an evaluation of the report of the prime minister’s task group on emissions trading
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An Evaluation of the Report of the Prime Minister’s Task Group on Emissions Trading. Lowy Lunch Presentation June 6, 2007. Warwick J McKibbin CAMA, Australian National University & Lowy Institute for International Policy & The Brookings Institution. Overview. - PowerPoint PPT PresentationTRANSCRIPT
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An Evaluation of the Report of the Prime Minister’s Task Group on Emissions Trading
Lowy Lunch Presentation June 6, 2007
Warwick J McKibbinCAMA, Australian National University &
Lowy Institute for International Policy &
The Brookings Institution
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Overview
• The ETR Approach - a philosophical shift from the Kyoto Approach
• Some (implentation) differences between the ETR and the McKibbin Wilcoxen Blueprint (MWB) Credibility of long term goal Allocation of permits
• How to get the Government/ETR and Labor approaches to become bipartisan policy
• Conclusion
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ETR is not Kyoto
• Kyoto is a targets with timetables strategy –clear targets over time independent of the costs of reaching them
• Kyoto is a centralized global approach
• ETR sets goals with the timetable not specified exactly but policy steers emission reduction towards the goals based on the observed costs over time.
• ETR is a national to global approach
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What Australia Should Focus on*
• “engaging the top emitters• providing flexibility to reflect different national
circumstances• addressing competitiveness issues• coupling near-term action with a long-term
focus• integrating climate change, energy security
and sustainable development policies• addressing the need for adaptation to the
impact of climate change• delivering a politically acceptable equity
formula.”
* Page 60 of the Report
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Decentralized Linked Approach
• “A more realistic possibility might be the emergence of a global scheme through a system of linked national emissions trading schemes. Under this scenario, countries and/or regions would develop their own emissions trading schemes and other types of carbon pricing arrangements. Over time, links might be developed between individual schemes, and design features might be progressively harmonised, thereby providing the building blocks for a global regime.”
* Page 71 of the Report
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The Details of ETR
• a long-term aspirational emissions abatement goal and associated gateways to provide a context for community efforts
• maximum practical coverage of all sources and sinks, and of all greenhouse gases
• a system of permit allocation and issuance • a ‘safety valve’ emissions fee designed to limit
unanticipated costs to the economy and to business
• recognition of a wide range of credibledomestic and international carbon offset regimes
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The Details of ETR
• capacity, over time, to link to other national and regional schemes in order to provide the building blocks of a truly global emissions trading scheme
* Page 99 of the Report
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How ETR Works versus the MWB
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The ETR
• Require emitters to have an annual emission permit
• Create packages of date stamped permits out to perhaps 40 years (medium term permits)
• Allocate some of these medium term permits to affected industries
• Auction some – keep the rest for future allocation• Trade the allocated permits in a market with a
futures market trading future permits• Allow emitters to pay a “safety valve” penalty if
they don’t have enough permits in a given year• Every 5 years assess whether to auction more
permits
Figure 7.1 Illustrative emissions trajectories
Source: ETR page 101
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Figure 7.2 Illustrative price paths for carbon permits and the emissions fee
Source: ETR page 101
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MWB
• Require emitters to have an annual emission permit
• Create long term permits that give a declining permit each year for 100 years
• Allocate all of these long term permits to affected industries and households
• Trade the allocated permits in a long term market (this is a futures market )
• Trade annual permits in the annual market• Allow emitters to buy “safety valve” annual
permits at a fixed price from the government if they don’t have enough permits in a given year
• Every 5 (or 10) years assess whether to change the safety valve price for the next 5 years
Emissions and Long Term Permits in Australia
020406080
100120
2000 2020 2040 2060 2080 2100
Emis
sion
/allo
catio
ns
long term permits actual emissions annual price reset
Source: McKibbin Wilcoxen Blueprint
Annual permit Sales - Australia
0
5
10
15
20
2000 2020 2040 2060 2080 2100
Emis
sion
s ab
ove
targ
et
Source: McKibbin Wilcoxen Blueprint
Figure 5: Annual Permit Price
0
20
40
60
80
100
120
140
160
2006
2011
2016
2021
2026
2031
2036
2041
2046
2051
2056
2061
2066
2071
2076
2081
2086
2091
2096
2101
$US
2002
Australia
Source: Author's Calculations
Source: McKibbin Wilcoxen Blueprint
Figure 6: Value of Long Term Permits (r=5%)
0
500
1000
1500
2000
2500
3000
2006
2011
2016
2021
2026
2031
2036
2041
2046
2051
2056
2061
2066
2071
2076
2081
2086
2091
2096
2101
$US
2002 Australia
Source: Author's Calculations
Source: McKibbin Wilcoxen Blueprint
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Key difference
• Long term goal is more credible under MWB
• Two step process rather than 3 steps• MWB simpler• MWB better approach for developing
countries
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Credibility of Future Price
• The current carbon price drives economic costs; the future price of carbon drives technology
• A rising future price critical for encouraging emergence of emission reducing technologies
• Re-issue of medium term permits potentially undermines the long term goal
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Issues about Allocation
• In ETR a bundle of emission permits of different durations are given to exposed industries and the remainder auctioned
• In MWB all long term permits are given
out at the start – half to industry and half to households
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Application to Developing Countries
• Example China receives a larger allocation of long term permits than current emissions (twice versus three times)
Figure 5: Annual Permit Price
0
20
40
60
80
100
120
140
160
2006
2011
2016
2021
2026
2031
2036
2041
2046
2051
2056
2061
2066
2071
2076
2081
2086
2091
2096
2101
$US
2002
Annex B China double China triple
Australia China Double
China Triple
Figure 6: Value of Long Term Permits (r=5%)
0
500
1000
1500
2000
2500
3000
2006
2011
2016
2021
2026
2031
2036
2041
2046
2051
2056
2061
2066
2071
2076
2081
2086
2091
2096
2101
$US
2002
Annex B China double China triple
Australia China Double
China Triple
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Labor versus Government
• Labor has a medium term target and timetable
• ETR recommends a long term aspirational goal with large amount of flexibility over time
• MWB is in between these two approaches of targets and timetables with flexibility based on costs
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Conclusion
• ETR is an important document that shifts the debate away from the Kyoto style policy of targets and timetables
• Government needs to shift part way back towards a more credible emissions goal to ensure high future path for carbon prices to encourage technology
• The approaches of the Government and Labour should be merged to form a bi-partisan policy.
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Background Papers
www.sensiblepolicy.com