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Learning from Europe’s carbon price crash: we need a carbon bank

The dramatic fall in Europe’s carbon price in April led to claims emissions trading had failed as a model for addressing climate change. While the low EU price is problematic for the EU and Australia (by…

A carbon bank would reduce the risk of the carbon price crumpling. Niall Glynn

The dramatic fall in Europe’s carbon price in April led to claims emissions trading had failed as a model for addressing climate change. While the low EU price is problematic for the EU and Australia (by virtue of our linkage with the EU), carbon pricing is still the most efficient tool to address climate change at the scale required.

It may be more productive to discuss what we can learn from the European Union’s experience. What design features should be built into both existing and future emissions trading schemes to safeguard against volatility and ensure that carbon markets reduce emissions and encourage investment in low carbon technologies?

This question is also relevant to other countries that are currently designing national emissions trading schemes, most notably China, Brazil, South Korea and Chile.

Why did the EU’s carbon price crash?

Unlike in Australia, when the EU’s Emission Trading Scheme (ETS) started trading in 2005, most member states had no system in place to measure greenhouse gas emissions from industry.

Industry was left to make their own emissions projections. and allowance allocation was based on these estimates. Perhaps unsurprisingly, this led to a gross over-estimate of emissions by some sectors, notably German utilities. This resulted in the price crashing at the end of Phase 1 (2007).

The European Commission announced a tighter cap for Phases II and III, which increased the EU allowance price to around €30 in 2008.

The recession then took hold in Europe. The fall in industrial activity combined with the success of other emissions reduction policies in the EU, have been the predominant causes of the current oversupply of EU allowances.

The oversupply means prices have fallen sharply over the last year, to a point where they are not driving any abatement in low carbon technologies.

To increase the price of EU allowances, the European Commission tried to address over-supply with a temporary measure known as “back loading”. This proposed that 900 million allowances be withheld from auctioning over the next three years and reintroduced around 2020.

Industry lobbying intensified, the proposal became increasingly politically contentious, and it was defeated by a narrow margin in the EU Parliament last week. The proposal is not necessarily dead, but the Parliament’s vote sent a negative signal that led to prices falling even further, to around €2.

Those in favour of back-loading argued that the EU ETS could not incentivise investment in low carbon technologies while the price was so low. Those against it argued industry should not be hit with further costs at a time when many member states are still in recession. It’s a familiar debate in the climate change policy arena.

The collapse of the EU price is not all bad: it basically means emissions have been cut more efficiently than expected.

Taking decisions away from politicians

The European “back-loading” experience shows decisions about the functioning of carbon markets need to be made outside the political process. The politics of climate change have become more divisive over the last few years, just as the threat to the planet grows.

This is because acting on climate change is still considered to pose a direct threat to mainstream industry’s interests and the status quo. We cannot leave market decisions to the political process if we are to have a chance of addressing climate change.

An independent bank, with the job of regulating the market, should be part of the architecture of any emissions trading scheme. Similarly to the Reserve Bank of Australia, a carbon bank needs the authority to act decisively when required in order for the market to function efficiently.

A call for such a bank is not new: Professor Ross Garnaut and the Clean Energy Council have called for it in the past.

A carbon bank is critical for two reasons. Unusually, carbon markets are government created; they are artificial markets. When over-supply occurs, it is not naturally addressed by market dynamics; that is, by the low price generating an increase in demand and in turn driving up the price again.

The functioning of a carbon market relies on the quality of the market’s administration.

Further, addressing climate change is too important for each market decision to be subject to lengthy political wrangling. Once a government has decided to establish an emissions trading scheme, the market should be entrusted to a regulator to make the necessary decisions to enable the market to function, such as to regulate over supply.

Over-supply is not necessarily a bad thing, or evidence of failure, in a carbon market. It can mean the market is working better than expected.

The experience in environmental markets to date has been that when a price on pollution is introduced, innovation is unleashed, so emission reductions are consistently underestimated by regulators. Over-supply can also occur because the complementary measures to a carbon price are working effectively; this was certainly a factor Europe.

