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.

4 thoughts on “A snippet on the CPRS and trade-exposed industries

  1. “…free allocations of emissions permits (‘grandfathering’)”.

    Those two aren’t actually the same, somewhat in the way that zero rating and exemption for a tax aren’t. For instance, it would be grandfathering to declare that plant and equipment in place as at the introduction date wouldn’t be covered by new restrictions. However, giving firms free allocations of emissions permits equivalent to their emissions as at the introduction date wouldn’t be, as the entitlements would continue indefinitely rather than dying with their linked facilities (the key feature that makes grandfathering transitional). Unlike linked exemptions the permits would be unlinked, and would roll over or even be transferred to other firms indefinitely, e.g. being traded (depending on the details of the system – and sunsetting isn’t grandfathering either). In the opposite direction, free allocations might not match prior emissions even in amount.

    So I see grandfathering as sound here, basically an acknowledgement of sunk costs in the form of existing facilities, but free allocations of permits as unsound from not actually achieving the right sort of transition. All that can be said for the latter – and it is quite a lot – is that it does not divert resources to the government, giving the government a free ride on the back of implementing sound incentives from selling permits. The resources would stay more within the sectors they started in.

  2. One of the problems with free permits is that they go to those who scream loudest. For example I suggest that Australia’s LNG export industry was barely affected by the CPRS yet they got 60% free permits for their minor domestic emissions. It may be from a global perspective that industries like aluminium smelting should relocate to hydro rich Iceland, Quebec or Congo. Heaven forbid we could actually pay more for aluminium smelted with coal fired electricity. That is why a carbon tariff may be justified to stop unrepentant coal users like China and India taking advantage.

    Note that a carbon tariff also hurts the western consumer as well since it raises the imported cost. I suggest we back off the free permits and generous offsets in the current crop of weak ETS formats in Australia, Europe and the US. Instead these countries should impose a form of no-frills carbon charging with very little wriggle room. Imports from countries which decline to participate will attract punitive but somewhat arbitrary carbon tariffs. This won’t just be goods like aluminium but services like call centres. When they come on board the tariff goes.

  3. Good post. If an international agreement has strong incentives against non-participation and non-compliance, there will be less likelihood of free-riding. The issue of “carbon leakage” adds credibility to threats to impose measures such as border adjustments on countries that are not compliant. In the book Barrett 2003, Environment and Statecraft, it is stated (p.320) that “while leakage frustrates unilateral efforts to protect the shared environment, it assists multilateral cooperation.”

  4. In NSW we have a permit scheme that applies to operating a taxi. If you want to operate a taxi you need to buy (~$350000 per vehicle) or lease a permit (licence). This system is obscene and ought to be removed however the cost of compensating current permit owners (or the politics of not compensating them) is a barrier. So if JQ is against compensation for those impacted by the introduction of a permit scheme I wonder what his approach is to those impacted by the removal of a permit scheme.

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