Trade in emissions permits is a good thing

Tim Colebatch gives us an apparent scoop in The Age: we won’t reduce emissions by 5% by 2020.

Treasury modelling estimates that even with a cleaner, more effective model than the one now adopted, Australia’s emissions in 2020 would rise 5.8 per cent above 2000 levels. We would pump out more emissions in 2020 than we do now.

Sounds damning right? Wrong. While it is true that Treasury forecasts that we will emit more in total, the permits issued by the government will be 5% less than our total emissions estimated in 2000. The apparent discrepancy is because Treasury forecasts an international agreement by 2020 that will allow trade in permits. The WHOLE POINT of allowing such trade is to allow our industries to buy and sell those permits. Turns out that we are likely to buy them.

Think about what that means. If we buy permits, some other country has less of them. That means they emit less. So Australia’s policy has enabled a 5% reduction in emissions from our 2020 levels whether we actually emit less or not. And guess what? That is the WHOLE POINT — not to reduce our emissions per se but to reduce global emissions.

Colebatch argues that international permits are not real permits and so we shouldn’t trust them. But if we can’t do that there is no point to an international agreement. Moreover, if we can’t get an international agreement then we will have to reduce emissions on our own. So the issue there is that all this will be more costly to the Australian economy than Treasury is forecasting.

This type of distrust of markets is what has led to carbon offsetting not being part of agreements such as Kyoto. That is a big mistake as it removes incentives to find other ways of gettting greenhouses gases out of the atmosphere than putting less in. We need schemes that create lots of pathways to environmental management and not less.

5 thoughts on “Trade in emissions permits is a good thing”

  1. I think the issue is less of distrusting markets to work (we all know it works), but more of the issue of creating property rights where it never existed. Say you have countries A B and C who are involved in the emissions market. A and B complies well. They buy x and y amount of emission permits and they emit x and y tons of gas. C buys and trades z amount, but refuses to honor the contract, (or that the govt doesn’t police it well enough, leading to firms producing as much as they want), and produce z+100 tons of greenhouse gasses.

    In an international scene, what are you going to do to police this situation? Invade them? Sanction them?


  2. You realise that the CDM and JI were introduced at Kyoto, don’t you?

    Does it occur to you that there are very good reasons to be suspicious of CDM credits because of reasons such as the flimsy legal status of the CDM Board? The Board is actually in the process of reforming the process itself which should tell you something about the pressure it’s faced of late.

    This is not an inherent distrust of market, but an acknowledge that for markets to function properly they need appropriate, legitimate legal frameworks.


  3. To the two previous commentators – if you are right, why bother at all? Australia’s emissions are trivial on a global basis so without international agreement and policing (possibly through a UN scheme) we are all just wasting our time. if any reductions by some countries just lead to increases by other countries then any attempt to reduct global emissions is doomed.
    Existing schemes to verify reduction projects in other countries under the EU system are far from perfect – but they are a lot better than nothing. And they allow some very ‘cheap wins’ to reduce greenhouse gases. Some good examples are presented in the new edition of Joshua’s undergraduate textbook.


  4. Josh
    That is pathetic.
    Is it too much to ask you to read what I actually wrote, and then correctly reproduce it before you make what you think is a devastating reply?
    It’s got nothing to do with a distrust of markets per se – as I made very clear. If you had been concentrating on reading the argument, you would have seen that I said there was nothing (repeat: nothing) wrong with trade in emissions so long as emissions were in fact reduced as a result – exactly the point you made. But that has not been the case in trade in emissions reduced in China by phasing out HCFCs, and there is a serious risk it will not be the case if countries are allowed to issue themselves tradeable emission permits for not cutting down forests. (Why? Because it is impossible to prove the counter-factual: would these forests in fact have been cut down had there been no permits trade?)
    Josh, may I say: you’re a bright bloke, but your riposte to those commentating on your note suggests you have not thought much about this issue, have not read the literature, and do not understand the problems that Garnaut and others have been trying to illuminate. I suggest you start with the homework, then make your comments on it. And read other people’s arguments carefully rather than rushing off into your own train of thought. Regards, Tim


  5. Tim

    You are entitled to your opinion but I thought your piece was a big rant against emissions trading and having re-read it based on your comment I am not changing my mind. What is more the tone of it is hardly calm and considered.

    The most important paragraph in your piece is this:

    “What’s wrong with that? Nothing, so long as it really cuts emissions. But we have seen China sell “certified emissions reduction” permits for phasing out hydrochlorofluorocarbons, which it has to do anyway under the Montreal Protocol. The ease of rorting is one reason why economists such as Jeffrey Sachs plead instead for a carbon tax.”

    But I respectfully disagree. I think the evidence suggests that in the main emissions compliance can be monitored. Moreover, it is no less difficult to do that with permits than with a tax. It won’t be easy but if we can’t monitor and enforce we may as well not try and do this.

    In addition, are you really suggesting that I have not read the literature? I don’t think you have done your research this time. Take a look at and the papers and government submissions there and see if you still maintain that. The issues of offsets is critical for finding a technological solution on climate change. Indeed, I have been even published in your newspapers on climate change policy.


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