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Can NZ and Australia from international approaches to reducing carbon emissions?

by Jessica Irvine

International pressure is increasing on Australia and New Zealand to achieve more ambitious carbon emissions reduction targets. Meanwhile, many other nations have already implemented truly robust market mechanisms.

Kazakhstan is – unfairly – best known in Australia and New Zealand for the spoof movie Borat.

But the joke is on us.

In 2013, the oil-rich, central Asian nation successfully launched a functioning emissions trading scheme (ETS) to achieve its ambitious target to reduce emissions by 15% on 1992 levels by 2020. In contrast, Australia has made history by being the first nation ever to dismantle its own carbon pricing scheme. New Zealand’s ETS looks set to miss its emissions reduction mark.

Even as our antipodean efforts flounder, the rest of the world continues to embrace market-based solutions to climate change, according to Martijn Wilder, the head of law firm Baker & McKenzie’s global environmental markets practice.

“Its a broad, slow march that’s happening,” says Wilder, whose firm has just finished helping draft a directive that will link Kazakhstan’s scheme to the largest and oldest in the world, the European Union scheme.

Today, more than 17 distinct ETSs are in place around the world at state, city and regional levels according to a status report by the International Carbon Action Partnership released in February.

The Republic of Korea became the latest country to launch a trading scheme in January this year, bringing to 40% the proportion of global GDP covered by a trading scheme.

The list of countries with carbon taxes is also long: Iceland, Norway, Sweden, Finland, Denmark Switzerland,France, UK, Ireland, Japan, South Africa and Mexico. British Columbia in Canada also has one.

Taking in carbon taxes and emissions trading schemes,the World Bank now estimates there are 40 countries and 20 sub-national jurisdictions, including states and provinces, with carbon pricing mechanisms in place or scheduled.

“Although the international climate negotiations are under some strain, experience with carbon pricing is growing and price information is becoming more widely available,” the World Bank concluded in the latest update on the carbon market.

The World Bank has identified significant progress in countries such as Brazil, Chile, Mexico, Thailand, Indonesia and South Africa towards better carbon pricing. Even Russia is stepping up to the plate, with a Presidential decree which could set the country on a path to emissions trading in the longer term.

“All those countries are moving towards putting limitations on emissions,” says Wilder.

“In Australia, we removed our cap on emissions which was underpinned by a market-based polluter pays system to a system known as the Emission Reduction Fund where the government purchases project based offsets and in effect sees public funds used to fund projects to reduce emissions.

Wilder notes that “while it is a very important mechanism that will encourage project-based abatement, it is simply not enough for Australia to achieve real long term cuts in its emissions. Without a cap on emissions in the economy it also runs the risk that any savings could be immediately offset by uncapped emissions from the energy and transport sectors. In this respect ensuring that the government actually implements its proposed safeguards mechanism which could introduce some future emission caps based on historical baselines, is absolutely critical”.

He says unless Australia acts, its economy will be left behind and become uncompetitive.

Jeff Swartz, the director of international policy at International Emissions Trading Association, has described Australia’s actions as “setting a shameful precedent for other countries” which run counter to the prevailing global winds. “No corner of the globe has been left uncovered by the rise of emissions trading, and more policies are on the way.” New Zealand’s efforts, too, are under the microscope.

The ETS introduced in 2008 set only a “soft” cap on emissions and allowed unlimited purchases of international credits. As the world price of carbon plummeted during the Global Financial Crisis, so too did the price of credits in the New Zealand scheme, giving very little incentive for companies to actually reduce emissions. In fact, emissions from deforestation and harvesting increased and it is likely New Zealand will fall short of its target to reduce emissions by five percent from 1990 levels by 2020.

Meanwhile, global efforts to mitigate climate change are set to reach a new crescendo this December when countries meet in Paris to commit to targets and plans for a post-2020 world.

After the failure of Copenhagen, countries are coming back to the table to lay out their plans to reduce emissions by 2030.

