Global Warming & the ETS
Global Warming & the ETS
As global warming, carbon pollution reduction schemes & Copenhagen dominate the news this week, I have synthesised all the critical facts necessary for an intelligent debate on the subject into a simple read. Please email me your comments!
Tony Nix ASA, MBA - Director, Solutions Marketing & Consulting
Is climate change a reality? Is climate change exacerbated by carbon emissions? Will the earth warm more than 20 before the turn of the century? Will such a warming have a disastrous impact upon the earth and low/lying countries in particular? No-one knows for certain the answers to these questions.
The Intergovernmental Panel on Climate Change (IPCC) 2007 reported the following:
- Warming of the climate system is unequivocal.
- Most of the observed increase in globally averaged temperatures since the mid-20th century is very likely due to the observed increase in anthropogenic (human) greenhouse gas concentrations.
- Anthropogenic warming and sea level rise would continue for centuries due to the timescales associated with climate processes and feedbacks, even if greenhouse gas concentrations were to be stabilized, although the likely amount of temperature and sea level rise varies greatly depending on the fossil intensity of human activity during the next century
- The probability that this is caused by natural climatic processes alone is less than 5%.
- World temperatures could rise by between 1.1 and 6.4 °C (2.0 and 11.5 °F) during the 21st century and that:
- Sea levels will probably rise by 18 to 59 cm (7.08 to 23.22 in)
- There is a confidence level >90% that there will be more frequent warm spells, heat waves and heavy rainfall.
- There is a confidence level >66% that there will be an increase in droughts, tropical cyclones and extreme high tides.
- Both past and future anthropogenic carbon dioxide emissions will continue to contribute to warming and sea level rise for more than a millennium.
- Global atmospheric concentrations of carbon dioxide, methane, and nitrous oxide have increased markedly as a result of human activities since 1750 and now far exceed pre-industrial values over the past 650,000 years
In IPCC statements "most" means greater than 50%, "likely" means at least 66% likelihood and "very likely" means at least 90% likelihood.
An ANU poll conducted in Sept, 2008 with n=1000 respondents 18+ across Australia found the following:
- Global warming is the most serious threat to the western world? – 41%
- Global warming considered a ‘Very/Fairly Serious Threat in your Lifetime’ – 56%
- Is Govt. doing enough to protect the environment – ‘Too Little’ – 56%
- Are you in favour of an EMT scheme? – ‘Strongly/Mildly in Favour’ – 54%
(Briefly explained without cost impacts)
Are consumers really willing to pay to protect the environment?
The 2008 ANU poll showed softening attitudes towards protecting the environment amongst respondents as the cost seemed to increase, i.e. ‘Very/Fairly willing’ …
- To pay higher prices - 64%
- To suffer a cut in living standards – 60%
- To pay higher taxes – 46%
Although this survey and others indicate broad support tor action on climate change, recent results indicate a softening of attitude
So in Australia, a number of different polls have shown declining support for global warming. It appears that only a small majority believe climate change is a critical development demanding immediate action. Nevertheless a Newspoll conducted in Sept, 2009 Found 67% in favour of the introduction of a carbon pollution reduction scheme (down from 72% in favour a year earlier, but again the results are suspect because no cost impact was included)
What’s more even some scientists disagree. Ralph Alexander, an Australian-born US scientist with a PhD in Physics from Oxford has written a book called Global Warming – False Alarm which purports to unpick the science behind the assertions that man-made CO2 causes global warming. However it appears that many more scientists support the Intergovernmental Panel of Climate Change findings that it is 90% likelihood that Global Warming is due mainly to man-made CO2
Well, even medical specialists disagree. If 4 out of 5 specialists were to tell me I had a 90% chance of getting cancer I would take remedial action. So let’s assume CO2 reduction is a worthwhile insurance action, then the question remains how best to do this? Is Rudd’s Emission Trading Scheme (ETS) the best answer or perhaps a carbon tax or a combination of both or as Abbott keeps saying, some other method that is not ‘a great big new tax?
The Emissions Trading Scheme (ETS) simply explained
First the Government will set a limit (or cap) on the total amount of carbon dioxide that can be emitted in a particular year and then they will gradually lower the limit each year thereafter. The top 1000 emitting companies in Australia will have to report and buy carbon emission permits. Initially many companies will be given permits (often depending how well they have lobbied) but sooner or later they will have to pay for these permits and the greater the emissions the more they will have to pay the government. Now if a company finds a way to reduce their emissions they will be able to sell their unused permits at the prevailing market price, currently estimated at between $26 and $35 a tonne of CO2. But if a company cannot reduce its emissions and there is an increasing demand for their goods, then prices will rise to pay for the carbon permits. This in turn should encourage consumers of these products (particularly energy intensive products such as petrol and electricity produced by coal generated power stations), to find ways to be more economical in their use of them. Motorists will be encouraged to use more public transport, switch to more fuel efficient cars. Householders will be encouraged to use less electricity by switching to more energy-efficient models, adjusting thermostats on heating and cooling systems and installing installation.
