The May 8 issue of Green Left Weekly carried an editorial criticising a proposal for a tradeable emissions scheme for electricity distributors. CLIVE HAMILTON argues in favour of the idea.
Late last year the NSW parliament passed a truly historic piece of legislation. The Electricity Supply Act is aimed at cutting greenhouse gas emissions from the electricity sector by 20% of current levels by the year 2005. In contrast to the federal government's risible international position, NSW could now lead the world in measures to tackle global warming.
The big question now is how the NSW government will ensure that the target is met. Under the newly legislated system of licensing and fines, polluters who exceed their limits may end up with nothing more than a ministerial slap on the wrist. But a radical new scheme endorsed by environmentalists in NSW will use the competitive market to achieve emissions reductions at lowest economic cost.
Under the Tradeable Emissions Entitlements Scheme, electricity distributors in NSW would be permitted to sell electricity only up to an amount allowed by their entitlements to emit greenhouse gases. This will clearly influence both how much electricity they sell and from where they source it.
The total of entitlements issued would be determined by the legislated greenhouse gas emissions targets. This would involve issuing entitlements up to the amount determined by the existing commitment to cut emissions by 20% by 2005. The entitlements could be reduced rapidly thereafter.
Environmentalists have traditionally been sceptical about tradeable emissions schemes because they appear to be a 'licence to pollute", something that seems morally objectionable. This criticism makes little sense. At present, the electricity industry in effect has a licence to pollute as much as it likes. The NSW legislation sets a regulated upper limit on emissions and the tradeable emissions scheme is simply a means of bringing about the mandated cuts in emissions. By minimising the economic cost of reducing emissions, the tradeable emissions scheme increases the likelihood that the cuts will actually be achieved.
The proposed scheme has been developed in a paper by the Australia Institute in consultation with leading environmentalists and is now under active consideration by the EPA. Under the scheme, entitlements to emit greenhouse gases could be bought and sold. Entitlements would thus be valuable and their cost will be treated in the same way as other business costs. Depending on how many entitlements are issued and how quickly their number is reduced over time, the cost of acquiring entitlements would almost certainly form a significant part of a distributor's costs.
The scheme would force distributors to choose carefully their sources of supply from among high-emitting sources (coal-fired power stations), moderate emitters (gas) and low or zero emitters (renewables), with an increasing preference over time for the latter. It would also induce distributors to attempt to keep their customers supplied with energy services through demand management and energy efficiency schemes in homes, factories and offices.
A system of tradeable entitlements introduces flexibility into the emissions reduction program because not every polluter is required to reduce emissions at the same rate. Some polluters could achieve faster reductions and profit by selling excess entitlements, while others could reduce emissions more slowly but at the cost of purchasing more entitlements.
Victorian values
The scheme would mean that Victorian distributors hoping to break into the NSW market would need to buy entitlements from existing NSW distributors. Victoria's brown coal power plants are some of the worst greenhouse gas emitters in the country and would be at a significant disadvantage in trying to compete in NSW.
The NSW reforms thus have major implications for the privatisation of electricity generators in Victoria. They could knock hundreds of millions of dollars off the value of the Victorian generators, and this could blow a large hole in Premier Jeff Kennett's budget strategy.
The initial allocation of entitlements would be a critical issue. One possibility is to auction them so that electricity distributors would need to purchase entitlements from the NSW government at market-clearing prices. A second is to distribute them free using an allocation rule based on historical levels of emissions (this is known as 'grandfathering"). The latter method is likely to run into fewer political difficulties, but the revenue from an auction could be used to buy back entitlements for sale for new entrants to the market.
Contrary to suggestions by Pacific Power chief Fred Hilmer, it is appropriate for electricity distributors rather than generators to be constrained by greenhouse targets because the distributors provide the vital competitive link between generators and final consumers of electricity. They are therefore much more subject to the forces of competition which will see the new emissions targets achieved at lowest economic cost.
The proposed system is quite consistent with the emerging electricity national market. The national competition framework gives powers to states to deal with environmental aspects of industry according to their own standards. Generators that can offer lower emissions per unit of power will possess a competitive advantage, whether they are based in NSW or interstate.
How would the proposed scheme affect electricity consumers? In the short term, the free allocation of entitlements would mean that electricity prices would not be affected. In the medium term (4-10 years), as entitlements are reduced to cut greenhouse gas emissions, the costs of generating electricity may rise as distributors shift to lower-emission sources. However, the benefits of tackling global warming will be achieved at least cost to consumers under the proposed scheme.
In the longer term, consumers may enjoy cheaper energy services than they would if no measures were taken, as new technologies induced by the scheme become increasingly cost effective. Moreover, since the national and international requirements to limit greenhouse gas emissions will inevitably became tighter, residents of NSW will be relieved of the extra costs associated with a more rapid transition to low emissions later on.
At the Berlin Climate Change Conference last year the Australian government pleaded shamelessly for Australia to be given special consideration and worked hard to spoil attempts to introduce targets for developed countries.
A strong contrast should be drawn between the tradeable entitlements scheme proposed for NSW and the international tradeable permits proposals advocated by the Australian Bureau of Agricultural and Resource Economics (ABARE) and being toyed with by the federal government. To advocate such a scheme internationally is little more than a ploy to defer any action indefinitely. ABARE Director Brian Fisher recently conceded that it would take 20 years to get such a scheme up. On greenhouse issues, the federal government has a long way to go to catch up with its NSW counterpart.
[Dr Clive Hamilton is executive director of the Australia Institute.]