Carbon trading

In principle

Tackling global warming using carbon trading is a cunning way of using the power of economics to achieve a goal – limiting greenhouse gas emissions – in the cheapest way. Though it can seem wrong-headed, the basic idea is fairly simple.

It works by countries agreeing that the amount of greenhouse gases they collectively release will be limited to a safe level. This agreed level is measured in tonnes of CO₂ (see box). This big number is then chopped up into one tonne portions, which get called carbon credits. These are shared out among participating countries.

From there each government shares out the credits amongst its industries, keeps some for itself, and sets a starting price for each credit – say $25.

It then becomes a rule in that country that any industry generating a tonne of CO₂ emissions must give up one of its credits. If it generates so much that it uses them all up it needs to buy more – either from the government or from another industry that hasn’t emitted as much, so has carbon credits to spare.

Meanwhile, industries that can prove they store carbon – such as forestry – are given a credit by the government for each tonne they pull out of the atmosphere. These businesses rub their hands in glee because they’re selling all their new credits to the carbon polluters – and so it goes, around and around.

This is called a cap and trade system (because the amount of carbon that can be released is capped, and industries can trade the right to pollute) and the clever thing about it is the way it gives an incentive for good behaviour. The companies that keep polluting hate having to pay for it and work out ways to change – while the companies that are making money from storing carbon double their efforts in pursuit of carbon profits.

Even if all the industries in the country find they make more money by polluting, despite having to pay, the system can still work: the whole country soon runs out of credits and has to buy more from a cleaner and greener country that has them to spare. The more countries that run out of credits, the scarcer they get. The scarcer they get the more the price goes up. And the more the price goes up the more incentive there is to cut costly emissions, or earn credits by creating carbon-capturing industries.

Of course, all this time the total amount of carbon being traded is equal to an agreed safe level – and because that level is lower than where you started the basic rules of supply and demand create a kind of vacuum effect that passively influences the world’s industries to become more climate friendly. Brilliant.

That is, so long as everyone signs up. And so long as they play by the rules…

In practice

New Zealand’s climate change efforts got off to a promising start in 1997 – but it’s been all downhill since then. Here’s the short version of why carbon trading Kiwi-style has never really flown.

New Zealand signed up to the UN’s Kyoto Protocol in 1997 and began the rollout of an emissions trading scheme (ETS) in 2008 with forestry. Energy, transport and industry were included in the ETS in 2010.

The Government annually gives many industries emitting significant amounts of CO₂, especially those it considers exposed to international competition, free carbon units covering 90 per cent of their emissions. The remaining 10 per cent liability for CO₂ emissions is supposed to act as a motivator for reducing emissions to avoid payments.

Going easy on industry

Unfortunately the Government last year declared a two-for-one deal for industrial emitters, requiring them to only surrender one carbon credit for each two tonnes of carbon released, weakening an already soft scheme to the point that it is useless.

Undermining the ETS further has been the decision to delay indefinitely the requirement that farmers pay for methane emissions from their livestock. These emissions account for about half of the country’s total.

Tough times for forestry

At first glance forestry might seem to benefit considerably from the ETS. However, once trees are felled, most of the carbon in them is deemed to have been released and foresters then have to surrender units or pay for those emissions. 

There’s a potential trap here. Carbon units are expected to rise in price, and forests take 30+ years to mature. Foresters may sell the units they are given as a forest grows for $25 or $30, to discover that the price (and hence their liability) has risen to $50 when they fell their trees! At a carbon price of $25/unit, liability on a mature pine forest would be about $15,000/Ha.

However, unexpectedly, the price of carbon units has recently plummeted. Our ETS (unlike most) allows emitters to buy and surrender unlimited carbon credits from overseas. The economic crisis in Europe has squeezed companies to sell any excess credits they held so a glut of credits has flooded world markets and international prices have fallen as low as $2–$3.

Local polluters are buying cheap international credits to surrender, depressing home-grown credits, and foresters – worried about getting stung if prices go up – are no longer interested in planting for carbon. Indeed, pine forests are being cleared for dairying.

Our report card

December 2012 was the end of the first round of Kyoto, and government has decided we aren’t going to re-commit. Our emissions are 20 per cent above 1990 levels, but we’ll cover our Kyoto responsibilities because exotic forests have stored a lot of CO₂ since 1990.

Dr Jan Wright, the Parliamentary Commissioner for the Environment, has stated that she believes an ETS is still the best vehicle for cutting the country’s carbon emissions, but describes the current state of our scheme as almost useless.

See page 21 for 10 ways you can make a difference on climate change.