Wednesday, March 15, 2006

The Topsy-Turvy Politics of Climate Change

There are two major political parties in Australia. Only one of them trusts markets. That’s the inescapable conclusion to be drawn from comparing the Government’s position on climate change with the Opposition’s, released last week.

The Government can’t countenance the idea of allowing traders to buy and sell licences to pollute.

Kim Beazley and his otherwise Left-leaning environment spokesman Anthony Albanese not only want to allow trading in pollution licences but also want to hand them out for free, with the most licences going to those firms that pollute the most.

It’s a policy that is not only pro-market, but also pro-polluter. So why on earth aren’t environmentalists screaming?...

Because there are some problems that markets are extraordinarily good at solving, and in the most painless way possible.

The idea of trading in pollution permits has an impressive parentage. When in the mid-1990s the United States had a problem with acid rain it handed out permits to emit sulphur. The firms that polluted the most got the most permits. And then it encouraged the Chicago Board of Trade to set up an exchange on which those permits could be bought and sold.

Polluters liked the idea because they could make money by installing filters on their chimneys and selling the excess permits they no longer needed. Firms that found it difficult to install filters didn’t need to. They could go to the exchange to buy the excess permits, providing a tidy profit to those firms that had installed filters.

Each year that followed the US handed out fewer new permits. Over a decade the price of a sulphur emission permit on the exchange climbed from $US100 to $US800 a ton. The polluters who could cut back found themselves rich. Those that couldn’t found business increasingly expensive — but not as expensive as it would have been if they had been made to install filters. The market rewarded the firms that could cut emissions cheaply and cushioned the blow for those that could not.

The European Union introduced the first scheme for trading in permits to emit carbon in January last year. It handed out permits to 12,000 carbon-intensive businesses such as oil refineries, electricity generators, and iron and steel foundries. Any firm found emitting carbon without such a permit faced a steep fine.

And then it sat back and waited. At first, the permits weren’t much traded. Their price actually fell. But then the EU knocked back a number of applications for extra permits and the price soared, leapfrogging from €6 per tonne of carbon to around €27 per tonne at the moment.

Along the way an entire new industry of professional carbon permit traders evolved. Once you get used to the idea it is not unusual. Financial markets that trade in bonds are just as bizarre. In his book Bombardiers author Po Bronson describes a bond trader who one day demands to see an actual bond, ‘… any kind of bond. He says he can’t sell bonds anymore if he’s never seen one.’

It is too early say whether the EU’s trading scheme will actually cut the amount of greenhouse gasses emitted by the EU. But there are reasons for confidence.

Over the ten years since the US sulphur trading scheme was introduced, sulphur emissions there have halved. In some parts of the US acid rain is down 25 per cent. The annual saving in healthcare costs is said to top $US20 billion.

The US and Australia would have seemed to have been likely starters for a European-style carbon trading scheme. Both have governments that are thought to approve of market-based solutions and

Yet both have said no to a legislated system of tradeable carbon pollution permits. This might be because they have both refused to sign up to the greenhouse gas reduction targets set out for them in the Kyoto Protocol. Yet the two questions — targets and means to achieving them — are really quite separate. It is possible to have a system of tradeable permits together with a very mild greenhouse gas reduction target. It is also possible to have no system of trading at all and a very severe and damaging greenhouse gas reduction target.

Permit trading is simply the most polluter-friendly means of achieving whatever target the government sets.

Support for the idea is spreading. In Britain, Tony Blair wants to extend the European scheme worldwide. Japan will begin a pilot program next month. Eight States in the US are banding together to introduce their own unified trading scheme without waiting for President Bush. And in Australia, New South Wales and Victoria are considering combining separate State-based schemes for carbon trading in the electricity industry into one semi-national market.

Even the Coalition may not be able to resist the lure of market-based solutions for much longer. Australia’s Environment Minister, Ian Campbell, says carbon trading might have a place in the future, but that he first wants to kick start some ‘breakthrough’ pollution-fighting technologies.

This preference for ‘picking winners’ over harnessing the power of prices may only be temporary. The Treasurer Peter Costello is said to privately support emission trading. His nemesis Malcolm Turnbull lives and breathes market-based solutions. Generational change might soon make Labor’s policy bipartisan.