Australian emissions trading scheme review

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The Garnaut Climate Change Review’s approach to mitigation was initially set out in the Interim Report in February 2008. This paper focuses on the key role for an emissions trading scheme (ETS) in those mitigation efforts. It recommends an approach for Governments to consider in developing and delivering an effective ETS. Further consideration, informed by detailed economic modelling, will be given to these issues in the full reports of the Review.

The centrepiece of the ETS is a greenhouse gas emissions market. A price on carbon is needed to address the market failure of unpriced greenhouse gas emissions. A Global Challenge: Climate change is a global issue requiring global solutions. Australia’s efforts both internationally and domestically need to be situated in this context. Reducing the risks of dangerous climate change to acceptable levels requires a comprehensive global agreement, which will be difficult to achieve and take time to build. Emissions targets for Australia will eventually be defined through such agreement.

It is not in Australia’s interests to free ride, nor to act in isolation. We should set an emissions budget and specific reduction targets prior to the emergence of a comprehensive global agreement, but comparable in adjustment effort to those accepted by other developed countries.

Target and trajectories: Australia should declare the ambitious emissions budgets and target trajectories that it would be prepared to accept in the context of an effective, comprehensive global agreement. Along with the design of the ETS we can announce a set of trajectories of permit releases over time, consistent with our emissions budgets. The trajectories should embody rising degrees of constraint. Any shift in trajectory should only be triggered by movement towards stronger effective international mitigation commitments.

To live within our emissions trajectories, Australia can require a permit to be acquitted against any emissions, and can allocate permits for specified amounts of emissions that sum to the budget. Economic efficiency will be maximised and the costs of abatement minimised if there are no constraints on how each permit is used.

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