House of Representatives, Parliament House, Canberra

By Simon Hukin:

The Business of Emissions Trading

It’s not enough saying a cap-and-trade system will work in theory. Sure, the underlying economics behind a perfect cap-and-trade system are sound, but it is very unlikely any ETS ever developed will be perfect. Ours definitely won’t be. In order to fully understand the drawbacks of non-ideal carbon trading schemes one must examine the only one presently in existence, the European Union Greenhouse Gas Emission Trading System (EU ETS).

Under this scheme individual member states each developed emissions reduction targets, then handed out credits to polluters. However, thanks largely to the work of powerful big business lobbyists, the cap was initially set far above the level strictly necessary and the vast majority of polluters fell beneath it without needing to take any action whatsoever.

The power of lobbyists is a pressing problem. In Australia as in Europe special interests, particularly big polluters (who tend to be big business), infect the political system so totally and effectively that any decision which may harm their interests is immediately vetoed. Politicians are forced to tip-toe around the coal lobby, the energy lobby and especially the menacing figure of Heather Ridout from the Australian Industry Group. Industry wins, as we’ve seen during the process of exempting or compensating ‘trade exposed industries’, no matter what the environmental impact.

Of course, Europe also highlights the problem of monitoring. Cheating the system is ludicrously simple – the environmental agencies of the member states are, in most cases, simply not strong enough to effectively police the quantity and concentration of emissions by individual corporations at individual sites. Polluters can fudge the figures without fear of reprisals. This may be avoided in Australia by providing for a strong regulatory authority, but this is, again, unlikely.

There is excellent reason to believe the polluters who are lobbying for the CPRS (particularly those represented by the Australian Industry Group and the National Farmer’s Federation) have a seat at the table when permits are being handed around. There’s no doubt they’ll attempt to either actually maximise their emissions or fudge their figures so it looks like they emit more than they do, in the hope of securing more permits. Why? There is a lot of money to be made in permit trading. Companies want to get their hands on as many permits as they can.

It is also likely the CPRS will have a deleterious effect on our power bills. Consider the recent spell of hot weather in

Power Station, Victoria. Credit: Damian Baker.

South Australia and the eastern seaboard. Power companies have had to burn more coal to produce more power, causing their emissions to rise sharply. Under the proposed ETS they would have to purchase more permits in order to offset their emissions. This  heavy demand would see permit prices leap sharply, and the power companies would pass the associated costs on to consumers.

This inherent price volatility, which has been endemic to the EU ETS, doesn’t hurt end-users alone. It also provides a disincentive for innovation, as there is a high congruence between cost and demand, meaning there is no reason to invest in research into cleaner technologies. Investors (especially venture capitalists) prefer stable prices in order to accurately calculate potential returns. After all, they need to know if they’re going to make enough money from their newfangled solar-powered iPod to pay for its production.

Part Three of CPRS: A Taxing Question published tomorrow. See Part One of the series here.

By Simon Hukin: Interested in writing on this or another category for theangle.org? Contact us via our online form.

Simon Hukin is a student at the Australian National University, General Secretary of the Western Australian Secondary Students’ Association, peripatetic music teacher and general curmudgeon. He is heavily involved in politics and the union movement.

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