and threaten to cross the floor if Mr. Turnbull strikes a deal with the government. The legislation might still pass under this scenario, but Mr. Turnbull will face the embarrassment of a Coalition split on the issue just weeks after declaring he would stake his leadership on success.

Cloud over climate climate change deal in Parliament House, Canberra

On Thursday (13/08/09), the Australian Senate defeated the Rudd Government’s Carbon Pollution Reduction Scheme (CPRS), a legislative package made up of a Carbon emission trading scheme and ten related bills (click here for previous developments). The Opposition, Greens, and the independents, Nick Xenophon and Steve Fielding, voted to defeat the package 42 to 30. Prime Minister Rudd has called the day “a disappointing day for Australia” and accused the opposition of “placing the nation’s future at risk” (ABC 13/08/09).

The Government is determined not to go to Copenhagen empty-handed, and will reintroduce the same legislation in three months. At that time, if the bills are rejected a second time, Labour will have a trigger to dissolve both houses of Parliament and call an early election.

Let’s have look at the opponents’ rationale for rejecting this scheme.

Malcolm Turnbull, the Coalition leader, has managed to save himself some embarrassment by gaining the support of the majority of his party room to keep alive the prospect of negotiating a deal with the Government over the emission trading scheme. Indeed, if Turnbull had directed the Coalition to vote for the Government scheme, his weakness would have been fully exposed. The Nationals, and perhaps even some Liberals, would have defied him by crossing the floor in the Senate.

However, his leadership is seriously threatened as he will have to reassess his position to avoid potentially disastrous elections, and faces an inevitable split among the Coalition. Eventually, Liberals will somehow have to support the legislative package and split from the Nationals, who are not prepared to countenance any emissions trading scheme. In the meantime, Turnbull is trying to win some time in order to offer constructive alternatives. But he is not. Two days before the vote, the Coalition had produced a policy model, commissioned from the consultancy Frontier Economics, and which Climate Change Minister Penny Wong has described as a ”mongrel” (SMH 14/08/09). The model is radically different from Labour’s scheme in that it treats electricity generation less punitively and claims to reduce the negative impacts on Australian employment, one of the main Liberal arguments against CPRS. But Turnbull has little hope of succeeding in negotiating with the Government, which is showing him no mercy.

The Greens rejected the bills because they see the Government’s 2020 emissions reduction targets – between an unconditional 5 per cent and a highly-conditional 25 per cent – as too timid; and generally condemn the CPRS’ easiness on polluters (ENS 14/08/09). Green groups are now using the defeat of the emissions trading scheme bill to urge the Government to separate its renewable energy target from the rejected trading legislation. Indeed, the renewable energy target – 20 per cent by 2020 – is set to reach the Senate next week for a vote, but is not expected to pass unless the Government removes a part of the bill that links compensation to heavy-emitting industries under the target to the passage of its now-rejected carbon trading scheme.

The Greens will move amendments to the target legislation, increasing it and removing industry assistance, and introducing a renewable energy feed-in tariff. The Opposition is also working on amendments, mainly to add extra exemptions for the aluminum and milk pasteurisation industries. Prime Minister Rudd said he would not commit to changes to the renewable energy target but that Labour is likely to separate this question from the carbon trading scheme. Next week’s vote on renewables target will therefore be an important test to see if Australian parties manage to overcome their excessive divisions. All the more so as a recent poll showed that Australians, who by a majority support the CPRS legislation, are losing patience with their politicians on climate change. (SMH 14/08/09)

The economics of reducing greenhouse gas emissions are a complicated business. And this is especially true when you want to set up a domestic cap and trade system in a carbon-dependent economy, a process both the USA and Australia are in the process of beginning to work through.

At the outset there are the problems of setting a floor and ceiling price for carbon; this ensures that it remains scarce enough to be expensive but in supply enough to prevent a domestic economic squeeze from soaring prices.

Another issue is how the permits will be given out to emitters. This is the problem that the new EU climate deal has being grappling with. On one hand, auctioning permits increases the initial price of carbon and so further reduces willingness to pay; at the same time an a

uction also generates funds for other climate change policies, such as grants for clean technology. However, on the other hand, as the EU has found, auctions are politically rather unpalatable–so much so that the EU has agreed to only auction 30% of the second round of ETS permits. As well as economic prices, then, there are political prices to take into account.

Once the price and distribution has been set, there is still the question of coordinating the system. This is emerging as a particularly important variable in the Australian carbon trading scheme. While at the federal level the purchase price of carbon is capped at AUS$40 per tonne, a report released today shows that in New South Wales the state government has been buying permits up from companies at AUS$240 per tonne.

In effect the NSW government has been paying companies a vastly inflated price to force them to reduce emissions. These kind of actions heavily distort national markets, especially those still in their infancy; in this case, they give a competitive advantage to companies in NSW in a low-carbon economy compared to those who have not been injected with capital in this way.

Pricing, Politics, Coordination: three issues that the architects of domestic carbon markets need to tackle in order to get these systems working effectively. As yet the details of soon-to-be President Obama’s domestic cap-and-trade system have not been finalised or released. However, in a country that is traditionally market-driven, with powerful industrial political lobbies, and that is highly geographically diverse and decentralised, the Pricing, Politics, and Coordination questions are big ones to answer.

Following El’s blog a few minutes ago, I wanted to give some details and thoughts that are coming in from those around the EU delegation here in Poznan.

Despite predicted NGO criticisms of not going far enough, this package was not easy to achieve, as evidenced by concessions that have been made to industrial communities as well as the central European states that joined the Union in 2004 and 2007.  These concessions relax the proposed changes to the European Emissions Trading Scheme (ETS) that had been proposed, including:

• Electricity companies can continue to pass the costs from the permits system through to their customers.  Yet, they will continue to receive these permits for free, and so will be passing on false costs to consumers, generating large profits for the companies
• Industry operating in Central and Eastern Europe will not now have to buy emissions permits from 2013.  Instead they will only have to buy 30%, rising to 100% by 2020.
  

  Source: chinadialogue @ flickr

There is also some speculation that heavy industry in Western Europe will also have some exemptions.

While these concessions are indeed a step down from the original plan, passing what is still an ambitious package during the financial crisis is indicative of the EU–and French Presidency’s–determination to deal with climate change and, in doing so, lead on it.

In comparison to the deal being negotiated in Poznan, the EU certainly does have some characteristics in its favour in terms of its leadership.  Policy in the EU, for example, is not only legally binding but also well enforced by the ECJ and Commission; violation of environmental targets has incurred severe fines as well as legal challenges in the past.  In contrast, a major flaw in the UNFCCC process has been its lack of enforcement, leading to accusations of hollow targets.

The EU package is also significant in a wider, global sense.  As I reported yesterday the UN climate change negotiations are a good example of game theory in practice, where a number of parties are required to make early moves in order to incentivise the move for other parties.  This EU package goes some way to addressing the need for this early move in the context of the COP-14 to COP-15 process.  Firm, enforcable targets gives other parties a good assurance that the EU is now committed to this emissions pathway, and so potentially makes the move to global mitigation of climate change more attractive by making the optimal equilibrium of reduced climate change a possibility.

We shall wait to see here in Poznan whether the EU deal has such an impact, although it is widely expected now that tonight’s (said with extreme caution) statement will focus on mechanisms not targets.