Energy

Carbon Pollution Reduction Scheme (CPRS)

The Garnaut Report provides the intellectual basis for the present Australian, national and international, climate strategy.  This work, together with subsequent work by the Commonwealth Treasury, has resulted in the development of a cap-and-trade CPRS scheme for Australia.  This is enshrined in legislation that is currently blocked by the Senate and could provide a trigger for a double dissolution election if the Government decides to resubmit it to the Senate.

The Garnaut analysis relies very heavily on ‘near-zero emissions coal technologies’ based on CO₂ sequestration to avoid serious short term economic consequences from the CPRS to the Australian Economy.  But it seems evident, based on the preceding analysis, that the likelihood that CO₂ sequestration technologies can be implemented, on a sufficient scale to provide industry scale tradable carbon credits, is almost certainly illusory. 

If sequestration is not available as a practical solution for removing emissions, the remaining option for limiting CO₂ release to the atmosphere is not to produce it.

In essence the Garnaut report argues that:

• climate change is so important and critical to the future of the world that a very significant restructuring of the economy is justified;
• the best method of achieving this is by means of a broad based market intervention (economic distorting)  mechanism (the preferred method being ‘cap and trade’) ; and
• the scientific and engineering establishment ‘black box’ will respond to the new settings with technological solutions that preserve economic progress (and retain the coal industry).

It is easy to see the attraction of a cap-and-trade solution to an economist.  Similar schemes are already in use for tradable water credits.  If applied arbitrarily (without favour) to all carbon dioxide released, such schemes theoretically allow market mechanisms to achieve similar outcomes to a carbon tax but potentially more efficiently, with lower government administrative overheads (and without a commissariat).

But to avoid serious economic dislocations and misallocations it is very important under a cap-and-trade mechanism (that deliberately distorts markets to make releasing greenhouse gasses more expensive) that all carbon dioxide in an economy is treated equally and that market credit is only allowed for genuine reductions in carbon dioxide release (or its permanent removal from the environment).

Experience with water suggests that the most significant risk in implementing a cap-and-trade mechanism is the initial over-allocation of free credits.  But water is relatively easily defined and audited and all users in a given catchment are caught.  Additional problems exist with carbon dioxide. It is released by a wide range of means and sources (from a domestic gas water heater to motor vehicles, metal smelting and power generation, to a wide range of agricultural and natural processes, including bush fires) and there is no clear demarcation on which means should be caught or how equivalence is determined. Further, several existing schemes (and proposals) allow credits or offsets for supposed and often illusory, or temporary, carbon sequestration.

At present, tradable credits are granted in Europe to scientifically suspect (and essentially short term) carbon sinks like tree plantings (similar to those currently used by companies to claim dubious ‘carbon neutral’ status).  These have already caused considerable economic misallocation and damage to traditional agriculture in places like Portugal.

There is a serious problem in assigning equivalence across different release and absorption environments.  To resolve this, tree plantings should only be allowed as offsets for land clearance.  A total forest carbon balance is unlikely to produce a net carbon sink as clearing still exceeds replanting, bush/forest fires release millions of tons of CO₂ each year and trees are not a permanent sink but part of a natural cycle, eventually being felled or dying and rotting. Similarly other agricultural offsets should only be allowed for like activities; for example, grazing for grazing (eg cattle reductions for sheep increase). 

Any carbon sequestration offsets are problematic and need to be rigorously examined on a full carbon accounting basis.

One pilot project in Victoria proposes ‘carbon sequestration’ by converting lime (manufactured elsewhere) to calcium carbonate ‘for the paper industry’, using power station flue gas.  In the absence of full technical details this appears far less efficient than the conventional combined limestone to calcium carbonate production method (in a single plant with lime and CO₂ as intermediate factors in a closed loop).  The net effect of the proposed scheme could be more net CO₂ being generated than if the flue gas was simply released without processing and the calcium carbonate manufactured conventionally.  Under the CPRS it will be essential that such technologies are properly technically assessed before earning credits.

In the absence of substantial credits for genuine sequestration, a cap-and-trade mechanism (that is effective in reducing CO₂) must rely entirely on substantial reductions in domestic coal, oil and gas consumption.  The mechanism for this reduction must be price driven abandonment of the technologies that are the principle consumers of these fossil fuels. And relative economic contraction in energy related economic activities.

An effective CPRS therefore has significant short to medium term disinvestment implications.

Protecting the industries and consumers from these impacts with a modified cap-and-trade mechanism appears counterproductive, since these are principal sources of carbon dioxide, the limiting of which is the initiative’s whole justification. Without these industries and consumers within its scope the CPRS is simply administrative overhead and its market interventions economically inefficient and substantially futile.  The proposed exemption of agriculture is a case in point.

The proposed CPRS is a long way from the economists’ ideal.  With exemptions for special interest groups and trade exposed industry it is little more than a shadow of the initial concept.