I haven’t had time for a really thorough reading of the government’s Green Paper on emissions trading, let alone a full-scale response. But I thought I’d put down a few points for discussion.

The obvious omissions from the Green Paper are a target for emissions reductions, and (a big reason for the first omission) an analysis of costs and benefits. This is unsurprising in view of the fact that the previous government left virtually nothing in the way of institutional capacity to deal with problems like this. What modelling was done, mostly by ABARE, was designed to support the ever-shifting policy line of the day, and had very little value in terms of objective analysis. In any case, the departure of most of those involved in this work means that ABARE, like Treasury, is starting pretty much from scratch. Still, when it arrives, the analysis is likely to be a lot better than the spurious scaremongering offered by the Shergold committee (see my Agenda review (PDF))

Although there’s plenty of interesting and useful detail about the design of emissions trading schemes, the hot topics are obviously those concerned with exemptions, offsets and compensation. On compensation, the broad outline of the approach is pretty good. At least 50 per cent of the proceeds of the permit auctions should be allocated to compensating households for the cost increases arising as carbon costs are passed through to consumers. That leaves 30 per cent for business and 20 per cent to fund research into cost-effective ways of reducing emissions.

The big question here is whether business is getting too much and whether it is being allocated appropriately. I am working hard on this will colleagues at UQ, and my provisional answers are Yes (most of the cost will flow through to households) and No (sectors should be compensated for a general increase in costs, but firms should not be compensated for bad investment decisions in CO2-intensive technologies. In addition, more money should be allocated to workers rather than capital-owners). However, these are only provisional views – we’ll have to see how the numbers come out.

Then there’s the decision to effectively offset any impact on petrol prices. Unlike the other compensation measures (which transfer wealth but preserve price incentives) this will negate any impact of the scheme on actual behavior. The only defence for this is pragmatic – this will make it harder for the Opposition to reject the scheme and the likely impact below 10c a litre in the first round of trading is marginal compared to the price increases we’ve already seen. The big danger is that, when reviewed at the end of the first round, this fudge will prove politically untouchable.

Whatever criticisms we might have of the scheme, it’s important to take a step back, and consider how the issue stood only a couple of years ago. No progress at all had been made in nearly a decade after Kyoto and plenty of commentators were asserting that even a change of government would make no real difference. Now we are set to have an emissions scheme in place by 2010 and serious targets for 2020. That’s a fundamental shift, and one I hope to see replicated in the US once the long disaster of the Bush Administration is over.