When international permits are OK or not OK
The new carbon package deals with the issue of international permits far better than the CPRS did. Funny the Coalition is complaining about it.
The Coalition's retreat from economic reality has taken a peculiar turn on the issue of international carbon permits.
Under the carbon price package announced on Sunday, businesses will be able to use international permits to meet up to 50% of their carbon emissions obligations once the fixed initial period ends in 2015.
On Sunday, Tony Abbott appeared to rule out any use of international permits to enable the Coalition to meet the same emissions target as the government, a 5% reduction in emissions by 2020. No one outside the Coalition believes their "direct action" plan will enable Australia to meet the target, and Malcolm Turnbull has suggested it will have to massively increase in cost in order to do so.
At the same media conference, Greg Hunt gave a different answer to his leader on international permits, ruling out only the purchase by government of international permits, a disingenuous answer given under neither the CPRS nor the current package will the government directly buy international permits.
But that leads us to Hunt's problem, because international trading is critical to Hunt's "soil magic" proposal under which most of the burden of meeting the 5% reduction in emissions by 2020 would be met by somehow sequestering and retaining millions of tonnes of carbon in famland, and verifying it. Under the Kyoto Protocol, such abatement isn't accepted, reflecting the undeveloped science of actually verifying that sequestered carbon stays put. Hunt supports the government's effort to have forms of biosequestration form part of the new international agreement to replace Kyoto.
So, there are international permits that the Coalition likes because it suits its own purposes, and those that they don't like. Indeed, there's an interesting mix of jingoism and sanctimony to Hunt's complaints on Monday that international permits would form part of Australia's emissions abatement task.
When did the Coalition suddenly become so holier-than-thou about international permits?
Well, quite recently. Under the CPRS, there was no limit on the level of international permits that firms could use to fulfill their obligations. If firms could find a cheap source of international permits, they could stick to business-as-usual and meet all their obligations under the scheme through no domestic abatement whatsoever.
Strangely given its sudden outrage at the use of international permits, the Coalition didn't have a problem with this. Indeed, under the CPRS-Intensity model developed by Frontier Economics for the Coalition and Nick Xenophon, they would have relied even more heavily on foreign-sourcing of permits than would have happened under the CPRS. That was one of the reasons why they could claim "CPRS Intensity" would have had less economic impact domestically than the CPRS -- because less domestic abatement happened under it.
The point of international permits is that they enable lowest-cost abatement. Countries where abatement can be achieved at a lower cost than Australia can provide us with abatement that is as effective as our own. In Hunt's own words from last year "a tonne of carbon is a tonne of carbon". This is particularly beneficial for Australia, which is so heavily dependent on cheap coal that abatement costs will be higher than for many other countries.
So in railing against international permits, the Coalition is going even further down its bizarre path of opposition to market mechanisms and minimising costs -- except, of course, where it suits it.
The problem with international permits, of course, is verification. The Greens sought, and secured, tighter requirements for international permits under the current package than under the CPRS. Under the package, Kyoto-compliant permits from nuclear power and large-scale hydro-electric outside EU guidelines won't be permitted and the government can add or remove the types of permits allowed to maintain the environmental integrity of the scheme. The Climate Change Authority will also have a role in determining the types of international permits allowed.
The other problem with international permits, as suggested above, is that they can be a substitute for any domestic abatement activity at all. By limiting international permits to 50%, the scheme establishes a baseline for domestic abatement that didn't exist under the CPRS. For an economy such as Australia's, that is significantly more emissions-intensive than almost any other economy in the world, the task of decarbonisation requires some spur. We can't entirely rely on the rainforests of developing countries to fund our carbon reliance.
That the Coalition had no problem with relying on foreign permits under the CPRS and wants international agreements for its own preferred type of abatement, but now attacks them to the extent it suits their agenda, is a particularly impressive combination of economic irrationalism and hypocrisy. Far better than the CPRS, this package strikes a balance between sourcing lowest-cost abatement and driving domestic decarbonisation.