Carbon Trading
Posted: October 05, 2008
The government calls it a Carbon Pollution Reduction Scheme (CPRS) and the opposition calls it a tax. Everyone else calls it carbon trading. Most Australians are in favour of it, even though most of us don’t know what it is.
The recent Garnaut Review promotes a carbon emissions cap and trade system as the most cost-effective way of cutting greenhouse gas emissions. The basic idea is that major producers of greenhouse gasses will need to buy permits to cover their carbon dioxide emissions. The number of permits available will reduce from year to year, in line with emissions reduction targets. Over time the price of permits will most likely rise, creating an incentive for companies to improve efficiency. The other incentive is that if Company A can reduce its emissions at low cost, it can sell its surplus permits to Company B. This may mean that inefficient plants, such as some power stations for example, become economically unviable and shut down.
Companies that can reduce their energy consumption or switch to low-emissions energy sources clearly gain a comparative advantage. Renewable energy sources, such and wind and solar power, become more competitive. This stimulates further investment into clean energy technology and improved energy efficiency, all of which contribute to further reductions in greenhouse gas emissions.
That’s the basics, but we won’t know the final details of the Australian scheme until later this year. It appears that about 1,000 companies or industrial plants will need to source permits to cover their emissions. Despite being a significant source of greenhouse gas emissions in Australia, difficulties in measuring emissions from agriculture mean that this sector won’t be included in the first version of the CPRS.
Carbon trading is complex, and will create winners and losers. Winners include clean energy companies, financial institutions that trade in permits, and, hopefully, planet Earth. On the losing end may be heavy users of electricity and fuels, such as airlines, transport companies and older power stations.
What about the cost?
A primary aim of carbon trading is to make carbon pollution more expensive, and this will increase the price of gas, electricity and petrol. But to look at its impact on individuals, we need to remember that a key aim of carbon trading is to change behaviour in relation to energy use. It’s also important to differentiate between price and cost.
Petrol prices went up recently, but many people reduced their fuel costs by switching to smaller cars, using public transport and driving less. A simple example: four neighbours forming a car pool to commute to work could reduce their petrol consumption by 75%!
Energy efficiency improvements and changes to behaviour are the cheapest ways of reducing carbon emissions. Installing a solar hot water system, improving insulation and switching
to low energy appliances will all pay for themselves within a few years and reduce the future costs we face from a carbon trading scheme.
We’ll see many changes as a result of carbon trading, and who knows—maybe energy planning will become a routine part of every financial plan?