The Black Hole In Labor's Carbon Tax

How much carbon pollution will actually be reduced by the Gillard Government’s carbon tax? If you’ve been following the debate, you’ll have the Prime Minister repeat the figure "160 million tonnnes" a number of times, which, she is keen to point out, is the equivalent of taking "45 million cars" off the road.

The figure comes from the sophisticated economic modelling performed by Treasury for the carbon policy. The Treasury models suggests that to meet Australia’s target of a 5 per cent cut in greenhouse gas emissions by 2020, we’re going to have to emit around 152 million tonnes less pollution.

But it turns out that the majority of this abatement does not come from Australian industry or consumers — or from Australia at all. According to Treasury, 94 million tonnes of that 152 million tonnes will come from "internationally-sourced abatement" (see the graph, obtained from Treasury, below). 

In the graph above, the bars in yellow represent the amount of carbon abatement that will come from domestic Australian activities. The bars in blue represent the international abatement. As you can see, Australia plans to meet its pollution reduction targets primarily by purchasing reductions in carbon emissions from overseas.

Section 5.2.2 of the Treasury modelling document explains why. "While pricing carbon cuts domestic emissions, it is inefficient to meet the whole abatement task through domestic abatement," Treasury writes. "Purchasing recognised international permits leads to real reductions in global emissions, just like reducing our domestic carbon pollution."

In other words, buying carbon credits from other countries is cheaper than achieving the same cuts domestically — and the least-cost strategy for reducing carbon emissions is the entire point of a carbon price.

So what is this "internationally-sourced abatement", and how will it work?

The broad outlines are already known, and indeed some international schemes are already in operation under the UN’s Kyoto Protocol (which is, however, also about to end). In principle, the idea is quite simple: because a tonne of carbon emitted in Gabon has essentially an identical warming effect to one emitted by Hazelwood power station in Victoria, it should be possible to reduce carbon emissions globally at the least cost by, say, preventing a forest from being cut down in a developing country.

The Kyoto process has a strategy for achieving this, called the Clean Development Mechanism, which "allows emission-reduction projects in developing countries to earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2. These CERs can be traded and sold, and used by industrialized countries to a meet a part of their emission reduction targets under the Kyoto Protocol."

The UN also has a scheme in place to prevent deforestation called REDD, which stands for Reducing Emissions from Deforestation and Forest Degradation in Developing Countries. In theory, these mechanisms should allow for the orderly and well-regulated international trading of carbon credits, as they are often known, allowing polluting companies in Australia to offset their emissions here by buying up cheap carbon abatement in poorer countries.

But, as ever, the reality on the ground is rather different. Carbon trading is wide open to rorts. A 2008 paper by Stanford University academics David Victor and Michael Wara examined more than 3000 projects in the Clean Development Mechanism, and concluded many of them didn’t represent genuine emissions reductions. "It looks like between one and two thirds of all the total CDM offsets do not represent actual emission cuts", Victor told the Guardian back in 2008.

The Clean Development Mechanism has also been criticised for the way developing countries can "game" the system. In one case that came to light last year, a number of chemical companies in developing countries appeared to be actually increasing their production of certain greenhouse gases in order to cash in on the lucrative carbon credits available by committing to "reduce" their production at a later date.

Carbon markets themselves have faced their own issues, with a recent World Bank report on the state of the international carbon market describing a dramatic collapse in volume in the world trade since the global financial crisis. "This bodes very badly for the countries we are trying to help," the World Bank’s envoy for climate change Andrew Steer told reporters. "The [carbon]market is failing us."

The REDD program has plenty of critics too. Norway recently signed a $1 billion deal with Indonesia to lock up tracts of rainforest and peat land to prevent carbon emissions. But as New Matilda’s Angela Dewan reported here and here, enforcing forestry regulations in a developing country is a fraught process. "The Indonesian Forestry Ministry is regarded as deeply corrupt, and a number of forestry officials have been investigated for accepting bribes to allow illegal logging to continue," Dewan wrote in 2009. This year, she interviewed Louis Verchot, a senior scientist at the Center for International Forestry Research, who told NM that the Norwegian deal may not halt deforestation because "a lot of permit-holders have land that is just sitting there undeveloped. Over the next two years they are likely to continue clearing that land".

Similar criticisms have been leveled at the 2009 deal Norway signed with Guyana, which is also a highly corrupt country in which forestry regulations are difficult to verify and enforce. Some green groups believe timber exports from Guyana have actually increased since the 2009 deal with Norway was signed.

So how will the Gillard Government deal with the thorny issues of verification of international credits? New Matilda put a number of questions regarding international carbon credits to the office of Climate Change Minister, Greg Combet. The answers were not encouraging.

A spokesman for Minister Combet told NM that "international units available under the Kyoto Protocol’s flexibility mechanisms (which are already traded internationally) will be eligible for compliance purposes, subject to specific qualitative restrictions to ensure that only credible units are used."

The Minister’s office also confirmed that REDD permits may potentially be eligible in the future.

"Decisions regarding changes to eligibility for compliance of international units will be determined in the lead up to flexible pricing in 2015 and beyond. The Climate Change Authority will play a key role in advising on the integrity of international units, including recommending any additional units which should be accepted and any units which should be prohibited. The Authority will consider the robustness of relevant national and international validation/verification processes when making recommendations on which international units should be eligible."

You can read New Matilda’s questions, and the Minister’s answers, in full here. As you can see, much remains to be finalised. About the best that could be said of the government’s response is that they’re aware of the issue and plan to work on it.

The decision to include international permits from "credible trading schemes" like the EU and New Zealand may look like the Gillard Government is strictly regulating the matter, but as we’ve seen, many of the projects in developing countries financed by the European ETS are of dubious value in actually reducing greenhouse gas emissions. As a result, it may well be that carbon credits from Europe that are sourced from fraudulent or misreported emissions reductions sources could flood into the Australian market. We don’t really know.

What we do know is that many Australian banks are already gearing up to arbitrage and speculate on carbon markets, including the Macquarie Group. We also know that Australia’s own emissions will actually increase. As economist Frank Jotzo pointed out this week, Australian domestic emissions will rise by 12 per cent to 2020 on 2000 levels, with all of our greenhouse gas "reductions" coming from the purchase of international credits.

"An outcome like this is unlikely to satisfy many environmentally concerned citizens," Jotzo wrote.

All of which makes the verification of international carbon abatement the single most important part of Julia Gillard’s carbon policy. Let’s hope the new Climate Change Authority knows what it’s doing.

 

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