February 2009


When the leader of the Liberal Party, Malcolm Turnbull, announced that the Liberals will go for stronger targets than Labor, he mentioned that 150 Mt of carbon dioxide could be sequestered through land use, including a technology known as biochar. How likely is it that we can do this? Does Malcolm Turnbull have the right policy for achieving this?

It is hard to tell whether Turnbull has the right policies because not much has been revealed about how this will be achieved. One issue with land use emissions and sequestration is that it is hard to measure. For example, to accurately measure carbon in soil, you need to dig a lot of holes. This makes it highly unlikely that soil carbon could credibly be included in an emissions trading scheme. Treating biosequestration as an offset is also problematic. For offsets to be credible, they need to be permanent, measurable, verifiable, and additional. Many emissions associated with land use are not accounted for under the Kyoto Protocol, but are nonetheless very real.

Another problem with the above approaches is that if large amounts of carbon are sequestered, and they contribute to a given total target, then unless the target can be strengthened, the credits could flood the market. This could lead to the emission reductions from fossil fuels that are necessary for decarbonisation not taking place.

We shall now examine how many emissions reductions are possible from different land use areas. These numbers are just estimates, but they allow us tio arrive at a ballpark figure.

Related posts:

* Greenhouse Gas Emissions from Agriculture and Land Use Change
* Green Carbon

Estimated potential for sequestering carbon in terrestrial ecosystems

Sequestration or emissions reduction activity

Estimated annual sequestration potential (CO2-e yr-1)

Notes

End to land clearing

63 Mt

Emissions in 2006 from land clearing were 63 Mt CO2-e (using Kyoto accounting).

Protection and regrowth of native forests

136 Mt plus

Mackey et al. (2008)1 consider a study area consisting of 14.5 million hectares of native forests in south-eastern Australia. They estimate that it is possible to sequester 7.5 Gt CO2-e in these forests if logging is halted. This is converted into 136 Mt CO2-e per year for 100 years using an equivalence factor derived by Costa and Wilson (2000)2. Scope for considerable more storage with all native forests protected.

Rangelands sequestration

250 Mt

Garnaut (2008)3 has an estimate of 250 Mt CO2-e per year for several decades, for “comprehensive restoration of degraded, low-value grazing country in arid Australia”. Garnaut also includes an estimate of a sequestration potential of 286 Mt CO2-e per year in soil for 20-50 years for changed practices to rehabilitate previously degraded rangelands.

Soil carbon – cropped land

68 Mt

Garnaut (2008).

Environmental mixed species plantings

44 – 143 Mt

Polglase et al. (2008)4 presents three scenarios, each of which has a net annual equivalent return of over $150 per hectare per year for a carbon price of $20 per tonne CO2-e:

  1. Water yield reduction < 150mm yr-1, and sequesters 143 Mt CO2-e yr-1 using 9.1 million hectares;
  2. Land previously has a low biodiversity score, and sequesters 88 Mt CO2-e yr-1 using 5 million hectares;
  3. Water yield reduction < 150mm yr-1, land previously has a low biodiversity score, and sequesters 44 Mt CO2-e yr-1 using 3.2 million hectares.

Total

561—660 Mt

This estimate is 97—114% of Australia’s 2006 greenhouse gas emissions (576 Mt CO2-e).

1Mackey et al. (2008), Green Carbon: The role of natural forests in carbon storage. Part 1. A green carbon account of Australia’s south-eastern eucalypt forests, and policy implications, Australian National University, E Press, Canberra.

2Costa and Wilson (2000), An equivalence factor between CO2 avoided emissions and sequestration—description and applications in forestry, Mitigation and Adaptation Strategies for Global Change, 5, pp. 51—60.

3Garnaut (2008), Garnaut Climate Change Review, Table 22.2, pp. 542-543.

4Polglase et al. (2008), Regional Opportunities for Agroforestry Systems in Australia, Rural Industries Research and Development Corporation, Publication No. 08/176, pp. 77—80.

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In Phase I of the European Union Emissions Trading Scheme (the EU ETS), between 2005 and 2007, the carbon price collapsed. In April-May 2006, the price for a permit to emit one tonne of carbon dioxide collapsed from over 30 euro to less than 10 euro. The carbon price then eventually declined to less than 0.10 euro by September 2007. The primary reason for this was that too many permits were allocated — the size of the cap was higher than the total amount of emissions. Has Australia learned from what happened? Is the carbon price likely to collapse during the initial phases of the Carbon Pollution Reduction Scheme (CPRS)?

This question is pertinent because the Australian House of Representatives economics committee has been instructed conduct an inquiry into the choice of emissions trading as the central policy to reduce Australia’s carbon pollution. A low carbon price is inefficient because there is a lost opportunity to make deeper reductions in greenhouse gas pollution. This means that deeper reductions will need to be made later (which will cost more), or impacts from climate change will be greater (which will cost significantly more). This issue applies, in a much worse way, when there is no carbon pricing at all (as is happening now).

Phase I of the EU ETS has not been the only time that cap and trade schemes have experienced low carbon prices. In the north-eastern states of the United States, an emissions trading scheme called the Regional Greenhouse Gas Initiative (RGGI) has commenced. The RGGI covers emissions from electricity generation, and allows for the purchase of offsets. It aims to stabilise emissions at 2002-2004 levels by 2015, and then reduce emissions by 10% by 2020. Permits are auctioned, and there have been two auctions so far, the emission permit prices were US$3.07 and US$3.38 per tonne of carbon dioxide.

