Australian Carbon Trading Scheme - Green Paper

Green Paper

The draft Garnaut Report, issued on 4 July, was only one of many inputs into the policy-making process. The Labor government also issued a "Green Paper" on 16 July 2008 that described the intended design of the carbon trading scheme.

The Carbon Pollution Reduction Scheme, was a market-based approach to greenhouse gas pollution, to be implemented in 2010 (Department of Climate Change, 2008, 9). The main concern for the Australian government was getting the design of such a scheme correct, so that it would have complemented the integrated economic policy framework, and would have been consistent with the Government’s commercial strategy (Department of Climate Change, 2008, 10).

The objective of the Carbon Pollution Reduction Scheme was to meet Australia’s emissions reduction targets in the most flexible and cost-effective way; to support an effective global response to climate change; and to provide for transitional assistance for the most affected households and firms (Department of Climate Change, 2008, 14).

The basis of a Carbon Pollution Reduction Scheme was a cap and trade system, and was a way of limiting greenhouse gas pollution, as well as giving individuals and businesses incentives to reduce their emissions (Department of Climate Change, 2008, 11). The Australian Government would have set a cap on carbon emissions, consistent with longer term goals of reducing Australia’s emissions by 60% compared with 2000 levels by 2050 (Department of Climate Change, 2008, 11).

There were two definite elements of the cap and trade scheme: the cap itself, and the ability to trade (Department of Climate Change, 2008, 12). The cap is the limit on greenhouse gas emissions imposed by the Carbon Pollution Reduction Scheme. The system aims at achieving the environmental outcome of reducing greenhouse gas emissions, the idea being that capping emissions creates a price for carbon and the ability to trade ensures that emissions are reduced at the lowest possible price (Department of Climate Change, 2008, 12). Setting a limit means that the right to emit greenhouse gases becomes scarce, and scarcity entails a price. The Carbon Pollution Reduction Scheme would have put a price on carbon in a systematic way throughout the economy (Department of Climate Change, 2008, 13).

The ‘covered’ sectors are sources of emissions subject to the cap, which were specified in the Carbon Pollution Reduction Scheme (Department of Climate Change, 2008, 12). After setting the cap, the Government would have then issued permits that are equal to the cap. The Green Paper gives the example “if the cap were to limit emissions to 100 million tonnes of CO₂-e in a particular year, 100 million ‘permits’ would be issued that year” (2008, 12). For every tonne of emissions emitted, a source of emissions would have been required to acquire and surrender a permit (Department of Climate Change, 2008, 12). About one thousand firms were expected to have obligations from the Scheme.

The price of emissions would increase the cost of those goods and services that are most emissions-intensive (Department of Climate Change, 2008, 13). This means that there will be a change across the prices of goods and services across the economy, reflecting how emission-intensive the goods or service is. That therefore provides businesses and consumers with incentives to use and invest in low-emissions technologies.

The second essential element of a cap and trade scheme is the ability to trade. Since carbon pollution permits will be tradable, the price of permits will be determined by the market (Department of Climate Change, 2008, 13). The main idea behind this part of the scheme is that a firm who can undertake abatement more cheaply than the permit price will do so, and that a company will pay for permits if the cost to it of lowering its emissions exceeds the cost of the permits. By trading among themselves, firms achieve the scheme cap at the least cost to the economy (Department of Climate Change, 2008, 13).

The cap would only achieve the desired environmental objectives if it is enforced. This means that firms responsible for emissions covered by the Carbon Pollution Reduction Scheme must monitor their emissions and report them accurately to government (Department of Climate Change, 2008, 12). The reported emissions data would need to be monitored and verified.