There are also events, such as recessions, that are unforeseen at the time a cap is set: these also affect carbon markets. The point is, however that there needs to be a mechanism built into a carbon market design at the outset that can address market issues when they occur.

As schemes link up around the world, the focus should shift to the need for a global carbon body will to regulate the global carbon currency, and it could also help countries explore the feasibility of linking with other schemes.

It is important that we remove decisions on market function from the political arena so that we can get on with the task of reducing emissions. If we can do this, we might surprise ourselves and exceed emission reduction targets without even noticing.

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58 Comments sorted by

Comments on this article are now closed.

  1. Mark Pollock

    Analyst

    The author claims that "carbon pricing is still the most efficient tool to address climate change". Given that we have had some form of carbon pricing for some time, can anyone tell me what effect this has had on the climate?

    The author is correct in pointing out that that these markets are 'government created" and "artificial". In fact, they are hardly markets at all and it shouldn't surprise anyone that they don't really behave like markets. It is not possible to create value by fiat and…

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    1. Mark Pollock

      Analyst

      In reply to Mike Hansen

      We'll see how that flies then.

      In the meantime, any idea how much the current carbon pricing arrangements have "addressed climate change"?

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    2. Mike Hansen

      Mr.

      In reply to Mark Pollock

      Not enough.

      But the problem is not solely due to the ETS. Even if the ETS functioned "perfectly" it would not be enough. The gap between the science and the politics is large and getting larger. We do not need bankers, we need better politicians.

      The following is a plan that gets closer to what is required.
      http://thinkprogress.org/climate/2011/01/10/207320/the-full-global-warming-solution-how-the-world-can-stabilize-at-350-to-450-ppm/

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    3. Mark Pollock

      Analyst

      In reply to Mike Hansen

      Would " not enough" be close to absolutely nothing? I won't bother with the link except to wonder about stabilising at 450 ppm. Aren't we all meant to have been roasted alive at that point?

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    4. Mike Hansen

      Mr.

      In reply to Mark Pollock

      So you are commenting here despite having absolutely no idea what the science says. Do not feel embarrassed - most of your fellow climate science deniers do the same.

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    5. Mark Pollock

      Analyst

      In reply to Mike Hansen

      I'm just curious. The European scheme has moved billions of dollars around. What effect has this had on the climate? Surely you, a scientifically minded chap by your own admission, can come up with something better than "not enough"? Haven't you got some activist link you can point me to which gives me some quantification of benefit to the climate from all this effort?

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    6. Mike Hansen

      Mr.

      In reply to Mark Pollock

      For an analyst, you have very weak research skills.

      The ETS is more or less on target.

      "Based on recent estimates from 14 Member States and the EEA, total GHG emissions of the EU decreased by 2.5 % in 2011, standing approximately 17.6 % below their 1990 levels (about 16.5 %, if emissions from international aviation are taken
      into account). This important drop follows a 2 % increase in emissions observed in 2010 and substantial emission reductions in 2009 in all Member States. Projections…

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    7. Mark Pollock

      Analyst

      In reply to Mike Hansen

      And the benefit to the climate?

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    8. Mike Hansen

      Mr.

      In reply to Mark Pollock

      Well any reduction in CO2 emissions is going to benefit the climate.

      The long answer is here in the detailed atmospheric physics and associated maths.
      http://scienceofdoom.com/roadmap/atmospheric-radiation-and-the-greenhouse-effect/

      But for someone without any grasp of the science the key point is the long residence time of CO2 in the atmosphere. What we put in takes a few hundred years to get out via the carbon cycle which is why it is building up. So an easier way to visualise the problem…

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    9. Greg North

      Retired Engineer

      In reply to Mike Hansen

      Aside from projections being just that Mike there are a number of less than minor hiccups with that plan.
      1. No global plan is going to succeed without full global political support and the chances of that occurring make it not even worth considering the implications - sign up or we'll nuke you!

