The Rudd Government’s Carbon Pollution Reduction Scheme (CPRS) is riddled with rorts. But just in case you thought all of them had been exposed, let me show you another, this time about the treatment of the so-called “uncovered sectors” — ie. those sectors of the economy that are exempt from the scheme (like agriculture and deforestation).
Under the CPRS, the caps on emissions in the “covered” sectors will be calculated by subtracting projected emissions in the uncovered sectors from the national emissions trajectory. That is, total national emissions minus emissions from the uncovered sectors equals emissions within the CPRS.
This sounds reasonable. No scam there — or so you might think. But what happens if the Government underestimates the likely abatement in the uncovered sectors? Who gets the surplus permits created by the error in the projections? The environment, polluters or the Government?
The answer is the Government. If emissions in the uncovered sectors are lower than forecast, the Government will have surplus emission allowances and, under the international rules, will be able to sell these to other countries. This could result in the Government getting hundreds of millions, possibly billions, in windfall gains. Obviously, it also works in the opposite direction — if it overestimates the abatement in these sectors, the Government could be exposed to a substantial liability.
Not surprisingly, the Government has made conservative estimates of the extent to which emissions from the uncovered sectors might fall. The main area of concern here is projected deforestation emissions — or what most people know as land clearing, the vast majority of which is for agricultural purposes.
Between 2006 and 2010, deforestation emissions are projected to fall from around 65 million tonnes (Mt) to 44 Mt. This is due to the introduction of new land clearing laws in Queensland and New South Wales earlier this decade, and declining availability of uncleared productive agricultural land. This near-term projection is plausible, but the post-2010 estimates are less convincing. The Government has forecast that after 2010, deforestation emissions will decline linearly to 24 Mt in 2050 and to zero in 2100. This equates to a piddly reduction of under 0.5 Mt per annum.
The costs associated with reducing deforestation emissions in Australia are low — arguably the lowest on offer. In some cases, reducing deforestation emissions might even generate a net benefit, after biodiversity, salinity and other environmental benefits are factored in. Given this, it makes good economic sense to squeeze as much abatement as possible from agricultural-related land clearing.
In the White Paper, the Government has acknowledged there are opportunities for abatement in this area and committed to exploring other mitigation measures. A guiding principle will be that all uncovered sectors must make an “equivalent contribution” to achieving Australia’s national emissions reduction objectives. The White Paper states:
To ensure an equivalent contribution, alternative mitigation measures will be designed to deliver abatement up to a cost that is roughly the same as the carbon price under the Scheme.
If the Government follows through on this commitment, and imposes restrictions on land clearing that equate to the permit price under the CPRS, the extent of abatement in deforestation emissions is likely to far outstrip the projected annual decline of around 0.5 Mt. As a result, the Government is likely to receive a windfall gain by being able to sell the additional allowances that flow from its wayward estimates.
To give you a feel for the types of numbers associated with this issue, conservatively assume that deforestation emissions decline at double the rate assumed by the Government (ie. almost 1 Mt per annum) until at least 2025. Also assume that the carbon price follows the path used in the Government’s CPRS-5 scenario (ie. where the world tries to stabilise greenhouse gas concentrations at 550 parts per million).
Under these assumptions, by 2020, the surplus allowances created by the underestimation of deforestation emissions are worth around US$160 million per year (or roughly AU$250 million/yr using current exchange rates). In 2025, it is almost US$300 million (AU$440 million). Not the biggest heist in history, but a nice earner for the Government.
The obvious solution to this problem is for the Government to cancel international allowances in the event that its projections turn out to be too conservative. This would ensure the benefits of any underestimate accrue to the environment, not the Government or the already over-subsidised polluters.