Twenty years ago as share prices collapsed all around him during the 1987 stock market crash television reporter Charles Wooley, then with the Sunday program performed a social experiment.
He introduced one of Australia’s brightest futures traders, sat her down for an interview, and then asked her to explain how the futures market worked. She fell about laughing.
His point was that a simple explanation wasn’t possible, even though we deserved one...
R.S. Gilbert of Turner has written asking for an explanation in “simple, layman’s terms” of how an emissions trading scheme would work and why it would help. He says that unless we can understand it we are unlikely to vote for it.
And we will be asked to vote for it later this year, at least by Labor, but quite possibly by the government itself. The Prime Minister has set up a taskforce to advise on the best model and report to him by May 31. It is accepting submissions for another fortnight.
One of the things that is hard to understand about emissions trading is how the buying and selling of licences to pollute could possibly cut pollution. Surely if we want to cut pollution we should ban it rather than licence it.
But carbon emissions are different from some other forms of pollution. They are not all bad. At the personal level each time I exhale I emit carbon dioxide and I quite keen to keep doing so.
Carbon emissions are something we need to limit rather than ban altogether. Like firearms. Guns can kill human beings but in certain circumstances they are useful. So we licence them, banning their use except by certain people in certain circumstances.
Licences to emit carbon work a little differently. What is important for carbon is not who can emit or for what purpose, but the total amount of emissions. Carbon emission licences would be a bit like some of the licences used in some places to prevent over-fishing. There the government decides each year on how many fish it wants caught (or in this case how many tonnes of carbon it wants emitted) and then issues licences for the catching of that many fish (or the emission of that many tonnes of carbon) and for no more.
The real wizardry of an emissions trading system begins after the permits have been issued.
(Theorists will tell you that it doesn’t actually matter much how the permits are issued. It could be by an auction at which the firms that need the permits can bid, each existing emitter could be given an allocation, or in a particularly ingenious scheme proposed by the ANU’s Dr Warwick McKibbin existing emitters could be given about half of what they need and the rest could be distributed like share certificates to each Australian citizen. Would be polluters would have to buy them from us.)
What is important is that the total number of permits that are issued be limited to allow for less pollution than is being done at the moment.
To simplify, let’s suppose that the only emitters of carbon in Australia are power stations. Lets say that this year they have been emitting 100 units.
If an emissions licensing and trading scheme were introduced next year the government might only hand out enough licences to allow the emission of 90 units.
Obviously each power station could comply if it cut its emissions by 10 per cent. It would be the same as if the government had legislated for a station-by-station 10 per cent cut.
But it would be a bad way of cutting total emissions by 10 per cent. Some power stations would find it difficult if not impossible to meet the10 per cent cut. They would be crippled. Others might find it easy. At little cost they might even be able to cut by 20 per cent.
Without trading in permits the stations that found it hard to cut would suffer, while the stations that could easily cut by more than required would be given no reason to do so.
Trading removes those problems. In the language of the economists, whatever the target for cutting emissions is, trading allows industry to meet it in the least damaging way possible.
Here’s how. A firm that can easily cut its emissions (perhaps because its coal-fired generator is nearing the end of its life and it can easily be replaced with a wind one) will find it has permits to spare. It might have been issued nine but only need seven, having two to sell.
Another firm, that can’t cut emissions without incurring a tremendous cost will find it cheaper to buy spare permits from the firm that no longer needs them. Its cost of producing power will go up but by nowhere near as much as it would have had it had no choice but to meet a target. Over time that firm will find that business case for switching to cleaner technology increasingly persuasive. But not all at once.
The firm that can easily cut emissions will have discovered a new way of making money, and the cleaner it makes its business the more money it will make. As a former Liberal Party leader used to say, it will become “incentivated”.
That’s the theory. It was put to the test in 1990 in the United States when President George Bush senior signed into law a new act designed to combat acid rain, caused by the emission of sulphur.
In a sharp break with the approach of the past the Bush administration issued annual permits to allow the continued emission of sulphur, but not quite as much as before. Then it encouraged the Chicago Board of Trade to set up an exchange on which those permits could be traded.
Each year the administration handed out fewer annual permits. Over ten years the price of a permit on the exchange climbed from $US100 to $US800 a ton. The polluters who could cut back easily found themselves rich. Those that couldn’t found business increasingly expensive — but not so expensive as to force them out of business straight away.
Over that decade sulphur emissions halved throughout the US. In some parts of the country acid rain declined 25 per cent. The annual saving in healthcare costs was said to top $US20 billion.
That’s the promise held out the promoters of emissions trading schemes for carbon. To work best the schemes would have to be national, not state based, or supranational as is the two-year old trial in Europe. Some promoters would like an world-wide trading scheme as proposed in the Kyoto Protocol, but fluctuating exchange rates and financial flows as well as disparate national objectives might make that difficult.
All sorts of variations are possible. But at its core emissions trading schemes allows businesses to use the tools that they are familiar with to cut emissions rather than having someone else tell them what to do.
That’s why the Prime Minister’s taskforce is likely to recommend such a scheme at the end of May.