      2. The planning for massive technological changes on the scale proposed may mean some planning could occur and yet the resources necessary for implementation do not exist.

      3. If the planets work forces…

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    10. Alice Kelly
      Alice Kelly is a Friend of The Conversation.

      sole parent

      In reply to Mark Pollock

      Mark, you may find your "roasted alive" sneer funny, but if we do get to 450 ppm, how do we stabilise CO2 at 450?
      This is the sort of number where a runaway climate starts to dictate everything we do, we won't be able to stabilise it ,and the worlds economies and climate become dysfunctional.
      Do you think that not starting to act, will make this all go away? September is some sort of golden age salvation? A bit juvenile don't you think.
      Here is a link, you can see it won't take long for your 450 scenario.
      http://www.youtube.com/watch?v=SXHDwdd7Tf8

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    11. Felix MacNeill

      Environmental Manager

      In reply to Mark Pollock

      Mark, given that we've had the first phase of carbon pricing in place only since 1 July 2012, to ask how much impact that has already had on climate change is absurd. You can show some evidence of a reduction in emissions and, more importantly, emissions intensity, from electricity generation. That will ultimately, assuming it continues and hopefully grows, have a sustained impact on emissions levels which, over a far longer time period, will have beneficial impacts on climate change.

      To ask for immediate evidence of an impact from so young a process is as comical as complaining that the acorn you planyted yesterday isn't yet a tall tree and must therefore be a dud that should be dug up.

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    12. Felix MacNeill

      Environmental Manager

      In reply to Mark Pollock

      Mark, you show me your dysactivist links (from which you are obviously getting your talking points and echoing absence of empirical evidence) and i'll see if I can find something that meets the description of being an 'activist link'.

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    13. Mike Hansen

      Mr.

      In reply to Greg North

      Here is the thing Greg. I read your long gish gallops and then wish I had not. You never make any sense even to your own side.

      Let us deconstruct your point 1.

      "No global plan is going to succeed without full global political support and the chances of that occurring make it not even worth considering the implications - sign up or we'll nuke you!and the chances of that occurring make it not even worth considering the implications - sign up or we'll nuke you!"

      "No global plan is going to succeed without full global political support" - not that is not correct - you only need support from the major emitters and that exists already. The problem is that the plan they have agreed to is not aggressive enough.

      "sign up or we'll nuke you!"
      If you want to participate in adult conversations Greg, you need to put adult arguments.

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    14. Michael Guy

      Clinical Psychologist

      In reply to Mark Pollock

      Goldman Sachs is now supporting an ETS for the US so I think the Coalition may find it lonely with non-action on climate change if they get elected.

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    15. Greg North

      Retired Engineer

      In reply to Mike Hansen

      You are splitting hairs Mike and sure having the big emitters sign up would be a start though your assertion that the support from the big emitters exists already is a bit far fetched and such illusions are not what I would expect of adult rationality.

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    16. Mark Pollock

      Analyst

      In reply to Alice Kelly

      Alice,
      Since the AGW disaster scare campaign started, we have been warned that the tipping point is nigh, if not already with us. Yet nothing seems to have tipped. Are you suggesting that 450 PPM is the new tipping point?

      And 450 ppm is not my scenario. Mike Hansen pointed me to a doomist website which seemed to suggest that we could stabilise at 450 by covering the Sahara in solar panels or some such rot.

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    17. Greg North

      Retired Engineer

      In reply to Mike Hansen

      So Mike, as just a Mr. I take it you are very strong on trust are you?

      How good are the estimates re being on target? and especially specific claims related to 1990 given:

      " Unlike in Australia, when the EU’s Emission Trading Scheme (ETS) started trading in 2005, most member states had no system in place to measure greenhouse gas emissions from industry.

