What's all this emissions trading scheme (ETS) fuss about? Here's an introduction to the concept of an ETS by Rural Press environmental writer, Matt Cawood, written as a question and answer.
• What is an emissions trading scheme (ETS)?
- An accounting framework that allows for trade in what is effectively a new form of currency – emissions permits.
The Australian ETS will largely be governed by the rules laid down in the international Kyoto Protocol.
• Why is Australia developing an ETS?
- As an international citizen, Australia has a responsibility to cut down its greenhouse gas emissions, considered to be the main driver of global warming and thus climate change.
By signing the Kyoto Protocol in 2007, Australia formally committed to this aim, and to driving down national emissions to 40pc of 2000 levels by 2050.
• How?
- Taxation could be used to drive down emissions, but would allow for little flexibility and innovation.
- An ETS with regulation would underpin the more flexible “cap-and-trade” system.
Industries will be given an initial “cap” on emissions — the industry’s estimated emissions levels in 2000 — and will only be able to exceed that cap by buying emissions permits.
The cap will be progressively lowered to force industries into continuously lowering their emissions.
At the same time, cap-and-trade would encourage innovators to explore ways of sequestering carbon so it could be sold to those businesses exceeding their caps.
• What’s the difference between an ETS and a voluntary carbon trading scheme?
- Note the word “voluntary”.
Australia’s ETS will be mandatory for all participants. Voluntary schemes will exist alongside the national ETS for special purposes that don’t require as much accounting rigor, but are likely to put less value on carbon.
This is an important point.
Under an ETS, a farmer who is charged $20 a tonne for emissions will be able to sell offsets at $20 a tonne.
A voluntary scheme may make it easier to sell offsets, but could pay only $10 a tonne, therefore not fully offsetting the $20/t cost for emitting under an ETS.
• Why the agricultural industry?
- Agriculture produces an estimated 16 per cent of Australia’s total greenhouse gas emissions.
Australia is unlikely to meet its Kyoto targets without agriculture’s contribution to emissions reduction.
Once an ETS scheme is in place, agriculture will have to be within the system if it wants the ability to trade against the inevitable costs that will be passed on by fuel, fertiliser and other inputs suppliers meeting their own ETS obligations.
• When do we start?
- Agriculture starts right away, because the decisions it makes now will affect the design of the ETS.
The ETS will be introduced in 2010, but because of the complexities of levering agriculture into the system, it may be several years before the farm sector begins operating under an ETS.
There may be transitional arrangements, possibly a form of regulation, to encourage farmers to begin lowering emissions.
• What will it cost me?
- No-one knows.
It depends on the price set for a tonne of carbon, the rules agriculture operates under, and farmers’ creativity.
Initially, the direct cost to farms should be relatively light.
The farm sector doesn’t need to instantly reduce its emissions by 60pc.
That is the 2050 target, and it will be approached incrementally.
Some farm businesses may naturally operate under their caps.
As agriculture’s cap is progressively lowered, meeting targets may become more difficult and potentially more expensive.
However, innovation will mean that agriculture, and individual farmers, will probably find ways to operate under the cap.
• Who pays?
- Because it involves 130,000 separate farm businesses, agriculture presents an accounting nightmare to the ETS.
Some would like to get around this by only accounting for agriculture’s emissions at the “point of sale” — dairies, meat processors, supermarkets.
These businesses are resisting the concept.
They don’t want the administrative burden, and argue that they can’t influence farmers’ decisions.
Despite the extra paperwork, farmers may be best served by being directly engaged with an ETS.
It gives them the opportunity to respond directly to price signals within the carbon market. It’s a bit like being clever with tax.
SOURCE: The Land,NSW