What would an ideal system look like?

Mike YoungUniversity of Adelaide

EMISSIONS TRADING

2

Greenhouse gases Global warmingpotential

Carbon dioxide CO2 1

Methane CH4 21

Nitrous oxides N2O 310

Perfluorocarbons PFCs 6 500-9 200

Hydrofluorocarbons HFCs 140-11 700

Sulphur hexafluoride SF6 23 900

Global warming potentials

3

Other0.3%

N2O5.4%

CH4

22.7%

CO2

71.6%

CO2-e for Australia

CO2 + CH4 + N2O

(99.7%)

KYOTO PROTOCOL

Negotiated December 1997

Needs 55 country or 55% ratification

6 gases

1990 benchmark

1st commitment period 2008-2012

CDM’s from 2000

5Years

1990 1995 2000 2005 2008 2012

100

106

108

Cap set for 2nd Commitment Period

1st Commitment Period

Australian CDMswith non-Annex 1

countries

Assigned amount

CDM credits2000-12

“Emissionscap”

{}

6Years

1990 1995 2000 2005 2008 2012

100

106

108

Cap set for 2nd Commitment Period

1st Commitment Period

Australian CDMswith non-Annex 1

countries

1995 Inventory (excluding land clearing)

Assigned amount

CDM credits2000-12

“Emissionscap”

{ 97

1995 Inventory(including

land clearing)

}

7

Design Principles

Adaptive Framework

Clear rights, entitlements and obligations

Low transaction costs

Minimum legal risk

Equity among all sources and sinks

SUCCESSFUL EMISSION RIGHTS SYSTEMS

Cap emissions

Are designed for adaptation

Allocate equitably- via permit auction- via shares- combination of two

Are pragmatic

Clear rights, entitlements, obligations

Minimal legal risks

9

Emissions Trading

Shares of Tradeable Amount Permits

Permit accounts

SHARES AND PERMITS

Initially, shares in each gas

Shares have renewal guarantee

Fixed share of assigned amount based on inventory

CO2 - e Permits last until acquitted

Reductions shared pro-rata

Windfall gains to Crown

SHARE REGISTER

Record ownership

Electronic

Minimum Trade: 1 share

Could be mortgaged

12

Date Transaction Debit Credit Balance1/7/01 Balance bought

forward1,000

1/7/01 Emission permitallocation, 1030shares @ 1.1 tonnes /share

1,133 2,133

15/7/01 Emissions for monthof June 2001

300 1,833

19/7/01 Permits acquiredfrom Bush CarbonPty Ltd

250 2,080

20/7/01 Permits sold to ABCPty Ltd

200 1,880

Emissions Permit Account

13

A Permit Cheque

Pay ____________________________________________

The sum of ________________________________ tonnes CO2-e

Emissions Trading Australia

Signature______________________807512 085 249:0223 7851

Date ____________

__________t

14

Stationary energy 45.8%

Transport14.1%

Agriculture17.9%

Land Use Change & Forestry11.7%

Waste3.4%

Fugitive5.3%

Industrial process

1.8%

AUSTRALAN GREENHOUSE GAS EMISSIONS - 1995

WHAT TO TRADE?

Sufficient emissions

Sufficient firms

Low cost monitoring

Stationary energy 45.8%

Transport14.1%

Fugitive5.3%

Industrial process1.8%

A griculture17.9%

Land Use Change & Fores try

11.7%

Waste3.4%

PERMIT ACCOUNTS

All in C02 - e

No charge for trading in Phase 1

Account Fee

Full permit trading

Penalty - 3 times value after 1 month grace period

HIGH LEVEL ISSUES

Windfall gains - 5% return to community

Legislation – Parallel in each state

Where to acquit – upstream v’s downstream?

How to allocate shares