International Emissions Trading

In December 1997 the Kyoto Protocol established legally binding targets for developed countries to limit greenhouse gas emissions (subject to ratification). Targets or "assigned amount units" (AAUs) were set relative to emissions in 1990 and apply for the initial target period of 2008 - 2012.

Fundamental to the Kyoto Protocol are its "flexibility mechanisms" (also known as "Kyoto mechanisms") which give developed country parties more flexible and cost effective options for meeting their targets. A key flexibility mechanism is international emissions trading, a ‘cap and trade’ arrangement under which countries are able to buy or sell part of their assigned emission allocation. It is expected that most governments will devolve the right to trade to companies and others.  The other flexibility mechanisms, the Clear Development Mechanism (CDM) and Joint Implementation, are ‘baseline and credit’ schemes under which abatement projects in developing and developed countries respectively can earn emission credits.for use in meeting developed country targets.

In emissions trading terms, the Kyoto Protocol represents a ‘cap and trade’ scheme for developed country parties, supported by a ‘baseline and credit’ scheme for developing countries. Consequently the entry into force of the Kyoto Protocol on 16 February 2005 has prompted the rapid development of an international emissions trading market.  This has been given particular impetus by the implementation of an extensive emissions trading scheme within the EU (EU ETS) with links to other Kyoto Protocol parties. Other national and regional trading schemes are also being implemented.

With the change of federal government in 2007, Australia has now ratified the Kyoto Protocol and will be looking to play a more active role in international emissions trading under the Protocol. Elsewhere in the region, New Zealand is also implementing a domestic emissions trading scheme and Japan has a pilot voluntary scheme underway. Asia is also the major host region for CDM projects.

Domestic Emissions Trading

In Australia, there is now bi-partisan support at the federal level for the introduction of a national emissions trading scheme. This would involve companies and other emitters being allocated emission permits to a certain limit. They would then be required to control their emissions and/or trade permits to ensure their permit holdings cover their emissions.

While the recently elected Labor federal government has had domestic emissions trading (and Kyoto ratification) as part of its platform for a number of years, support for domestic trading on the part of the previous federal government was a new position. This follows the acceptance by the government of the recommendations of the Prime Ministerial Task Group on Emissions Trading which reported in May 2007. Details of the proposed domestic scheme can be found in the Task Group’s report but in summary the key features of the proposal are:

• a ‘cap and trade’ model supported by offset projects, to be operational no later than 2012.
• a long-term aspirational emissions abatement goal and associated pathways to provide an explicit guide for business investment and community engagement
• maximum practical coverage of all sources and sinks, and of all greenhouse gases including agriculture when practical issues are resolved
• a mixture of free allocation and auctioning of single-year dated emissions permits
• free allocation of permits as compensation to existing businesses likely to suffer a disproportionate loss of value or adverse trade exposure due to the introduction of a carbon price
• a ‘safety valve’ emissions fee designed to limit unanticipated costs to the economy and to business, particularly in the early years of the scheme, while ensuring an ongoing incentive to abate
• recognition of a wide range of credible carbon offset regimes, domestically and internationally
• capacity, over time, to link to other comparable national and regional schemes in order to provide the building blocks of a truly global emissions trading scheme
• revenue from permits and fees to be used, in the first instance, to support emergence of low-emissions technologies and energy efficiency initiatives.

A timetable of around four years has been proposed by the Task Group for Australia to begin full-scale emissions trading. This involves announcement of a long-term aspirational goal and establishment of an emissions reporting and verification system in 2008; finalisation of the key design features and establishment of the legislative basis of the scheme by 2009; establishment of the first set of short-term caps and allocation of permits in 2010; and commence trading in 2011 or, at the latest, 2012.

Federal support for a national emissions trading scheme follows long standing support for emissions trading as the state government level. In particular, the NSW Greenhouse Gas Abatement Scheme launched in 2003 includes an important element of emissions trading. Building on this experience, a possible national trading scheme to be implemented jointly by state governments was explored by a multi-state taskforce, the National Emissions Trading Taskforce (NETT). With the support of all State Premiers and Chief Ministers, the NETT undertook research on options and issues related to implementing a state-based national scheme, and in 2006 released a detailed discussion paper describing a possible design for such a scheme. It is anticipated that the design of the national emissions trading scheme to be implemented by the new Labor federal government will draw on the findings of both the NETT and the Prime Ministerial Task Group. Final details are likely to determined during 2008 following the outcome of the high level Garnaut Review currently being underway by the distinguished academic, Prof. Ross Garnaut.

Augmenting the evolution of a formal trading scheme are a growing range of voluntary trading initiatives, particularly focused on providing emission offset opportunities for businesses and consumers.

Support for a national trading scheme at the federal level, and the ratification of the Kyoto Protocol, means that Australia is now moving to establish a domestic market and will also be exploring opportunities for participation in the wider international market.