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You can save the world

Article from: Herald Sun

Jack Pezzey

July 23, 2007 12:00am

PRIME Minister John Howard has announced a carbon-trading scheme to cut greenhouse gases.

But how does carbon trading work, and where do greenhouse emissions come from?

About three quarters of Australia's emissions, which are just 1.5 per cent of global emissions, are CO2 from burning carbon fuels such as coal, oil or gas.

Once CO2 is produced, it is very costly to clean up and one way of doing this would be to capture it from exhaust stacks and store it underground. This is called geosequestration.

Of course, it is far cheaper to burn less fuel, but how to do it and who will do it?

Should a power station switch from coal to gas, which contains much less carbon, or to solar power which uses none?

Should households use one fridge instead of two?

Should commuters cut, say, a $250-a-week fuel bill to $150 by changing from a 4WD to a smaller car, or move house and job closer together?

There is no way any government could make such decisions for us, even if we were crazy enough to let them try.

And that is the beauty of carbon trading.

It lets us decide. Companies will be free to change their fuel source, install a better boiler, or whatever is best for them.

And we as consumers can choose our CO2 emissions, provided we are willing to pay the price.

We will be able to decide by how much we will cut our consumption of electricity, petrol, gas, or other carbon-gobbling products such as steel or aluminium, which will all increase in price.

All these decisions together give the least-cost way of cutting total emissions. Yes, those prices must and will go up under carbon trading, with electricity showing a bigger price increase than petrol.

Electricity uses more carbon to produce and is not already highly taxed.

To create a cap-and-trade system, the Government must first set caps or targets for easily measurable greenhouse emissions.

This is basically CO2 from fuel burning, hence carbon trading. These caps need to be set for each year until well into the future and at levels well below current trends.

Government must then issue permits equal to each target, selling some and giving some away.

Companies required to have permits will be able to trade them with each other.

For instance, when a company installs a better boiler, it can sell its extra permits to a company that finds it may have to increase its emissions.

This trading will set a market price for CO2 permits that will force carbon prices up and consumption down.

Finally, anyone who offsets atmospheric carbon in a measurable way, say, by planting or buying into tree plantations will be given carbon permits to sell.

Sensibly, the Government proposes that only big emitters, such as power stations, will need direct permits.

Small emitters, such as motorists and households, will pay for the carbon content of petrol and gas through higher prices, with the actual permits being bought by petrol and gas companies.

The public and smaller companies will not trade in carbon directly.

Most of the debate about the Government's scheme has been about its slowness in coming.

The short-term target won't be set till 2010.

That matters, but who gets the permits really matters, because permits could easily be worth about $10 billion a year.

Big companies such as power stations should be made to pay for most of their permits. Permits in Europe were free and it resulted in billion-dollar windfall profits for power stations.

That was because higher electricity prices had already allowed the companies to pass on most of their carbon-control costs to the consumer. At most, only net costs, allowing for these pass-on costs, might deserve compensation, which probably means giving them less than half their permits for free.

But just how much less than half?

And what will the Government do with its revenue from selling the other permits?

Don't we consumers, already slugged with higher energy prices, deserve compensation too?

Don't redundant coal miners deserve help to retrain for other jobs?

Here's where a ripoff can come in.

The Howard Government promises to give some free permits to compensate firms likely to suffer "disproportionate losses of value" because of carbon trading.

To do this it needs two years to monitor emissions and estimate these losses.

So far, there has been no mention of who gets the permit revenue, or if compensation will be paid to consumers or workers.

The Government does not have the data to estimate these costs because it has been asleep at the wheel on climate policy for the past five years.

But this means some companies will have an incentive to boost their emissions over the next two years, in the hope of getting a bigger handout of free permits.

The Government says it will stop this happening, but doesn't say how.

Carbon trading is a ripper idea, but the consumer must be protected from being ripped off by any government giving away too many free permits.

JACK PEZZEY is an environmental economist at the Australian National University

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