any ETS is both an emissions floor and an emissions ceiling

19 06 2009

I’ve updated my thinking on the importance of Richard Denniss’ exposition of the futility of voluntary action under the CPRS.

I think Denniss’ expression of this reality of the CPRS as proposed was a reasonably novel perspective. The fact that it represents a ceiling as well as a floor for abatement is not something I’d really seen stated explicitly before. But it’s not a flaw of the CPRS per se, it’s how any ETS works. In fact, in many ways it’s kind of the point.

Why?

Well because by putting a price on carbon (internalising them externalities), you are sending a signal to consumers of goods that are produced in ways that generate greenhouse gases. That signal — use less of these products; or substitute for products that generate less (or no) GHGs in their production process. So adding insulation to your home or purchasing rooftop solar PV (both great things) are really an expected response to that signal. In this case responding to the higher costs of fossil-generated electricity (or natural gas, for heating). Stimulating such changes is a major part of what an ETS is intended to do.

It is true that if you reduce your electricity consumption by installing PV and improving overall energy efficiency you make it ‘easier’ for players (other polluters). That’s because if you use less then there is now a larger proportion of the original to be consumed somewhere else. Somewhat perversely, if you don’t reduce your consumption (or, ahem, even increased it…) then more electricity would need to be generated and if it continues to come from fossil fuels then those electricity generators will either have to genuinely abate (eg, invest in renewables), or they will have to acquire more permits, which drives up the permit price. Higher permit price means it’s tougher on those other polluters.

But the key factor in all of that is the level of the overall emission cap. If it’s, say, insultingly, pitifully low — as the CPRS is heading for — then no-one needs to abate much and the permit price won’t be very high (hell, it might even trend to zero with a decent Renewable Energy Target operating in parallel). So when this happens, those voluntary actions are much more likely to be significant — so significant that they could make it even easier for the main polluting interests, amazing though that is,  than the ETS itself.

And so the truly important facet of any ETS, both in terms of actual environmental efficacy — you know, the reason we’re here: abating GHG emissions — and in terms of redressing the floor=ceiling issue, is to set a meaningful cap in the first place. If the CPRS did that, then voluntarism would really not be a problem.

Oh, and want to offset, force emission reductions, etc? Buy a permit and retire it. If they let us.

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