what is this carbon tax and emissions trading scheme about?

Carbon tax. Emissions trading scheme. Climate change. These are terms that we hear so much about, but are they concepts that you really understand? I have tried to make these concepts a little more comprehensible to normal people like us.

How did it all start?
In September 2008, the Garnaut Climate Change Review presented its final report recommending that Australia implement an emissions trading scheme (ETS). This would facilitate the report’s recommended reduction in carbon dioxide emissions by 25% of 2000 levels by 2020 and 90% by 2050. Read the Garnaut Report here.

There has been criticism of Garnaut's targets (Crikey)

What did Kevin Rudd do about it?
In response to this report, the Rudd government released an exposure draft introducing a Carbon Pollution Reduction Scheme (CPRS) in March 2009. After public comment, the CPRS was introduced as a bill in May 2009 with modifications including extending the implementation date, increasing the conditional target and improving industry assistance. This bill was defeated by the Coalition and Greens in the Senate in August 2009.

The bill was re-introduced in October 2009. After negotiations with Malcolm Turnbull that ultimately cost him his opposition leadership, the Rudd government again made concessions. Again it was defeated by the Senate in December 2009, creating a double dissolution trigger.

In February 2010, Rudd again re-introduced the CPRS bill but then in April 2010 deferred the CPRS’ introduction until after the commitment period for the Kyoto Protocol. In June 2010, Rudd was ousted by Julia Gillard as leader of the Australian Labor Party.

His handling of climate change amongst other things? (Courier Mail)

Read a timeline outlining the history of the failed CPRS here.

What has Julia Gillard done?
Shortly after the federal election, the Gillard government in September 2010 established the Multi-Party Climate Change Committee (MPCCC) to consult, negotiate, and report on agreed options for the implementation of a carbon price in Australia, and to build community consensus for climate change action.

In February 2011, the Gillard government announced that the MPCCC was considering at a high level, a climate change framework involving a carbon price mechanism.

The government committed to announcing further details of the carbon price mechanism by mid-2011, which it did do.

What is the carbon price framework?
The carbon price framework announced by the government begins on 1 July 2012 (given legislation is passed this year) with a fixed price ETS before changing to a cap and trade ETS within three years.

The fixed price ETS, or “the carbon tax” as it is more widely known, involves the issue of fixed price units, with the price first determined by the government and increasing annually at a pre-determined rate. The price for 1 July 2012 has been set at $23/tonne, and will achieve a reduction in carbon of 5% of 2000 levels.

It is intended that Australia will move onto a flexible price cap and trade ETS by 1 July 2015. However, there will be an option to defer moving to a cap and trade ETS, with the decision to be made one year prior to the end. Unless deferred, the government must set its emissions targets one year prior to the end.

The carbon price mechanism will cover the stationary energy sector, the transport sector, the industrial processes sector, fugitive emissions (other than from decommissioned coal mines) and emissions from non-legacy waste.

What is a cap and trade ETS?
It is my understanding that the cap and trade ETS first involves:

  • defining the amount of emissions permitted to be released within a given period Australia-wide,
  • defining the amount of emissions permitted to be released by an industry sector or company, and prescribing permits to these companies.

In effect, companies are only able to emit as much as its permits allow it to.

How does the market for permits function?
The trade component of the ETS means the creation of a market to trade these permits. Consider this:

  • if a company is able to reduce its emissions permanently, it can sell some of its permits on the market,
  • if a company is going to produce more emissions than its permits allow it to, it will need to buy permits from the market.

In other words, there will be a financial reward for companies to reduce its emissions. Conversely, companies will be financially penalised for needing to emit more.

New Zealand's ETS: look at how the permits can be traded

Check out the government’s clean energy future website for more information.

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