Forcing polluters to pay is the way forward

SMH

Wendy Frew Environment Reporter
November 1, 2006


CARBON trading may be the best way to set a price on greenhouse gas pollution and tackle climate change, according to the watershed Stern report released in Britain on Monday.

No matter the approach - imposing taxes on carbon polluters, trading carbon or regulating greenhouse gas emissions - the aim of any climate change policy should be to ensure those generating greenhouse gases pay for the damage they cause, says the author of the report, a former World Bank chief economist, Sir Nicholas Stern.

Stern says a common price signal is needed across all countries, developed and developing, and different sectors of economies. That would allow countries and companies to decide how, where and when emission reductions were made, and to make the cuts for the lowest cost.

"Tradable quota systems, such as the EU's emissions-trading scheme, may be the most straightforward way of establishing a common price signal across countries," he says.

The assessment from the economist would have been welcomed in environment circles. So often derided for making unrealistic environmental demands that would damage economic growth, many green groups have long supported the idea that market mechanisms could help solve climate change. Put a price on the pollution associated with burning fossil fuels for energy and you will curb demand, they argued. For example, coal-fired power would become more expensive and renewable energy cheaper which, over time, would prompt business to switch investment away from polluting energy sources and to clean energy.

As Stern puts it, in economic terms, greenhouse gases are an externality. That is, a business decision or consumer action by one party affects another party who did not have a choice and whose interests were not taken into account. "Those who produce greenhouse gas do not face the full consequences of the costs of their actions themselves," he says.

"Putting an appropriate price on carbon, through taxes, trading or regulation, means that people pay the full social cost of their actions. This will lead individuals and businesses to switch away from high-carbon goods and services, and to invest in low-carbon alternatives."

The idea behind carbon trading is that the market can choose to spend money to cover the costs of cutting pollution, or continue polluting and pay someone else to cut their pollution.

Quotas would be set for how much carbon each country is allowed to emit; countries then work out quotas for their industries. If they want to protect a particular industry, some other sector of the economy will have to make deeper emission cuts. If the quotas are missed, "credits" for emission cuts made by others can be bought in the market.

The carbon price concepts in the report are not new. In the 1970s the US began trading sulphur dioxide and nitrous oxide to tackle acid rain.

More recently, the international climate change agreement, the Kyoto Protocol, initiated global trading in greenhouse gases. The World Bank estimates $US10 billion ($13 billion) worth of carbon was traded last year. Under the Kyoto Protocol, which Australia and the US have refused to sign, if a country wants to exceed its carbon limits it has to pay a price.

Efficient businesses can step in and earn money by cutting emissions on somebody else's behalf, hopefully encouraging greener technologies in the process. It won't be easy to establish such a market. Stern envisages a much broader version of Kyoto - for example, he wants to expand carbon pricing to aviation and shipping - which could mean even more tortuous negotiations than those that gave birth to Kyoto.

Nor will a carbon price be the only measure governments will need to adopt. The Stern report also calls for government policies to support a range of low-carbon and high-efficiency technologies, change voters' behaviour by fostering a shared understanding of the nature of climate change and put an end to broadscale land clearing.

An influential environmental columnist in The Guardian, George Monbiot, is looking well past global carbon trading. He has called on governments to set a personal carbon ration for every citizen that would be spent buying gas and electricity, petrol and train and plane tickets. If people run out, they must buy the rest from others who have used less than their quota.

Monbiot says other initiatives could include building regulations that impose strict energy-efficiency requirements on all major refurbishments; introducing a stiff "feebate" system for all electronic goods sold, with the least efficient taxed heavily; developing a national network where buses travel in dedicated lanes; and obliging all petrol stations to supply electric-car batteries for lease.