The Carbon Pollution Reduction Scheme White Paper has been released. Australia’s Prime Minister Kevin Rudd has announced an emissions reduction target of 5-15% in 2020 compared to 2000 levels.

The target of 5-15% by 2020 sends a signal to the rest of the world that Australia is not willing to play its part in an international agreement that stabilises at 450 ppm or less. It does not even signal that Australia is willing to stabilise at 500 ppm or less. It obstructs a good agreement on climate change. This means that it says that we don’t care about the Great Barrier Reef, we will not make a serious attempt to stop it from being destroyed or seriously degraded. Curiously, Kevin Rudd states that 450 ppm should remain a core part of international negotiations.

Rudd and the White Paper have argued that a 5% reduction would imply greater per-capita reductions than the EU’s 20% reduction by 2020 because of Australia’s greater projected population growth. This argument is irrelevant because Australia’s per-capita emissions are much higher than the EU’s. Any international agreement that does not have high per-capita emitters reducing emissions more than low per-capita emitters would never be accepted by the developing countries in the world. Rudd’s approach makes promising per-capita approaches to climate change, such as contraction and convergence, more difficult to achieve.

In short, there are four problems with the targets that Rudd has chosen:

  1. They are too weak to correspond to the stabilisation targets that we need to avoid dangerous climate change. They effectively rule out Australian cooperation with global stabilisation targets that add up to 500 ppm or less.
  2. They are based on a model where low per-capita emitters and developing countries bear a disproportionate amount of the burden of emissions reductions. They do not take into account Australia’s high per-capita emissions and are therefore inequitable.
  3. This means that developing countries have less incentive to participate in a global agreement, making the mitigation task harder.
  4. There is considerable evidence that Australia can afford much more mitigation — the expected cost of climate change will be greater than the expected cost of mitigation.

Now for some comments on specific aspects of the White Paper.

Assistance measures: Much money is being squandered on assistance to emissions intensive industries. The coverage of assistance to “emissions intensive trade exposed” industries has been expanded to include industries that made the most noise, such as liquefied natural gas. Rentseekers have been rewarded. There will also be $3.9 billion dollars (assuming a $25 carbon price) in free permits handed out to coal-fired electricity generators. This is money that could have been invested in low emission technologies, reducing emissions from deforestation or forest degradation, or assistance to low income households. Instead it does nothing more than line the pockets of shareholders.

The large amounts of assistance to polluting industries have meant that there much less funding available for compensating households. The distribution of assistance to households is strange, households with incomes of less than $20,000 are given less assistance than households with incomes between $20,000 and $120,000. Newstart recipients will recieve $14.20 more per fortnight; people on the minimum wage will recieve $14.95 more per fortnight. No money has yet been allocated to help households increase their energy efficiency.

Low price cap on permits: There will be a price cap on permits, so the emissions cap can be exceeded by firms buying more permits at a price of the level of the cap. According to the White Paper:

  • The scheme will have a transitional price cap for the period 2010–11 to 2014–15.
  • The level of the price cap will be set at $40 commencing in 2010-11.
  • The level of the price cap will rise in real terms by 5% per year.

This price cap is less than recent estimates of the social cost of carbon from economists such as Richard Tol [Richard Tol disagrees, see comments]. It is much less than what Nicholas Stern has suggested is likely to be the social cost of carbon. Having a price cap does not make sense if it is less than the social cost of carbon.

No price floor: I have discussed why an emissions trading scheme needs a price floor here. Dr Richard Denniss, from the Australia Institute has recently pointed out a problem with purely cap-and-trade schemes, that in my opinion could be addressed by a price floor, if it was high enough. With cap-and-trade schemes, if a household decided that due to concerns about global warming, it wanted to reduce its electricity consumption, that will not necessarily reduce global warming. What it will mean is that the electricity generator would not sell as much electricity, would not need to buy as many permits, and another firm could buy the permits more cheaply. The total amount of permits will be the same. This is more of a problem when the cap is too weak.

A price floor, it it was high enough, would mean that the scheme would function more like a carbon tax, but still with an absolute cap on emissions. A price floor could be introduced by there being a reserve price when permits are auctioned, or by firms paying an extra fee when they exercise their permits.

Forestry: The White Paper proposes to cover reforestation, on a voluntary basis, and not cover deforestation. Forest entities will not be required to surrender more permits than have been issued for an individual forest stand. Only activities that are covered by the Kyoto Protocol will be included. Judith Ajani and I have shown that at carbon prices of significantly less than $20 per tonne, there will be more revenue from using plantation forests as carbon sinks that as sources of wood. Because native forest logging does not attract a carbon price, and is not properly regulated, there will be an increase in native forest logging. This is likely to lead to carbon leakage from the plantation forest sector to the native forests logging sector, and a net increase in emissions. We made some submissions to the Carbon Pollution Reduction Scheme green paper here and here.

Update: The Australian Governments’ climate change advisor, Ross Garnaut, has written an article criticising the White Paper for its conditional targets not being higher enough, the inclusion of a price cap, and the transfer of wealth to emissions intensive rent-seeking industries. This article was published in the Fairfax press, and at East Asia Forum (under the title oiling the squeaks)..