      Industry was left to make their own emissions projections. and allowance allocation was based on these estimates. Perhaps unsurprisingly, this led to a gross over-estimate of emissions by some sectors, notably German utilities. This resulted in the price crashing at the end of Phase 1 (2007). "

      The crashing of the European system would seem to have quite a bit to do with some inherent dodginess.

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    18. Mark Pollock

      Analyst

      In reply to Felix MacNeill

      I understand that the Europeans have had a scheme in place for a little longer than July 2012. And then there are all of those other places like NZ that we hear about. Surely someone can take a stab at the number of polar bears that have been saved as a result of all this effort?

      I would not expect an acorn to turn into a tall tree immediately. I would expect to see some signs of growth though and in the absence of any, I would properly conclude that it was a dud. .

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    19. Mark Pollock

      Analyst

      In reply to Michael Guy

      So, a major institutional merchant bank is supporting a government mandated compulsory trading scheme? What next? butchers demanding compulsory barbeques?

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    20. David Arthur

      resistance gnome

      In reply to Mark Pollock

      We haven't had a fair dinkum form of carbon pricing, we've had the dog's breakfast known as the Clean Energy Futures package.

      If they were fair dinkum about pricing carbon, they'd simply impose a tax, and use the revenue from that tax to cut other taxes.

      Ref 1) Dieter Helm, Economics, Oxford University "The Carbon Crunch: How We're Getting Climate Change Wrong--and How to Fix It"
      Ref 2) http://e360.yale.edu/feature/forget_kyoto_putting_a_tax_on_carbon_consumption/2590/
      Ref 3) Thomas L Friedman NYT op-ed, 17 March 2013 http://www.nytimes.com/2013/03/17/opinion/sunday/friedman-its-lose-lose-vs-win-win-win-win-win.html
      Ref 4) http://www.ceda.com.au/media/121695/a%20taxing%20debate%20%20the%20forgotten%20issues%20of%20climate%20policy.pdf

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    21. Greg North

      Retired Engineer

      In reply to Michael Guy

      Jeremy does have some in depth reflections about what other people feel or project Michael, no doubt about that and if we are able to get significant population reductions, that can only help our overall consumption.
      With continued blood letting that has been occurring over the last decade or so in a number of countries where population may be an issue, perhaps population decline is the bright dark side of that.

      We seem to have very mixed views in Australia about where our own population should…

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    22. Mark Pollock

      Analyst

      In reply to Alice Kelly

      Alice, on it's own, CO2 is too weak a greenhouse gas to cause any untoward increase in global temperature. To get around this inconvenient fact the tipping point was invented.

      At some (tipping) point, the slight extra temperature caused by CO2 is supposed to cause an increase in the amount of water vapour in the atmosphere. Water vapour is a powerful greenhouse gas and runaway global warming is meant to ensue.

      The science on this seems sadly unsettled and the tipping point keeps receding as the concentration of CO2 keeps rising. The new one seems to be 450 ppm.

      Until the science is a bit more solid it is impossible to say what the right level is. In the same way it's not possible to say what the right temperature of the earth should be.

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    23. Felix MacNeill

      Environmental Manager

      In reply to Mark Pollock

      Mark, if you're going to continue writing infantile crap like 'how many polar bears that have been saved' and 'the AGW disaster scare campaign' you've completely defaulted your right to be considered a rational adult and so are unworthy of any further responses.

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  2. James Hill

    Industrial Designer

    Can I "deposit" the trees I have planted in my backyard into a carbon bank?
    How about a twenty year lease on the land occupied by a tree being recognised and certified with a longitutde and latitude address and regular satellite verification.
    Then a market where the carbon sequestered in said trees can be traded with the certificates?
    Sounds exciting, when can we start?
    All the other attributes besides carbon associated with trees can be given a market value as well.
    It all depends upon what…

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    1. Wade Macdonald

      Technician

      In reply to James Hill

      You forgot seagrass and kelp bed carbon sequestration.

      Still, I wonder what will happen to these forests and oceans when this carbon fad is over and the multi nationals still privately own these areas of natural resources?