What are Rudd, Wong and now Abbott committing us to in CO2 reduction?
Note that the bench mark year Australia desires is 2000, but 1990 is not much different. 1995 is not in Australia’s interests
The above chart clearly shows the following:
- A 5% reduction in 2020 from year 2000 is actually a 9% reduction from 2010 and a 33% reduction from where we would have been in 2020 with no action
- A 15% reduction in 2020 from year 2000 is actually a 19% reduction from 2010 and a 40% reduction from where we would have been in 2020 with no action
- A 25% reduction in 2020 from year 2000 is actually a 28% reduction from 2010 and a 47% reduction from where we would have been in 2020 with no action
Early indications from Copenhagen look like Australia will commit to at least the 15%
Under this target Australia will begin to reduce CO2 emissions below the year 2000 level from about year 2015. Keep in mind that electricity production generates almost half of the Total Australia CO2 emissions.
So much for the theory but let’s explore Rudd & Turnbull’s ETS a little more deeply!
Once the scheme has been working for awhile the Government will receive a huge new source of revenue – an energy tax windfall from the major businesses of as much as $20 billion per year. If the companies find they cannot pass this cost on to consumers they will have less money to invest in new carbon reduction plants.
Is the Emissions Trading Scheme (ETS) a ‘great big new tax’ in disguise?
Robert Gottliebsen writing in the Business Spectator on 1st December, 2009 has an interesting commentary on Rudd’s planned ETS with the main points as follows:
- On the basis of a $26 per tonne carbon price (it could be closer to $35) the government will raise around $114 billion from this new tax between 2011 and 2020.
- Rudd has planned to give about 47 per cent of that $114 million or $54 billion, to 4.3 million Australian households who are on low or middle incomes. Therefore almost half of all Australian households will have no incentive to reduce their carbon emissions because they are fully protected. Indeed 2.6 million of the households (about 30%) will receive assistance equal to around 120 per cent of their overall cost increases so they are better off. In other words the Labour Government is using the ETS legislation as a massive income redistribution exercise to boost the income of lower income people. (It is already common knowledge that when various income tax benefits and subsidies are added back 60% of all households pay no net tax. So the 40% who currently subsidise the 60%, who pay no net tax, will be hit with the majority of additional costs associated with carbon reduction. Perhaps many in the community would think this is a good thing, but why not clearly explain the intent?)
- The rest of the money is sprayed around industry in accordance with their lobbying influence over Rudd. Clearly the amount to be distributed is less than that which has been raised, so we have lots of losers. Exporters must buy permits, so making their products less competitive. Importers do not have to buy permits so it makes sense to make goods in countries that have no ETS laws
Will an ETS actually work to reduce carbon emissions?
Ross Gittins (a highly respected Economics commentator) in various articles argues that supply and demand economics (imposed by the ETS legislation) will force a change to consumers and producers habits, such that carbon emissions will be reduced. On the other hand, Gottliebsen in various articles in the Business Spectator during Nov/Dec, 2009 makes the following points:
- While switching to energy-saving light bulbs and turning off lights will help, the only way to achieve sustainable carbon reduction on a large scale is to invest in plants that emit less carbon. The biggest item is electricity generation (which generate almost half the greenhouse gases emitted in Australia. Gas is cheap and plentiful in Australia and gas-fired power stations would emit 35% less greenhouse gasses than coal fired generators)
- We can fund new power stations and other carbon reduction plants via taxpayers but, in fact, we need the private sector. However, the private sector has been drained of cash so it has less money to fund carbon reduction investment.
- Much of the losses, but not all, would be in the Latrobe Valley where electricity is generated from burning brown coal which in turn emits even more greenhouse gasses than the burning of black coal. The ETS legislation (if passed) will reduce the value of these power stations by $8 billion less the recently negotiated credits of $3.4 billion – a $4.3 billion shortfall which will wipe out the equity of the four investors namely, China Light and Power (CLP) of Hong Kong, International Power, Transfield Tokyo Electric AGL and three superannuation funds. Meanwhile, maintenance of these power stations has been stopped and the Victorian Government is pleading with the Federal Government to guarantee the generators continuance of operations through loans and commercial guarantees in order to avoid serious blackouts throughout Victoria. Perhaps the only way to repay these loans is to the belch out as much carbon as possible from the Latrobe Valley
- So Rudd has surgically attacked the major power generator investors based in Japan, China and India by changing the rules to reduce the value of their existing Australian power investments. These giants are telling the world that Australia is unsafe. Three superannuation funds are telling their mates how dangerous power investment has become in Australia. So how will we build new gas-fired power stations?
