A snippet on the CPRS and trade-exposed industries
One thing I do occasionally on the blog is publish snippets I’ve written but haven’t found a place for. This piece has been cut for space reasons from a paper I’m writing on free allocations of emissions permits (‘grandfathering’). Not to keep readers in suspense, I’m against it.
Treatment of emissions-intensive tradeable goods
In the absence of a global agreement on reducing emissions of greenhouse gases, the adoption of measures to reduce emissions in individual countries can have perverse effects.
Currently the international framework governing the emission of greenhouse gases is the United Nations Framework Convention on Climate Change, operationalised in the Kyoto Protocol to the Convention, which was adopted in 1997 and came into force in 2005. All major emitters, with the exception of the United States have ratified the Kyoto Protocol. However, following a change of government in 2006, Canada indicated that it would not fulfil its obligations under the Protocol. Thus, until the first commitment period under the Protocol ends in 2012, the only significant competition from non-compliant firms is that from the United States and Canada. Australian policymakers should seek to encourage these countries to return to compliance with the commitments made in Kyoto.
In the discussion leading up to the drafting of the Kyoto Protocol in 1997, it was envisaged that an initial phase in which developed countries would reduce their emissions would be followed by a global agreement encompassing emissions from both developed and developing countries. Subsequent discussion has produced widespread acceptance of a ‘contract and converge’ model. In this model, all countries would agree to move, over the period between the present and 2050, to a common level of per capita emissions consistent with stabilisation of global atmospheric concentrations of greenhouse gases at levels leading to warming of 2 degrees Celsius relative to pre-industrial levels.
Adoption of this, or any other comprehensive agreement, will require agreement from developing countries, most importantly China and India, to limit growth in emissions of greenhouse gases and, if the agreed final level is below current emissions, ultimately to reduce emissions levels.
At this stage it is unclear whether major emitters such as China and India will agree to accept quantitative emissions targets. Even assuming successful negotiation of an agreement with these countries, it is necessary to consider the possibility that other countries will remain outside a new agreement, or will fail to comply with their obligations.
A global agreement to reduce emissions will be undermined if emissions-intensive industrial activities are relocated to countries that decline to participate in such an agreement. It is desirable that Australian industries should not be disadvantaged in competition with firms located in non-compliant countries. However, this should not be regarded as the basis for an open-ended commitment to assist emissions-intensive industries, and should not reward the adoption of emissions-intensive technologies.
Assistance to emissions-intensive industries should be treated as a precautionary response to the possibility that no satisfactory successor to the Kyoto Protocol will emerge. It should be made clear in international negotiations that, in markets where all major participants are compliant, Australian firms will be required to participate in the emissions trading scheme and will not receive any special assistance. In particular, this policy should be applied even where, as in the Kyoto Protocol, an international agreement allows for differentiated emissions targets based on the circumstances of particular countries.
Any measure to assist export-oriented industries should be matched by assistance to import-competing industries in competition with competitors located in non-compliant industries, preferably in the form of taxes or quotas on imports from non-compliant countries. Since failure to comply with a global agreement is an unfair subsidy, such measures are consistent with the spirit of the agreements establishing the World Trade Organisation (WTO). In the event that any technical difficulties arise in relation to the WTO, Australia should support renegotiation of the WTO agreement to make explicit the right of compliant countries to respond to the unfair practices in non-compliant countries.