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    2. Alice Kelly
      Alice Kelly is a Friend of The Conversation.

      sole parent

      In reply to Wade Macdonald

      Wade, you keep posting claims you can't substantiate like "when this carbon fad is over".
      Really?
      When is this?
      Give us your best guess.
      What do you base your assertion on?
      Show me a graph that proves CO2 is not increasing rapidly.
      Or a study that shows both the impact on oceans. and the atmosphere are not problematic for the environment.
      Look at the youtube clip above, that shouldn't be too hard.

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    3. Wade Macdonald

      Technician

      In reply to Alice Kelly

      Full of assertions that I am not making aern't we? History is on the fads of resource exploitation through environmentalism are everywhere...where have you been?

      Big business will loose interest when the potential to make money from trading carbon credits is diminished through regulation.

      It is not a matter of if but when.

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    4. Chris O'Neill

      Retired Way Before 70

      In reply to Alice Kelly

      Wade would probably make better use of his time thinking about his grammar than waiting for a "fad" to be over.

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  3. John Newlands

    tree changer

    I agree that CO2 pricing is the right approach. However neither the EU ETS nor Australia's carbon tax have been rigorous in their implementation. I'd liken it to the standard of refereeing in TV wrestling matches.

    For starters I suggest no free permits (ETS) or industry exemptions (c.t.) for emitters over the threshold. Every permit must be bought and paid for. If not the Federal police shut down the plant. However if an industry like aluminium smelting (94.5% c.t. exempt) can't pay they get some…

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    1. Chris O'Neill

      Retired Way Before 70

      In reply to John Newlands

      "For starters I suggest no free permits (ETS) or industry exemptions (c.t.) for emitters over the threshold. Every permit must be bought and paid for."

      Hopefully our government will do that soon enough but bear in mind that less than one year ago EVERY permit was free and always had been. At least we are already vastly better than that. Perhaps we should be hoping it will always be at least this good (considering what will probably happen in September).

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  4. Sean Lamb

    Science Denier

    "Our children will enjoy in their homes electrical energy too cheap to meter... It is not too much to expect that our children will know of great periodic regional famines in the world only as matters of history, will travel effortlessly over the seas and under them and through the air with a minimum of danger and at great speeds, and will experience a lifespan far longer than ours, as disease yields and man comes to understand what causes him to age."

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  5. Malcolm Short

    Superannuation

    The author's naivety on this issue is astounding. Is she not aware that every commodity price in the world is 'fixed' or rigged by banking cartels? None of the proposed market-based solutions to the alleged problem of AGW will result in any measurable reduction in temperatures and it's most frustrating to see such tedious and nonsensical schemes being discussed as though they'll actually achieve this outcome.
    It should be apparent to even the most sincere AGW believer that the issue of climate change is being used as a vehicle to achieve centralisation of political control and the slow unwinding of democracy, as per the Fabian way. Why is it desirable to have Australian energy prices determined by some unelected commissioners of the EU and, ultimately, the UN? For some of the citizenry, national sovereignty is an ideal which shouldn't be forfeited so hastily, at least not in the name of saving the planet from questionable, unquantifiable and often imagined environmental threats.

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    1. Henry Verberne

      Once in the fossil fuel industry but now free to speak up

      In reply to Malcolm Short

      Oh please not more of this conspiracy theory stuff!

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    2. Mark Pollock

      Analyst

      In reply to Henry Verberne

      The author is quite clear that she wants control of this massive redistribution scheme taken away from "politicians" and presumably the electorates they represent. Perhaps you just glossed over the article.

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    3. Mark Pollock

      Analyst

      In reply to Mike Hansen

      Goodness me! We're exponentialising. I merely quote the author's words. I didn't even mention "suspend democracy" or "world government" and here am I indulging in a conspiracy theory.

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    4. Felix MacNeill

      Environmental Manager

      In reply to Malcolm Short

      Malcolm, using a phrase like 'alleged problem of AGW' is roughly like aeronautical engineers talking about the 'alleged problem of gravity' - it tends to completely undermine your credibility.