- The proposed scheme is so bad that there are circumstances that could arise where it will increase carbon emissions. No other major country in the world would do such a silly thing. But for the Rudd government it was not silly because, by convincing Malcolm Turnbull to support a bad deal, the government planned to destroy the opposition.
Rudd’s worst nightmare!
However, Rudd’s plan appears to have backfired. Rudd was so successful in destroying Turnbull that Abbott has emerged as the new leader of the Liberal Party with a new aggressive shadow ministry line-up dedicated to expose both the flaws in the EMT scheme and in Rudd’s confused messages to-date. Rudd will now be forced to come clean on the fact that the ETS is in reality ‘a great big new tax’ on basically only half the population. Perhaps more importantly Rudd will have to clearly show how the ETS will be successful in reducing carbon emissions at the least possible cost to the Australian tax-payer. This will be an almost impossible task, if for no other reason than it is complex economics far beyond the attention span of most Australians
The final solution
If most of the world’s larger CO2 emitters agree that CO2 reduction is worthwhile then the following needs to be agreed by perhaps all countries emitting 95% + of the world’s carbon emissions:
- Targets - the extent of the emission reduction reductions over ensuing years. This is no mean feat because the poorer, less developed nations will demand that the richer more developed nations contribute more and those with increasing populations will argue that the target should be population based. Australia given its increasing population should perhaps argue for a per capita basis target. But this will draw India, with the worlds fastest population growth, in to agreeing to less emissions
- Method – This is perhaps less important. Whether a particular country chooses an emissions trading scheme, a carbon tax, a combination of both or some other more direct non-tax method (such as government borrowing so that the costs are imposed upon the next generation who are the likely beneficiaries) is less important. Nevertheless we should be mindful that Australia being a significant trading nation might be best suited to follow whatever the USA and most of the developed world does. On the other hand it might be worthwhile to follow China!
- Lead countries – The world largest carbon emitters are clearly China (21.5%) and the USA (20.2%), followed by Russia (5.5%), India (5.3%) and Japan (4.6%) Australia ranks 16th at 1.3% and therefore makes little difference.
A good start
Robert Gottliebsen in his column in the Business Spectator dated 10 December, 2009 suggests a good start would be to replace the two worst polluting brown coal burning power stations, Yallourn & Hazelwood with gas fired turbines at an investment cost of around $5 billion. This alone would cut Australia’s emissions by 26 million tonnes or almost 14% of the 2020 abatement level required based on a 15% emissions reduction target. If we could do the same for the other two brown coal generators at a further $5 billion + the cost of a gas pipeline from Queensland, we would now have cut emissions by a total of 56 million tonnes or 29% of the 2020 abatement level required. More importantly, if the generators could be brought on-line by 2015, the CO2 reduction would be 125% of the abatement scheduled for that year, so no permits would be necessary and the Rudd’s ETS could be delayed until at least 2016. This would seem to be a far better option than the government propping up the existing brown coal generators by guaranteeing their debt and selling permits to cover each tonne of CO2 emissions. The only negative would be that with no price on carbon, Australia would fall behind other countries in new energy saving and generating technology!
Australia is the only G20 country with no nuclear generation capacity. Many of these countries will continue to build more such plants and Australia will have lost its coal based cheap energy competitive advantage. Some believe that carbon sequestration (the storing of carbon deep within rock fissures) will eventually enable clean burning coal, but this technology is untested on a large scale and may never materialise
Whichever Carbon Pollution Reduction Scheme is chosen it will not be without cost! Abbott knows this; he is simply applying the heat to Rudd and enjoying his squirming!
In the meantime, it is important for Australians (and the world) to be more informed of the science arguments in favour of global warming activism. If the science is judged to be less than say 2/3rds certain, then any drastic cost imposition solution should be delayed until the science is more proven. On the other hand if the probability of man made warming and its consequences are (say) greater than 2/3rds certain, we need to be taking reversionary steps now!
Perhaps we need a world wide conference to get together all the important & qualified) proponents and sceptics to thrash out their differences and hopefully narrow their differences. The moderator in such a group would need to have the scientific capability of Albert Einstein and Sir Isaac Newton combined plus the patience of Job and the Wisdom of Solomon. Perhaps Rudd will apply for the job!