Tuesday, July 26, 2011

Slim chance of global carbon market post Kyoto

Irrespective of whether Julia Gillard succeeds in selling her carbon tax plan to the public, eight months before the next federal election the policy and political foundations for its introduction will dissolve.

The market-based policy foundations for cutting emissions through a carbon tax or emissions trading scheme follows from the 1997 Kyoto Protocol.

Under Kyoto, developed countries are allowed to establish domestic and internationally linked emissions trading schemes and purchase emissions reductions in developing countries and count them as their own.  But on December 31 next year (eight months before the next federal election) Kyoto will expire without a successor agreement.

Since the 2007 Bali summit countries have been in a negotiating deadlock over different paths for a post-Kyoto agreement.  Developing countries want a second Kyoto emissions reduction period because it puts the entire onus on developed countries.

Non-European developed countries want a new non-binding agreement that brings all the leading emitters into the tent.  European countries want a mix of both.

The failure to agree over what was being negotiated, let alone the detail, led to the eruption at the 2009 Copenhagen summit, modestly repeated in Cancun last December.  To have an unbroken period between Kyoto and a successor, agreement countries would need to conclude negotiations at this year's Durban summit.  And that's extremely unlikely.

A recent survey by the World Bank's Carbon Finance Unit found that less than 20 per cent of carbon market participants questioned were optimistic that a new Kyoto-style, legally binding emissions reduction framework would be negotiated by 2020.  Optimism dropped further to a few per cent when they were offered a 2015 deadline.

The absence of a global framework undermines the political and policy case for prioritising emissions cuts.  It's a message that has not been lost on international carbon markets.

According to the World Bank's recently released 2011 State and Trends of the Carbon Market report, for the first time since 2005 the international carbon market went into recession last year.

The cause of its decline was the lack of clarity ''urgently needed on the post-2012 international climate change regime and on other countries' plans to use market-based mechanisms to meet domestic greenhouse gas [reduction] objectives''.

While Australia goes headfirst to introduce a market-based scheme, other countries aren't following our lead:  Japan and South Korea have effectively shelved their trading schemes until a post-Kyoto framework is established;  New Zealand is watering down its scheme;  participant states in regional US emissions trading schemes are withdrawing;  and China has flagged the possibility of trialling a scheme, but to date its carbon pricing experience has been to profit, having secured 42 per cent of Europe's offshore emissions reduction projects.

Even in Europe, with its operational emissions trading scheme, its ''year-on-year declines in greenhouse gas emissions ... now appear to be over'', with emissions on the rise again after recent dips in its floating carbon price.

Instead of pursuing their plan, Gillard and Climate Change Minister Greg Combet should be listening to the advice being sent by carbon markets, especially when the market and its message is put into context.

There is no global carbon market.  There is only a European one.

According to the same World Bank report, 84 per cent of the $142 billion global carbon market is made up of emissions permits sourced from within the European Union.  Europe's reach extends to 97 per cent when its purchased emission reductions in developing countries are included.  With the government allowing half of all permits to be purchased offshore, Australia's floating carbon price could be heavily influenced by European policy.  Europe's dominance is set to be the status quo until a post-Kyoto framework is established that could possibly bring China, India and the US into the fold.

Australia's scheme, covering the emissions of 22 million people, is also likely to be eclipsed by the size of a scheme for hundreds of millions Europeans and their centralised decision-making based on European policy and economic priorities and interests.

With a ''global'' market designed by Europeans for Europeans who are disconnected from the needs of a small, emissions-intensive economy, Australia's economic interests will be exposed and with it the political viability of continuing to accept an economic impost while international action is waning.

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