The European Union has already indicated its intention to reduce emissions by 40% from 1990 levels by 2030. China too has for the first time indicated a date for peak greenhouse gas emissions: 2030.

Countries are now openly questioning, through the United Nations, Australia’s efforts to set ambitious targets for emissions reduction. Both political parties are committed to a five percent reduction on 2000 levels by 2020. But beyond that, the commitment is unclear. Both Australia and New Zealand are now under considerable international pressure to set more ambitious targets and achieve them through robust market mechanisms.

So how have other countries tackled the problem? And what can Australia and New Zealand learn from these experiences?

First some theory. Economists agree that marketbased solutions are the best way forward to address climate change. This means the use of price signals to allow individual firms to reduce emissions in the least costly way.

There are really only two ways to go about this. Either policy makers can set a cap on the total level of emissions and let the market decide a price for emissions – an emissions trading scheme – or governments can simply determine a price for carbon emissions themselves – a carbon tax.

Countries have tried a variety of approaches with varying degrees of success.

European Union

The world’s biggest emissions trading scheme turns ten this year. Emissions from sectors covered by the European scheme have fallen, by 13% between 2005 and 2013. But the scheme has been bedeviled with problems. The European price of carbon remains in the doldrums – at around EUR6, down from EUR30 before the GFC – thanks to a massive oversupply of permits.

The onset of the Global Financial Crisis led to a decline in industrial production well below the emissions cap set by the scheme, resulting in an extraordinary excess of permits. In hindsight, the scheme needed greater flexibility in setting the cap, rather than sticking with a pre-determined, fixed amount.

“All is not well,” the European Union’s head of Emissions Trading, Dirk Weinreich, conceded in February. “Incentives for low-carbon investments are currently too low to ensure the dynamic efficiency of the system in the long run and may result in stranded investments.” Europe has set an ambitious target to reduce greenhouse gas emissions by at least 40% in 2030 compared to 1990 levels. Work is being done to establish a Market Stability Reserve which could soak up excess permits and be used to stabilise price fluctuations in times of extreme
swings in demand.

If there is one major lesson from the EU, it is that emissions caps need to be set flexibly and low enough to create scarcity for emissions permits to ensure resulting carbon prices are high enough to affect behaviour.

British Columbia

The Canadian province of British Columbia is widely cited as a success story of emissions trading. The province introduced a carbon tax in 2008 at a relatively low rate which has now risen to a robust 30 Canadian dollars per tonne of emissions. The scheme is comprehensive, with no concessions to energy-intensive industries. Importantly, the scheme is also revenueneutral, with all revenue raised spent on tax cuts and compensation for those affected by the tax.

This aspect was well telegraphed, with good results, according to the World Bank: “The public responded in a broadly positive manner … the revenue-neutrality feature was key to securing public support and even the business community was mildly supportive of the tax.”

“The BC carbon tax was designed with contributions from academic experts through confidential exchanges, but there was no lobbying or open debate in the media.”

Despite a fuel price spike and intense criticism, the tax has remained in place. Revenue from the tax is now so significant to the BC budget that even politicians who oppose it can’t find a way to abolish it while also making budget ends meet. The tax has also had a significant environmental impact. Between 2008 and 2011 BC reduced its emissions per capita from sources subject to the tax by ten percent, while the rest of Canada only reduced emissions from those sources by one percent.

Nordic Countries

It may surprise many to learn that there have been carbon taxes in operation in the Nordic countries since the early 1990s. Finland introduced its Hiilidioksidivero (CO2 tax) in 1990, becoming the first ever carbon tax in the world. It taxes consumers of fossil fuels, with some exemptions, covering 15% of total emissions. The price is high at $US83 for liquid traffic fuels and $US48 for heating fuels.
Sweden followed suit in 1991 with a tax covering fossil fuels used for heating and motoring – responsible for a quarter of Swedish emissions. Norway also introduced its own tax in 1991, applying to consumption of mineral oil, gasoline and natural gas.

