The brave new world of carbon emissions trading

1 JANUARY 2003

A CSU academic says the federal Government's green paper on carbon emissions trading will force Australia to grapple with new concepts that will change the economy and the way we live.

CSU's Professor Kevin PartonA Charles Sturt University (CSU) academic says the federal Government’s green paper on carbon emissions trading will force Australia to grapple with new concepts that will change the economy and the way we live.
Professor Kevin Parton, from the Faculty of Business and CSU’s Institute for Land, Water and Society (ILWS) says trading in carbon emissions is like trading in any other commodity, and is about demand and supply determining price.
“When farmers grow and sell wheat, they get a price in the market because someone consumes it and is prepared to pay that price,” Professor Parton said.
“In this new world, farmers and others can produce another ‘good’ called carbon sequestration -  that is, taking carbon out of the atmosphere - by planting trees or implementing other carbon-absorbing activities.
“The idea of a carbon market is to get those who produce sequestration together with those who consume it.
“Who consumes carbon sequestration?
“Remembering that production of carbon sequestration means taking carbon out of the atmosphere, then consuming carbon sequestration means putting carbon into the atmosphere.
“Who puts carbon into the atmosphere?
“Those who fall into this category include anyone who uses a product that is manufactured in a process that emits carbon dioxide (CO2) into the atmosphere. This includes, as a significant example in Australia, the coal-fired generation of electricity.”
Professor Parton said a carbon market is where those who take carbon out of the atmosphere come together and trade with those who put it in, and thereby reduce the amount of carbon going into the atmosphere.
“Without government intervention there can be no carbon market, because the polluters can simply put carbon into the atmosphere at no cost,” he said. “Governments need to regulate to get the carbon market off the ground.
“How do we do this?”
The Rudd Government’s Green Paper release on Wednesday 16 July, proposes a cap-and-trade mechanism, under the Carbon Pollution Reduction Scheme. This involves the auctioning of permits by the government.  For every tonne of carbon they emit to the atmosphere, the firms that are major greenhouse gas emitters must purchase one of these permits.
“Let’s say that the price in the auction reaches $50 per tonne.  However, if firms that emit carbon can buy a permit privately for less than $50 per tonne, they will,” Professor Parton said.
“Also, permits can be created by private individuals who sequester carbon by growing forests or other means. Let’s say it only costs $20 to sequester a tonne of carbon and thus create a permit at a cost of $20 per tonne. If firms that sequester carbon can obtain more than $20 per tonne in payment for their activities there is an incentive for them to sequester.
“Therefore there is a financial incentive for emitting firms and sequestering firms to get together and trade permits for, say, $36 per tonne.
“For example, an electricity generating power station uses coal for fuel and emits, say, 10 000 tonnes of carbon. It needs to obtain 10 000 permits. It can go to the government and buy them at a cost of $500 000 or it can go to a sequestering firm and buy them for $360 000. Indeed it can sequester the carbon underground itself if the cost of doing so is less than $36 per tonne.”
Under the normal operation of a cap-and-trade policy, the government usually wants to get out of the permit trading system as soon as possible, and concentrate on setting the cap (or the total amount of greenhouse gases that will be allowed to be emitted). Direct trading between those who sequester and those emitting carbon, without government involvement, is more likely to lead to an efficient outcome, that will more rapidly lead to activities and innovations that reduce the emission of greenhouse gases. These activities will include carbon capture by polluters, improved methods of sequestration, and renewable energy generation.

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