It’s the machinery of capitalism that must solve climate change, not the politicians and scientists who have been meeting for 26 years and fruitlessly agreeing.
That’s why there are 25 emissions trading schemes (ETS) around the world, as politicians and scientists try to speak the language of market capitalism rather than the language of survival, or morality, as Kevin Rudd once tried.
And now eight years after the last one was triumphantly defenestrated, Australia is about to have another crack at an ETS, except it’s using the system devised by the Coalition to not reduce emissions – the Safeguard Mechanism – as the basis of it.
To make it work the other way round, it must be tortured, a bit like an espalier lemon tree.
But at least we’ll have an ETS, although if anyone tells you it will be cost-free and won’t be a carbon tax, don’t believe them.
How it will work
Labor’s reform of the Safeguard Mechanism involves forcing the nation’s 215 biggest carbon emitters to reduce their emissions by 4.9 per cent a year to achieve a 43 per cent reduction by 2030 and net zero by 2050.
They can do that either by changing the way they operate to actually reduce emissions, or by buying a Safeguard Credit (SC) from one of the others who has reduced emissions more than necessary, or buying Australian Carbon Credit Units (ACCUs), that have been issued to someone else for doing something that reduces atmospheric carbon, like planting trees, or not cutting them down.
SCs don’t exist yet, but the market price of ACCUs is currently $38 each (that is, per tonne of carbon). The government, wary of a price bubble, has said it will be capped at $75, rising at CPI plus 2 per cent a year after next year. So the question is not how high will the price go, but how quickly it gets to the cap.
Investors are piling into ACCUs right now because many think it’s a one-way bet – that higher demand and a limit on supply will quickly lift the price to $75. In the September quarter, a record 600,000 ACCUs were bought by investors.
Supply and demand
Like all markets, this one is simply about demand and supply, but it’s more complicated than most.
Demand will be determined first by investors and speculators, and second by how much of the carbon emissions reduction that the Labor government has promised – 43 per cent by 2030 and net zero by 2050 – will be allowed to come from the buying of ACCUs, rather than actual reductions of emissions.
Investor demand is hard to predict, but financial markets are herds of wildebeest: When there’s a stampede, anything can happen, as we’ve seen with Bitcoin four times now.
Brokers and banks are starting to get interested, producing research for their investor clients.
For example, last week ANZ Research put out a report that concluded: “Overall, we see significant upside for ACCU prices. The growing demand for carbon offsets both from emitters and investors should drive up prices over the coming year.”
As for the big carbon emitters, there will be two types of demand from them when they try to meet their obligations without changing how they operate: Voluntary and statutory – under the reformed Safeguard Mechanism.
A lot of companies have their own voluntary net zero by 2050 commitments, which is often just PR, with glossy brochures.
About 95 per cent of this involves buying cheap overseas credits flogged by a handful of brokers who collect them from private certifiers of abatement projects, usually in the third world.
The glossy brochures proudly boast of lower emissions, but most of these either don’t result in much, if any, actual abatement, or they’re past their use-by date, or they cause enormous harm to villages somewhere, wiping out their livelihoods.
In time, pressure should come on these companies to cough up for local ACCUs, instead of paying $1 to $10 each for foreign credits. If so, that might increase the demand for ACCUs, and therefore their price.
Meanwhile, the government’s emissions reduction plan is to torture the Coalition’s Safeguard Mechanism into a baseline and credit ETS (rather than the more conventional cap-and-trade system that other countries use), by reducing the baselines by 4.9 per cent a year.
The system was set up to replace the Gillard government’s dreaded Clean Energy Act 2011, but was never aligned with any emissions reduction target. The Coalition government signed up to reductions at successive UN meetings, but fingers were crossed behind backs and no company ever had to reduce its contribution to global warming.
In 2021, for example, the baseline target was set at 178 tonnes of CO2, but reported emissions by the companies covered totalled only 138 tonnes of CO2, so easy peasy.
Nothing to see here
The question now is – how much of the statutory abatement will be achieved by actual reductions, and how much by buying ACCUs (they won’t be allowed to buy credits from overseas like those doing it voluntarily for PR).
No one knows, but it could be a lot. This is alarming the Greens, who don’t trust the ACCUs.
Apart from the Greens, the other person leading the attacks on the integrity of ACCUs has been Professor Andrew Macintosh from the ANU law school.
To shut him up and the Greens, the government appointed former chief scientist Ian Chubb to report on the integrity of ACCUs – that is, whether they really do reduce emissions. He reported this month and basically said it’s all fine – move along, nothing to see here.
Andrew Macintosh told me last week that it’s not fine at all and that there remains considerable uncertainty about the fate of existing offset projects and the ACCUs they generate.
He thinks human-induced regeneration (HIR), which basically means stopping the grazing of land by livestock to allow forests to regrow, is a rort because the regulator has allowed projects to be established in uncleared desert and semi-desert areas where grazing doesn’t have much impact on tree and shrub growth.
While the Chubb review gave these projects a clean bill of health, Macintosh believes that the recommendations, if fully and properly implemented, could have substantial adverse impacts on existing HIR projects.
He also thinks landfill gas projects – where landfill operators get given credits for collecting and burning methane to produce carbon dioxide, which is a less potent greenhouse gas – are problematic because many of them would be doing it anyway, either because they produce electricity or because the EPA requires it.
Again, while the Chubb Review’s high-level messaging suggests everything is fine, its recommendations on landfill gas could result in a marked reduction in the number of ACCUs issued to the older and larger landfill projects.
In fact, Macintosh told me that if the ACCUs were properly cleaned up, it could result in a reduction in supply of as much as 80 per cent. This would equate to reducing ACCU supply from its 2022 level of 16.5 million to 3 to 4 million.
But the last thing government wants is a massive squeeze on the supply of ACCUs, resulting in a price bubble, which is why it so happily accepted the Chubb recommendations, and why there’s a $75 cap on the price – just in case.
The Coalition made sure there was never a squeeze, and when the ACCU price did surge to $56 a year ago because of a burst of speculation, energy minister Angus Taylor intervened and changed the rules to make sure it fell back below $30, which it duly did.
Now speculators are sniffing around again, so the price has surged 25 per cent this year.
The Labor government doesn’t want to be seen to be imposing a carbon tax and is worried about the price, but it also has a serious emissions reduction target, unlike the Coalition, and meeting it won’t be cheap.
The other thing the machinery of capitalism is good at is passing on costs: It won’t be the companies that swallow the cost of emission reduction, whether it stays at $38 a tonne (it won’t) or quickly goes to $75 and then rises at CPI plus 2 per cent a year (it will).
It’ll be you and I, the customers, who pay. And since it’s the government imposing it, let’s call it a tax – a carbon tax.
Fine with me, but then, I’m woke.
Alan Kohler writes for The New Daily twice a week. He is also founder of Eureka Report and finance presenter of ABC news
