| Summary: | Climate change is the buzz-word of the decade. It is being discussed in the media, in universities, in environment groups and in business councils. So what is it and why the concern? Climate change is a relatively new phenomenon, referring to the changes in the Earth's climate as a result of humans releasing greenhouse gases into the atmosphere, largely through fossil fuel combustion. It is a concern because it challenges the way we live, our food resources and our environment. Climate change results in increased temperatures, more frequent and lengthy droughts and severe weather events such as flooding and cyclones. It affects agricultural productivity, increases the risk of infectious diseases such as malaria, and has the potential to destroy sensitive natural areas such as the Great Barrier Reef and alpine regions such as Kosciusko National Park. Increased temperatures can also lead to sea level rise as glaciers and ice caps melt, threatening low-lying populated areas. Thanks to publications such as the Stern Review on the Economics of Climate Change, the public is increasingly aware of the costs involved for present and future generations if action to reduce the impact of climate change is not taken. The call to action is not only coming from left-wing environmentalists, but from business groups, banks, and mining companies. Submissions to the Prime Minister's Taskforce on Emissions Trading reveal the breadth of concern coming from all areas of the community. In Australia, the federal government has initiated several climate change mitigation measures such as funding for low-emissions technologies, and is awaiting the report from the Taskforce before considering implementing an emissions trading scheme for Australia. The emissions trading option is increasingly being taken up around the world as a cost-effective and flexible way of reducing emissions. Emissions trading first began in America as a way of controlling nitrogen oxide and sulphur dioxide emissions, and since its adoption as a mechanism in the Kyoto Protocol it has grown in both popularity and familiarity. Emissions trading involves granting firms the right to emit a certain amount of emissions, in the form of emissions permits, and giving them the choice as to how and when they reduce emissions. Any firm that requires more than its assigned number of permits must buy more permits from another firm. Firms therefore have an incentive to reduce emissions and sell their excess permits to make a profit. Government can decide exactly how many permits to issue, in order to meet a certain environmental target of emissions reductions. Emissions trading then has the advantage over other options such as an emissions tax, because trading allows firms to choose when, where and how to reduce emissions in the most cost-effective way. It also allows government to choose the environmental target without the risk of choosing a tax rate that is too high or too low, resulting in emissions higher or lower than desired. Because of these advantages, emissions trading is rapidly being adopted as the climate change policy of choice - schemes exist in the European Union, Japan and New South Wales, and are being considered for the USA and Australia, as well as other countries such as Canada. All these schemes vary in their design rules and application. Some have only short-term targets, others long term. Some use a Cap and Trade model, others use Baseline and Credit. Some apply only to the electricity sector, some to four or more sectors of the economy. Some hand out free permits to firms, others auction them off to the highest bidder. What is increasingly clear about these design choices is that all involve a trade-off of some sort. Economic efficiency is traded off against politics. The environmental target is traded off against cost certainty. Flexibility is traded off against predictability. The decision to cover only the electricity sector reduces administrative cost but reduces the number of abatement opportunities available. The use of price caps increases cost certainty but may reduce the opportunities available for the development of low-emissions technologies. Linking with other international schemes increases the opportunities available for low-cost emissions abatement but reduces a country's ability to influence the price of emissions permits. It is important for those involved in climate change policy and emissions trading to be aware of these, and other trade-offs, in the choice of particular scheme design features. They then can design a scheme that is uniquely suited to the particular circumstances of the county in which it is to be developed, without compromising the effectiveness of emissions trading as a means of combating climate changing emissions.
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