A Lost Opportunity?

The final decision by the United States Senate not to proceed with climate change legislation for now raises the very difficult question as to where the world is going with a market driven / carbon price solution to emissions management. Added to the US decision is the near terminal condition of emissions trading in Australia, with the CPRS on hold at best and the current Federal Opposition, now contesting what looks like a close election, saying that a carbon price will not appear in Australia while they are in office. On top of all this is the legal possibility that the CDM may not function post 2012 if new Annex 1 targets are not agreed.

A market driven approach has been around for a long time now – at least in the context of greenhouse gas emissions it dates back to about 1995 and the early discussions at the UNFCCC. In terms of managing pollutants it of course has its roots in the US SOx and NOx programmes and its origins in economic thinking go back even further. The fundamental reason for wanting to do this is that it offers the most flexible, lowest cost pathway to reducing emissions and in combination with the global financial markets can leverage the huge investments in energy infrastructure and drive them slowly but surely in a new direction. Over time, the underlying carbon price will make its way into the cost of all goods and services globally, which in turn will change demand patterns by favouring lower carbon footprint offerings.

The starting point for current efforts is the Kyoto Protocol. Despite the many rocks that have been thrown at it over the years and the reality that it is no longer fully suitable for a world with rapidly developing economies, it is nevertheless an inspired piece of work. The underlying AAU structure, augmented by the CDM and JI, lays the foundations for a global carbon market built progressively as nations implement domestic legislation, but importantly with a fungible carbon currency. It was principally the United States that advocated such an approach and in the end won the day. The structure itself effectively drives the signatory countries with absolute targets to implement a cap and trade structure at home and encourages those without targets to opportunistically invest in clean energy projects. So in 1997 everybody signed on to this and went off intending to implement such a structure, or so it seemed.

Thirteen years later only the EU has done so, although very recently New Zealand passed cap-and-trade legislation. A number of developing countries have also established the necessary national bureaucracy to implement and manage CDM projects and they have benefited from doing so. Some AAU trades have also been completed between governments in an effort to ensure compliance under the Kyoto Protocol. Global trade in carbon instruments has grown year on year as a result of all this, but the EU and NZ alone cannot effectively support and drive a global market. In any case, even if they did it would not be a market of sufficient size to actually address the underlying issue.

If we don’t implement cap-and-trade, the alternative is potentially a long way shy of a true market based approach. It could include all manner of arbitrary policies, patched together in an effort to cover all the main bases but at the same time possibly missing many of the much easier abatement opportunities that a market may uncover. It will also be more expensive as governments dip into the abatement curve in an ad-hoc way rather than working methodically from left to right on a lowest cost basis. One thing is clear though – governments the world over will continue to tinker with the energy system in a bid to address all manner of issues, with carbon high on the agenda.

But a shift away from a market based solution is not yet set in stone. Although the rhetoric is “clean energy”, significant political support remains for a “price on carbon”, even though as a policy tool it appears undeliverable in the short to medium term. For example, last week I was at the public day of the Clean Energy Ministerial in Washington  (convened under the auspices of MEF) and every single US speaker from Secretary of Energy Chu to Presidential Science Advisor Holdren and many international speakers gave the good talk on clean energy but made the point of adding “But what we really need is a price on carbon”.

 We are at a crossroads and have a choice. Society can accept the developing clean energy agenda with its higher cost of implementation and potentially disruptive affect on investment or it can again make the case for a carbon price solution to the issues at hand, ideally delivered through a market responsive approach such as an emissions trading system. In the interim we may all have to settle on hybrid models in order to build towards the final goal. But to do nothing but watch will be to accept a pathway forward that is both higher in cost and less flexible to implement, neither of which are attractive for business and consumers.