We turn our attention to the issue of scheme caps (Part 2, Section 14 of the Carbon Pollution Reduction Scheme Exposure Draft Legislation) and gateways (Part 2, Section 15 of the Exposure Draft Legislation). The legislation states that the regulations must set a scheme cap for five years or more into the future; and may set a scheme gateway, with upper bounds and lower bounds for the scheme cap for the financial year beginning on July 2015, and any later financial year. This is slightly different to what is stated in the White Paper, which is that “the Government intends to provide up to 10 years of gateways beyond the minimum five years of certain Scheme caps, taking into account progress in international negotiations” (Policy decision 10.3).

There are two issues here. Firstly, are the caps and gateways that are in the government policy (the White Paper) appropriate? Secondly, is the framework for caps and gateways (the Exposure Draft Legislation) appropriate? Let us focus on the second issue.

Suppose for a moment that there was a comprehensive international agreement that not only reduced greenhouse gas emissions, but also reduced emissions in an optimal way. Reducing emissions in an optimal way would take into account the climate science, as well as the costs of mitigation and damages from climate change. The economics of climate change suggests that we should do our best to avoid even a low probability of potentially catastrophic outcomes1. The science, according to the NASA climate change scientist Dr James Hansen, suggests that if we maintain carbon dioxide concentrations of 450 ppm or more, for sufficiently long, the Earth would be pushed toward an “ice-free state”, and “the passing of climate tipping points and dynamic responses that could be out of humanity’s control”. Hansen therefore recommends that “an initial CO2 target of 350 ppm, to be reassessed as effects on ice sheet mass balance are observed, is suggested”2.

What sort of emission reductions are required to stabilise CO2 levels at 350 ppm or less? For any particular target, there is more than one trajectory to that target, and more than one way of allocating emissions between countries for any particular global trajectory. Most studies that have been done so far have focused on higher stabilisation targets, but there have been some that have included trajectories that stabilise at 350 ppm CO2. One of the more recent studies has OECD countries reducing their emissions by 5.17% per year3. No one has modelled in any detail (as far as the author is aware) what the mitigation costs of stabilisation at 350 ppm or less of CO2 are. However, there have been studies that suggest that the cost of stabilising at 450-500 ppm CO2-e of greenhouse gases are low.4

If optimal international cooperation on reducing greenhouse gas emissions was achieved, Australia could have reductions in emissions allocations of over 5% per year. This may be expensive, but an approach that is optimal globally is likely to have net benefit for Australia, more so than for most other countries. It would not in in Australia’s interest to rule out such a possibility.5

  • what the science is saying about the climate situation,
  • Australia’s high per-capita emissions,
  • Australia’s high historical emissions,
  • and Australia’s high capacity to reduce emissions or pay for emissions reductions because of its high per-capita GDP,

it is not appropriate to rule out any level of emissions reductions beyond 2015, and certainly not for an unlimited amount of years into the future. It is appropriate to have an upper bounds on Australia’s emissions for years beyond 2015, but not lower bounds. Part 2, Section 15 of the Exposure Draft Legislation should therefore be changed to reflect this issue. This could be easily achieved by removing paragraphs 2(b) and 3(b) from Section 15 of the legislation.

There are also problems with setting weak targets five years in advance: The targets for 2010-2013 are extremely weak, with the 2010-2011 target probably being greater than the amount of emissions. When combined with the 5-15% target range, there will probably be a very low carbon price. The only thing that is likely to prevent the price from collapsing is the banking of permits. It could also be argued that flexibility in emissions reductions could facilitate unforeseen international circumstances, either in the science, or in negotiations. Being able to tighten targets within shorter time-spans could also facilitate voluntary measures to reduce emissions. It is therefore recommended that Section 14 of the legislation is changed so that instead of an exact cap being set for five years, a gateway of upper and lower bounds is set for five years.

It could be argued that measures that reduce the certainty of the scheme cap provide uncertainty for investors. This is true in a limited sense, but there is also severe risk and downside uncertainty on impacts from climate change, there are uncertainties in the damage function. There is uncertainty in international negotiations. There are uncertainties in what carbon price will be required to achieve a certain level of emission reductions. There are uncertainties in the costs of emission reductions. There is uncertainty in whether the targets specified by the Australian government will be sufficient to drive sufficient to drive investment in low emission technologies. Some of these uncertainties could be managed by price based approaches, such as by having a floor on the permit price.

Measures that shift risk and uncertainty from investors to the climate are not appropriate any more, and may not be credible. This is particularly the case when it comes to measures that are not consistent with international cooperation on reducing emissions. This is because a world with poor cooperation on climate change policy is a far more uncertain world than a world where good cooperation is achieved.

1Weitzman (2009), On Modeling and Interpreting the Economics of Catastrophic Climate Change, The Review of Economics and Statistics, 91(1): pp. 1—19.

2Hansen et. al. (2008), Target CO2: Where Should Humanity Aim? The Open Atmospheric Science Journal, 2, pp. 217—231.

3Meinshausen (2006), Multi-gas Emissions Pathways to Meet Climate Targets, Climatic Change, 75, pp. 151—194 — p. 166.

4McKinsey Global Institute (June 2008), The carbon productivity challenge: curbing climate change and sustaining economic growth

5There are huge barriers to this level of international cooperation, but it is not unheard of. The Montreal Protocol on Substances That Deplete the Ozone Layer achieved a level of cooperation that was not far from optimal, this is discussed in Barrett (2003), Chapter 8.

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