Victoria should adopt an Emissions Trading Scheme
Australians are experiencing a climate cringe. Our government’s failure to adopt anything resembling an effective climate change policy is increasingly the subject of global bewilderment and pity. Although the current bushfire crisis makes matters infinitely worse, make no mistake: Australia’s reputation as a climate laggard was already well-established. Australians are rightfully angry at current federal inaction. But anger alone won’t change government policy. With another federal election not due until 2022, concerned policy makers and activists should turn their attention to state governments.
States and provinces across North America have demonstrated that meaningful emissions reduction is possible even under a hostile federal administration. California offers the best example. In 2013, California implemented its ‘cap and trade’ emissions policy. Since then, Californian emissions are down 16% and continuing to decline. The state is on track to achieve a 40% reduction below 1990 emissions levels by 2030. Job creation in advanced energy manufacturing is up 33%[i]. And the sale of emissions permits has generated $4.5 billion in government revenue between 2013 and 2016 alone[ii].
Of course, California’s economy is bigger than Australia’s, let alone an Australian state. But its success is inspiring. Currently run by the self-proclaimed “most progressive” government in Australia, one state stands out as the obvious choice to replicate California’s success. Victoria should adopt its own emissions trading scheme (ETS).
The economic and environment benefits would be numerous. To explain why, we must understand how an ETS actually works.
Under an ETS, a jurisdiction sets a ‘cap’ on its annual carbon emissions. Polluters covered by the scheme are then issued with emissions permits. Each permit is equal to one metric ton of emitted carbon. Polluters can sell excess permits, which provides an economic incentive to reduce emissions. If not, the polluter must pay for each ton of excess carbon they release. The sale of permits is regulated, generating revenue for the state or federal government. This revenue can be used to further reinvest in clean energy or offset any regressive effects, such as temporarily increased power prices. The cap on emissions is lowered annually. The trading of emissions permits creates a carbon market, generating a concomitant price on carbon. Since the introduction of an ETS in both the EU and California, emissions have declined as the cost of carbon increases[iii].
An ETS is the most economically efficient way to reduce emissions. Nonetheless, critics are to be found on both ends of the political spectrum. On the left, it has become fashionable to dismiss any ‘market mechanism’ as a way of combatting climate change. A good example is left-wing author and climate activist Naomi Klein, who argues in her latest book On Fire that climate change necessitates the dismantling of consumerist capitalism[iv]. However, to instinctively dismiss market-based climate policies is to misunderstand how they work. If the concern is lack of ambition, the emissions targets guiding the ETS can be increased and more polluters and industries covered by the scheme. Consider the Gillard Government’s Clean Energy Future Package, which operated for two years from 2012. Gillard’s scheme established a carbon price at $23 per tonne. Under the scheme, the Federal Government raised approximately $7 billion each year. Revenue helped establish a number of effective government agencies, including the Australian Renewable Energy Agency (ARENA), and the Clean Energy Finance Corporation (CEFC). Both remain active today.
An ETS does not preclude further government intervention. The CEFC helps underwrite renewable energy projects, and can and should have its funding increased. Nonetheless, in order to achieve the emission reduction targets of the Paris Agreement, the world needs both private and public investment. Around $3 trillion of global investment is needed to meet the Paris targets[vi]. By contrast, the most ambitious plan currently on offer is from Democratic Presidential nominee Bernie Sanders, who is proposing $200 billion towards the United Nation’s Green Climate Fund[vii]. An ETS sets up economic incentives to accelerate the current trend of private capital flight from fossil fuels.
Klein is however right to note that carbon prices can potentially be regressive. That is to say, they impact poorer citizens more. In the short term, businesses are likely to pass some of the costs of reducing emissions onto consumers. Again, there is an easy fix. Revenue from Gillard’s carbon price was used to cut taxes for lower income brackets and increase social welfare payments[viii].
Raising the cost to consumers is part of the right-wing critique, which focusses on the alleged negative effect of an ETS on economic growth. Increasing costs to consumers, so the theory goes, will dampen economic activity and lead to a reduction in consumer spending and thus government revenue. This argument is based entirely on falsehood. Wind and solar are now cheaper per unit than non-renewable energy sources. As they come onto the electricity grid, power prices will decrease[ix]. And as the Californian and European examples illustrate, renewable energy is a job creating industry. Rather than leaving Australian workers to face up to the vagaries of the free market by themselves, we should assist them in transitioning to well paid jobs in the renewable energy sector. Lastly, the revenue generated from the sale of emissions permits can be used to finance public transport infrastructure projects, having the dual effect of creating jobs and reducing transport emissions.
Victoria is particularly well-placed to benefit from an ETS. 85% of Victoria’s electricity generation still comes from non-renewable sources[x]. By linking Victoria’s ETS with the California-Quebec-Ontario carbon market, Victorian businesses could sell their permits internationally, providing even greater incentive to decarbonise. Indeed, the sale of permits would generate much needed revenue for the state budget, which currently over relies on stamp duty collection from land sales. So long as this is the case, there is no real economic incentive to stop the urban sprawl, as the rezoning of previously non-residential land provides an economic boon to the state government. A Victorian ETS would therefore help the transition to a more sustainable economy, in more ways than one. Victoria is also well placed to take advantage of natural carbon sequestration. Natural means of storing carbon can be increased to mitigate up to 20% of Australia’s emissions within the next forty years. As a result, Australia could become a net exporter of carbon land credits [xi]. Victoria could begin to develop this market now, providing much needed economic benefits to its rural regions.
If the Federal government won’t listen, perhaps Victoria will. Daniel Andrews, it’s time for Victoria to lead nation once again, and implement Australia’s only emissions trading scheme.
[i] ‘California’s cap-and-trade program step by step’, Environmental Defense Fund, https://www.edf.org/sites/default/files/californias-cap-and-trade-program-step-by-step.pdf
[ii] Hill, A, Martinez-Dias, L 2019, ‘Adapt or Perish: Preparing for the Inescapable Effects of Climate Change’, Foreign Affairs, vol. 99, no. 1, pp. 107–117
[iii] ‘What is the emissions trading scheme and how does it work?’, The Guardian, https://www.theguardian.com/environment/2011/jun/07/ets-emissions-trading
[iv] Klein, N 2019, On Fire: The Burning Case for the Green New Deal, Allen Lane, UK.
[v] Simons, M 2019, Penny Wong: Passion and Principle, Black Inc., Carlton, Victoria.
[vi] Rethinking Global Emissions Trading, Kleinman Centre for Energy Policy, https://kleinmanenergy.upenn.edu/energy-policy-now/rethinking-global-emissions-trading
[vii] https://berniesanders.com/en/issues/green-new-deal/
[viii] Garnaut, R 2019, Superpower: Australia’s low-carbon opportunity, La Trobe University Press, Melbourne.
[ix] Ibid
[x] https://www.energy.vic.gov.au/
[xi] Garnaut, R 2019, Superpower: Australia’s low-carbon opportunity, La Trobe University Press, Melbourne.
