Australia’s Prime Minister, Kevin Rudd, has announced some changes to the proposed carbon pollution reduction scheme legislation. In short, this is what is being proposed:

  1. The scheme will be delayed until July 2011;
  2. In 2011-2012 the carbon price will be set at $10/tonne and there will be an unlimited amount of permits;
  3. Emissions trading will be begin proper in July 2012 — I don’t know if there will be any price caps or floors after July 2012.
  4. There will be “recession buffer” where industries eligible for assistance at the 60% rate “would receive a 10% buffer for a finite period”, while those eligible at the 90% rate “will receive a 5% buffer for finite period”.
  5. The 5%-15% target reduction range will be kept unless an agreement consistent with 450ppm CO2-e is agreed to, in which case Australia will agree with a 25% reduction on 2000 levels.
  6. Some token measures that enable households to buy and cancel permits — something that they probably would be able to do anyway.

Some of the fine print on how the targets will work is here.

I’ll reserve my final opinion until I see whet the new legislation looks like next week, but it does seem like overall it is a slight improvement. There is stuff in the scheme that is unfortunate, such as the delay, the $10 carbon price in 2011-12, and the extra 5-10% free permits to emissions intensive industries. But the targets for 2010-11 and 2011-12 in the White Paper were so weak that I wouldn’t have been surprised if the carbon price was less that $10 in those years anyway. The 5-10% extra free permits to emissions intensive industries won’t affect the overall target, but is an equity issue and a waste of taxpayers money.

In my opinion the conditional target is more important than the unconditional target, because that is what makes the most of a difference for international cooperation. The willingness to go beyond 15% emission reductions is very good news, the government has partially fixed what was the worst problem with the CPRS. Unfortunately a 25% reduction for Australia would only consistent with 450 ppm CO2-e that was very generous to Australia, and unlikely to be acceptable to developing countries, low per-capita emitters, and countries responsible for low amounts of historical emissions — in other words Australia would be getting a “special deal”, which is similar to free-riding. What Australia should be doing is be willing to accept a reduction of at least 25% by 2020 as part of an agreement consistent with a stabilisation target of 450 ppm CO2-e or less.

One way to respond to this development would be to put on the table proposals that have not been on the agenda so far. A steadily increasing price floor should be at the top of the list, as should be overhauling the scheme caps and gateways approach for setting the target (too inflexible), and the ability of firms to buy an unlimited amount of CDM credits (which have additionality problems). Only a steadily increasing price floor will drive the investment in renewable technologies that we need.

On whether the legislation should be passed, I would be very reluctant to pass it unless something was done about the scheme caps and gateways approach to setting the trajectory. The problem with the gateway approach is that the minister can set lower (and upper) bounds on Australia’s emissions forever. It is not appropriate for the minister to set any lower bound for emissions, let alone forever.

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