Australia plans to introduce an Emissions Trading Scheme (ETS) in July 2012 to progressively reduce carbon dioxide and other greenhouse gases to five percent below year 2000 levels by 2020. Around 500 large emitting companies will be required to hold an allowance for each ton of emissions. Initially the allowance price will be fixed, but after 2015 it will be determined by market trading. About 25 percent of the emissions allowances will initially be given away for free to compensate trade sensitive and other vulnerable industries.
The ETS has a number of attractive features. Pricing policies (emissions trading and emissions taxes) are potentially the most effective and cost-effective policies for reducing emissions. The ETS is fairly comprehensive, including major industrial sources (e.g., power generators and gas producers). Although passenger vehicle fuels are not explicitly covered, fuel duties will rise to reflect the price on carbon emissions. Starting prices for emissions allowances - A$23 (US$25) per ton of CO2 - are approximately in line with estimated global environmental damages per ton and prevailing allowance prices in the EU ETS. And allowance banking and limited borrowing provisions will help to contain year-to-year variability in allowance prices. The majority of emissions allowances will also be auctioned, raising revenues of approximately one percent of GDP, about half of which will be used for progressive personal income tax reductions.
However, heavy reliance on emission offsets to contain price volatility could be problematic. Offset provisions allow firms to claim credits by paying for cheaper mitigation projects typically in developing countries (a large portion of the 2020 reduction target is expected to come through offsets). But offsets may not be real (i.e., the developing country project may have occurred anyway without the offsetpayment), which undermines environmental effectiveness. Alternatively, preserving policy credibility may require severe restrictions on offsets, and a correspondingly higher - and politically difficult - emissions price.
Converting the ETS into an explicit carbon tax could be a better approach. The carbon tax fixes the emissions price. This helps to strike the right balance between emissions reductions at different points in time and to create a stable environment for clean technology development. Broader tax reliefs (e.g., reductions in corporate taxes) could be provided instead of free allowances to compensate adversely affected industries. Carbon taxes at the national level also complement state-level efforts. Under the ETS, state-level policies may not affect national emissions as they are fixed by the cap. And an Asia-Pacific regional climate agreement may be easier to negotiate—and to adjust in response to scientific learning and other country actions—for a single carbon tax floor, than for a set of country-level emissions targets.
