Tue, 23 Dec 2008 02:02:27 GMT

Trade in emissions permits is a good thing.

Tim Colebatch gives us an apparent scoop in The Age: we won’t reduce emissions by 5% by 2020.

Treasury modelling estimates that even with a cleaner, more effective model than the one now adopted, Australia’s emissions in 2020 would rise 5.8 per cent above 2000 levels. We would pump out more emissions in 2020 than we do now.

Sounds damning right? Wrong. While it is true that Treasury forecasts that we will emit more in total, the permits issued by the government will be 5% less than our total emissions estimated in 2000. The apparent discrepancy is because Treasury forecasts an international agreement by 2020 that will allow trade in permits. The WHOLE POINT of allowing such trade is to allow our industries to buy and sell those permits. Turns out that we are likely to buy them.

Think about what that means. If we buy permits, some other country has less of them. That means they emit less. So Australia’s policy has enabled a 5% reduction in emissions from our 2020 levels whether we actually emit less or not. And guess what? That is the WHOLE POINT — not to reduce our emissions per se but to reduce global emissions.

Colebatch argues that international permits are not real permits and so we shouldn’t trust them. But if we can’t do that there is no point to an international agreement. Moreover, if we can’t get an international agreement then we will have to reduce emissions on our own. So the issue there is that all this will be more costly to the Australian economy than Treasury is forecasting.

This type of distrust of markets is what has led to carbon offsetting not being part of agreements such as Kyoto. That is a big mistake as it removes incentives to find other ways of gettting greenhouses gases out of the atmosphere than putting less in. We need schemes that create lots of pathways to environmental management and not less.

[CoreEcon]