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3CREDIT & LOSS |
Carbon credits
Sebastian Crawford
the Greenhouse and Energy Campaigner for Total Environment Centre
Carbon credits Sebastian Crawford the Greenhouse and Energy Campaigner for Total Environment Centre |
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Hot air or greenhouse saviour? In 1997 the Kyoto Protocol firmly tied emissions trading (ET) to the broader international response to greenhouse and climate change. While the world’s governments are still deciding the legislative details at a macroeconomic level, trading can facilitate emission reductions in areas where they may be achieved most cheaply, the ‘credits’ then being sold to industries or countries where reductions are more costly. For this reason ET is widely accepted as a mechanism that provides ‘flexibility’ in meeting CO2 obligations. |
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Economists, governments and industry support ET as a mechanism to facilitate a least-cost approach to meeting the Kyoto Protocol and it is generally assumed, though by no means certain, that many governments (including Australia) will introduce ET by 2008. In Australia, the Australian Greenhouse Office, State governments, the Stock Exchange, most environment groups and a surprisingly large proportion of industry support the theory of ET. Divergent views emerge, however, when it comes to implementation. When and how should ET be introduced? How should the credits be allocated? Should carbon sinks be included (such as tree planting schemes) – to allow the creation of additional credits over time? |
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Fundamental to any emissions trading system is a clear delineation of market parameters – what is included and what is not. ET in Australia will initially be restricted to large electricity generators where emissions can be calculated with a high degree of certainty. Inclusion of the transport, manufacturing and agricultural sectors may come later.
Allocating the permits –
auctioning versus grandfathering
The initial allocation of permits will represent a significant allocation of wealth. For this reason, environment and social justice groups strongly favour a system of auctioning, where polluters purchase credits in an open and competitive market. This would provide a large one-off revenue package for government which could be used to stimulate technology transfer.
The fossil fuel industry claim this could present a crippling cost and instead favour a system known as ‘grandfathering’. This would involve allocating permits (free of charge) based on current levels of pollution. After the initial allocation, then, and only then, would market trading begin.
Given the high stakes on both sides, it is probable that a hybrid approach will be adopted, with grandfathering to a base level followed by auctioning beyond that. To address this likelihood, some stakeholders have proposed an annual resumption and recycling of permits.
Under this scheme, a small percentage – say 5% – of all permits could be redeemed by the (government) regulator each calendar year. This would effectively ‘tax’ permit holders 5% per annum. The regulator could then determine to re-issue some or all of the redeemed permits back into the market. Permits released could be bought at market value, providing an ongoing revenue stream for government. The benefits of this system include:
• Allowing the regulator to control and gradually reduce permits (and thereby emissions) over time.
• Provide a flow of revenue back to the taxpayer and community, which ensures profits from a carbon credits scheme do not remain solely the domain of the private sector.
• Provide a mechanism for ‘new’ permits to be released onto the market each year and thereby allow new buyers to enter the market. This reduces the risk of carbon permits being monopolised by existing fossil fuel polluters.
• If a grandfathering approach is adopted for the initial allocation, permit recycling helps provide compensation, with permits gradually being re-allocated according to competitive market forces.
Generating new credits –
carbon sinks
The most controversial area of a carbon credits market will be the generation of new credits by sequestration – removing CO2 from the atmosphere. Planting trees – which soak up atmospheric CO2 and store it as carbon in wood – has suddenly attracted attention as a mechanism to generate money and offset ongoing emissions from the industrial sector.
Carbon stored or sequestered in trees can only be counted towards the Kyoto target if the trees have been planted after 1990, and if the land was cleared before 1990. These two points are critical to avoid land being cleared and consequently replanted simply to earn credits.
The key question, however, is how the carbon is counted. This depends on the rate at which carbon is sequestered and how long it remains in storage.
Scientific uncertainty
At present, our ability to measure biotic carbon flow is extremely imprecise. The risk is that scientific inaccuracy in measuring sequestration and stored carbon could undermine achieving real emissions reductions. This not only threatens the credibility of the Kyoto Protocol but also the value of carbon credits. While the forest sector and financial traders like the Australian Stock Exchange are aggressively supporting the inclusion of sinks in any ET scheme, environmentalists have begun questioning the benefits of sinks until greater scientific certainty can be achieved.
Conclusion
Carbon credits have become entrenched in the broader climate change debate; however, fundamental scientific and methodological problems persist. While these remain unresolved, they have the potential to seriously undermine the financial and environmental value of any carbon credits scheme. The danger is that reducing emissions at source and re-capturing carbon through sequestration are being treated by government and industry as equivalent policy options. ET should not be a mechanism that facilitates the transfer of fossilised carbon locked away for millions of years over to short-term biotic sinks. For this reason, the issue of carbon sinks is currently undermining the integrity of carbon credits and the creation of a carbon trading market.
References
Australia Institute (1999) Common Misconceptions in the Climate Change Debate. A submission to the Senate Inquiry into Global Warming, October 1999
Climate Action Network Australia (1999) Submission to the Senate Inquiry into Global Warming, October 1999
Pears, A (2000) Greenhouse Gas Emission Trading – Carbon Cult or Common Sense? A paper given to the Melbourne City Council Capital City Futures Panel, 18 February 2000-04-23
World Wide Fund for Nature (1999) Integrating Climate Change & Forest Conservation Policies, Sydney
Australian Greenhouse Office (1999) Establishing the Boundaries, Issuing the Permits, Crediting the Carbon, Designing the Market –Series of 4 discussion papers. Canberra
* Sebastian Crawford is the Greenhouse and Energy Campaigner for Total Environment Centre.
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