Transcript Alternative approaches to carbon reduction schemes Parliamentary

Alternative approaches to carbon reduction
schemes
Parliamentary Library vital issues seminar – 17 March 2009
© Frontier Economics Pty Ltd, Melbourne.
Context
Nature of policy problem
 Fast, effective response required
 Costs are upfront, but benefits arrive in the future
 Differing allocation of costs and benefits
 A global problem – countries do not gain from acting in isolation
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of particular relevance to small open economies (competitiveness and leakage
effects)
 These questions cut first to the overall reduction target, rather than scheme
design
 Scheme design issues are important in whether reduction commitments can be
achieved at lower cost
•
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all schemes will fail if they do not meet required reduction target
Scheme types
More or less, all schemes seek to do the same thing
 To switch the economics of being a cleaner producer and consumer
 It does so by changing the relative costs of cleaner production/consumption compared
to higher emission behaviour
 In switching the relative costs there is an effect on absolute prices (i.e. higher)
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Higher under some schemes than others
 It is these higher prices that cause many of the economic issues worrying policymakers
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Response is to apply more moderate targets
What are the alternatives?
 Cap and trade – works by charging for all emissions. Purely ‘sticks’ to induce cleaner
activity
 Carbon Tax – also works by charging for all emissions. Purely sticks but with none of
the benefits that come from trading emissions entitlements. Assumed to be more certain
(which is most likely to be an illusion)
 Intensity based approaches – works by rewarding cleaner production and consumption
and charging for emissions above ‘clean benchmark’. Combination of carrots and sticks
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Who is doing what?
Cap and
trade
Tax
Intensity
approach
Australia
CPRS
Switzerland
EU
USA RGGI
Korea
(planned)
Japan JVETS
Canada
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NB – solid red indicated primary mechanism;
dotted red indicates secondary mechanism
Who is doing what? (cont)
Increased emphasis on intensity-based measures in countries that are more
open to trade
 Some trade to GDP ratios:
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EU: 26.4%,
USA: 27.2%;
Australia: 44.7%;
Canada: 71.4%
Switzerland: 108%
 Reflects concerns regarding carbon leakage and adjustment through loss of
competitiveness.
•
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NB – carbon leakage a cost to global economy, not just the implementing
jurisdiction
Adjustment effects are largely assumed away in macro-modelling
 Key is to adopt scheme that is suited to economy, which maximises chances of
adoption of meaningful targets. It therefore may not be desirable, and it is
certainly not necessary, to have one uniform scheme around the world
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Intensity based approaches
Consider one variant – output-based allocation (a.k.a. the “Canadian approach”)
 Government sets a emissions intensity target – a ‘clean benchmark’ (e.g. for
sector/ industry/ activity).
 Benchmark can be set at any level – effectively the CPRS is set at zero
 Benchmark can be set to achieve same emissions cap as CPRS
 If you are above the benchmark you have to pay for your ‘excess’ emissions
 If you are below the benchmark you are ‘rewarded’ for you cleanliness
 How is cleaner activity rewarded?
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they get to sell the value of their relatively cleaner activity – by way of a clean
permit - to those that emit higher than the clean benchmark
this provides cleaner producers with additional revenue to compensate for the
additional costs of cleaner activity
Illustrative example
Emissions
per unit of
output
Can establish clean
benchmark for electricity,
steel, aluminium, pulp and
paper, transport,
agriculture… etc
Liability:
permits bought
Clean
benchmark
Surplus:
permits sold
Emissions
Emissions
High emitter
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Low emitter
Intensity based approaches
This approach has several benefits, but the biggest are:
 the absolute price effect is much smaller – which limit the concerns with
carbon leakage, and also opens opportunity to stiffen target
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Demand effects of lower prices addressed through demand side abatement
approach (which you would need to adopt under any scheme)
 the Government isn’t involve in churning revenue, which would otherwise
create its own inefficiencies
 high emitters are not let off the hook if others abate
 relatively minor change to CPRS, so doesn’t require Government going back to
drawing board
 CPRS infact adopts a variant of the intensity approach to deal with emissions
intensive activities …but
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arbitrary eligibility
subsidises higher emitters –a perverse outcome
 Intensity approach is completely compatible with other international trading
schemes
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Example of price effects - electricity
120
100
LRMC $/MWh
80
60
40
20
0
2010
2015
DCC Reference Case
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2020
2025
2030
Scenario 1: Green Paper ETS
2035
2040
2045
Scenario 2: Canadian Cap and Trade
2050
Who to contact about this presentation
Amar Breckenridge
email: [email protected]
Danny Price
email: [email protected]
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