The following year, Denmark introduced its carbon tax applying to oil, gas, coal and electricity, covering 45% of total emissions. The tax was introduced with full refunds initially, which were slowly taken away. The secret to Denmark’s carbon tax longevity, according to the World Bank, was that: “The Danish carbon tax was designed to minimise effects on the competitiveness of industry. The tax was implemented gradually and differentiated between energy uses.” All these taxes remain in place two decades later.

United States

While the world’s biggest economy is a long way from establishing a nation-wide emissions trading scheme, it is home to a number of flourishing regional schemes.

The economy of California is the largest in the US and has been covered by an emissions trading scheme since 2013. But the first mandatory trading scheme in the US was the Regional Greenhouse Gas Initiative.

The initiative includes nine states – Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont – who have collectively reduced power plant emissions by 40% between 2005 and 2012. Meanwhile, they have grown their economies by seven percent on average, proving that – despite difficult economic conditions – carbon pricing need cause no significant detriment to economies.

The experience of the United States suggests that, even if national governments fail to agree on a carbon pricing mechanism, local regions can take their own action to reduce emissions. In much the same way that the failure of multilateral free trade negotiations through Doha led to the proliferation of bi-lateral trade agreements, the failure of global climate talks is no bar to local action. And in the same way there are unilateral benefits for countries and regions in dropping tariffs and having freer trade (they get cheaper imports), so too can economic sub-regions benefit from transitioning to a greener economy.

Tokyo

Home to 13 million people and one fifth of the Japanese economy, Tokyo is also home to the world’s first urban emissions trading scheme. Launched in 2010, the scheme covers the city’s large offices and factories, which together account for a fifth of Tokyo’s emissions. It operates like any other cap and trade ETS, with a cap set for emissions and facilities forced to either reduce their own emissions or buy credits.

According to the head of the scheme within the Tokyo Metropolitan Government, Masahiro Kimura, strong leadership by the governor saw the scheme passed unanimously by the assembly after a “constructive” public discussion. As he wrote in an article for ICAP earlier this year: “Our experience with introducing the Tokyo Cap-and-Trade Program also demonstrates the importance of involving major stakeholders and corporate decision makers as early in the process as possible. By engaging them at the design stage, there is a much higher chance that they will get on board.”

Emissions under the Tokyo scheme have reduced by 22% from base level, according to Kimura.

China

The leadership of the world’s most populous country has indicated a strong intention to have a national emissions trading scheme as a centrepiece of its next five year economic plan, which starts next year.

Already, pilot programs are underway in seven of the country’s most prosperous provinces, comprising Shenzhen, Shanghai, Beijing, Guangdong, Tianjin, Hubei and Chongqing.

Together, these provinces represent 27% of China’s economic output.

According to the World Bank, China now houses the world’s second-largest carbon market, covering 1,115 MtCO2, after the European Union’s scheme with its cap of around 2,000 MtCO2.

The schemes remain works in progress, with low average prices – between 3 and 6 EUROS – and problems with over-allocation. However, China’s central leadership is pushing hard towards carbon pricing and emissions reduction.

It has expressed a goal to lower emissions per unit of GDP by 40 to 45% from 2005 levels by 2020. With rapid economic growth, this still leaves room for growth. But China has also said it hopes to reach peak emissions by 2030.

While its future remains unclear, China’s carbon pricing may yet prove a triumph of sheer political determination over geography and inherent complexity.

The world is littered with examples of different approaches to carbon pricing, with varying results. Where schemes have been successful in reducing emissions, countries have generally set clear and ambitious targets, consulted with industry and often started small with city or regional schemes.

In all cases, schemes have benefited from clear political leadership and communication with the public. Proof that where there’s a will to take action on climate change, there’s a way.

Jessica Irvine is a Sydney-based economics journalist and author.

This article was originally published in the June 2015 issue of Acuity.