One “design feature” of the CPRS is that Australia’s emissions trajectory is set 5 years in advance (see Chapter 4 of the White Paper). There is also a target range for emissions reductions to be achieved by 2020 to be 5-15% below 2000 levels (Policy position 4.2). The target range is perhaps the worst aspect of the CPRS White Paper, because an unwillingness by Australia to reduce emissions beyond 15% undermines a good comprehensive international agreement to reduce greenhouse gas emissions. The initial trajectory is given in Policy position 4.5 of the CPRS White Paper. I have converted these figures from percentages to megatonnes of greenhouse gases (carbon dioxide equivalent).

The first indicative national emissions trajectory will be:
• in 2010–11, 109 per cent of 2000 levels (602.5 Mt)
• in 2011–12, 108 per cent of 2000 levels (597 Mt)
• in 2012–13, 107 per cent of 2000 levels.(591.5 Mt)

How does this trajectory compare with what Australia’s emissions will be in the absence of of the CPRS? If the trajectory is higher, then the carbon price is likely to be very low (although this is affected by intertemporal flexibility measures, such as banking).

Projections for Australia’s emissions in the absence of of the CPRS are supplied have been estimated by the Department of Climate Change here. They project Australia’s emissions during the 2008-2012 Kyoto commitment period to be 599 Mt CO2-e. Note that this is below the CPRS trajectory for 2010-2011, about the same as for 2011-2012, and slightly higher than for 2012-2013. The projections include uncertainties in emissions for each sector, they range from 3% to 10%. They do not include uncertainties in emissions from land use change or from forestry. Aggregating these uncertainties is difficult, because emissions in different sectors are not independent. There can be covariance between different sectors. If we assumed the sectors were independent and ignore uncertainties in land use change and forestry, then the uncertainty in the projected emissions is 12-13 Mt CO2-e (about 2.2% of projected emissions). If the emissions in each sector are highly dependent, and we take into account the uncertainty from land use emissions, then the amount of uncertainty could be several times higher.

The Treasury modeling predicts that a 5% 2020 reduction scenario would be consistent with an initial nominal carbon price of $23 in 2010. Since the modeling was released, the global financial crisis has gotten worse and the global carbon prices have dropped significantly. The boom in Australia’s emissions intensive resource industries has also ended. The government has also unveiled a stimulus package that includes $3.9 billion in ceiling insulation for households and incentives for solar hot water.

There have been some very serious declines in the price of carbon as the global financial crisis has been unfolding. In the EU ETS, the carbon price has declined from around 30 euro in mid-2008 to 8-9 euro in February 2009. Credits for clean development mechanism projects (known as certified emission reductions, or CERs) have also declined in price, and are trading at less that 8 euro (around A$15). The price of CERs functions as a cap on the carbon price in the CPRS, because firms will be able to purchase an unlimited amount of CERs to account for their emissions (Policy position 11.5).

One thing that will provide stability for carbon prices is the banking of permits. The CPRS White Paper proposes that “Unlimited banking of permits will be allowed under the Scheme (except those accessed under the price cap arrangements)” (Policy position 8.2). Firms with extra permits can always hold them until a later year, and exercise them then. This means that even if there is an overallocation of emissions, there still will be some demand for permits if there is the expectation that there won’t be an overallocation of emissions in subsequent years. In Phase I of the EU ETS, there was banking of permits allowed, but not between phases. At the end of Phase I the permit price declined to less than 0.10 euro. When there is overallocation, banking spreads the impact in carbon prices across several years, instead of confining it to one or two years.

Because of unlimited banking of permits, the carbon price in the early years of the CPRS will also be affected by the medium term trajectory. The target range of 5-15% that has been set for Australia is not very steep, and is not consistent with what science and equity arguments suggest would be appropriate for Australia. Business as usual projections for 2020 emissions are available, but are even more uncertain than for 2010. Australia’s unconditional target is likely to be easier to meet than the EU’s unconditional target, because Australia’s high per capita emissions imply more opportunities for abatement.

At this stage it is too early to know for certain whether there will be an overallocation of emissions in the initial years of the CPRS, but is is very likely. In this sense, Australia appears not to have learned the lesson of Phase I of the EU ETS. International developments alone suggest that the carbon price is likely to be significantly lower than the price suggested by Treasury modeling. Banking of permits means that the carbon price probably will not be as low as the end of Phase I of the EU ETS. The US RGGI also has unlimited banking of permits, and that has not prevented the carbon price from being very low. It is therefore very likely that unless significant changes are made to the CPRS, it will start with very low carbon prices.

What changes need to be made to the CPRS to make it more effective and efficient? What changes need to be made to put in place long-term incentives for investment in clean energy and low-emission technology? Clearly the targets need to be tightened, the unconditional target could be significantly stronger. The conditional target only serves to undermine climate negotiations by ruling out Australia playing its part in a global effort to reduce greenhouse gas emissions. It is not appropriate for the government to rule out any level of emissions reductions.

There are also structural changes that should be made to the CPRS. The best way to rule out downward price volatility is by introducing a price floor. This could be implemented by having firms pay an extra fee when they surrender their permits, or could be implemented by having a reserve auction price. By having a price floor (and making it sufficiently high) we get many of the advantages that we get from a carbon tax. The CPRS also should not allow firms to purchase unlimited amounts of CERs, this is also because of credibility and additionality problems with the CDM, as well as the effect on prices. If the CPRS allows banking of permits, then for each permit banked, the regulator could reduce the cap by that amount of permits in the following year.

The overallocation issue suggests that permits should not be treated as property rights. This has lead to problems elsewhere, such as with the overallocation of the water in the Murray River. It is also inappropriate to create and allocate property rights that potentially infringe on the rights of future generations to a clean atmosphere. Emissions permits should instead be treated as limited compliance instruments. This suggests that Policy position 8.1 of the White Paper needs to be changed.