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    5. Felix MacNeill

      Environmental Manager

      In reply to Mark Pollock

      So, the Reserve Bank is a conspiracy? The judiciary is a conspiracy? The police force is a conspiracy? The armed forces are a conspiracy?

      Given that I didn't elect any of these bodies myself and they are only indirectly answerable to elected representatives, by your 'reasoning' they would also constitute a conspracy.

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    6. Alice Kelly
      Alice Kelly is a Friend of The Conversation.

      sole parent

      In reply to Mark Pollock

      And politicians have such a good record for caring much for anything beyond their own control/position/power, how dare Katherine ("she") suggest; "the need for a global carbon body, to regulate the global carbon currency, and help other countries "link with other schemes".That would make some sort of sense woonit.

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  6. Stephen Ralph

    carer at n/a

    I get very edgy when I read about carbon, banks, regulation.'

    Sounds like one big tax dodge to me. Don't big companies get away with enough as it is.

    What about making as simple as having a man with a big stick to whack the polluters over the knuckles and fine them a squillion dollars - or threaten to send them to jail (eventually).

    All of this selling and credits and dodging and weaving is not going to end well - for the planet.

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  7. Wade Macdonald

    Technician

    Quote...."It is important that we remove decisions on market function from the political arena so that we can get on with the task of reducing emissions."

    Good luck with that....I am sure the investment banking sector would be thrilled.

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  8. Alice Kelly
    Alice Kelly is a Friend of The Conversation.

    sole parent

    Katherine, Thank-you for your article. The link for "cut more than expected" seems to have changed, I am interested in this, can you help me? What have the reductions been since 2005? Also, do you see trade agreements or blocs playing any role in ensuring action?

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    1. Katherine Lake

      Research Associate at the Centre for Resources, Energy and Environmental Law at University of Melbourne

      In reply to Alice Kelly

      Hi Alice,
      Thanks for your comments. In the first three years of the EU scheme the data revealed that CO2 emissions were about 3% lower than the allocated allowances. Analysis has indicated that these were reductions made in response to the scheme (and not all over-allocation). See for example the article by Buchner et al "Over-Allocation or Abatement? A Preliminary Analysis of the EU ETS Based on the 2005–06 Emissions Data".

      Also, have a look at the annual EU greenhouse gas inventory report…

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  9. David Arthur

    resistance gnome

    "... when the EU’s Emission Trading Scheme (ETS) started trading in 2005, most member states had no system in place to measure greenhouse gas emissions from industry."

    Err, it's actually a piece of cake to know what CO2 is being emitted. All you need to know is how much and what types of fossil fuel are being used. This immediately tells you how many tonnes of carbon are being burnt, and the tonnes of CO2 emitted is simply 44/12 * tonnes of carbon being burnt.

    How did all these highly paid lawyers and consultants manage to miss that one?

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    1. David Arthur

      resistance gnome

      In reply to David Arthur

      The author rightly notes that "carbon pricing is still the most efficient tool to address climate change at the scale required." That's fair enough.

      By what stroke of disingenuity was this directly followed by the implicit assumption that carbon pricing is ONLY possible through emissions trading schemes?

      Surely the author and other economic and legal academics are aware of the simplicity of consumption taxes on fossil fuels? If not, here's a short list of remedial reading.
      Ref 1) http://e360.yale.edu/feature/forget_kyoto_putting_a_tax_on_carbon_consumption/2590

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  10. David Arthur

    resistance gnome

    "It is important that we remove decisions on market function from the political arena so that we can get on with the task of reducing emissions."

    Err, no. Actually, it is important to remove decisions on carbon pricing from the market so the market is not distracted (from the task of replacing fossil fuel technologies) by the gaming actions in trading markets.

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  11. David Arthur

    resistance gnome

    "... we might surprise ourselves and exceed emission reduction targets without even noticing."

    Err, no.

    Actually, the only emission target that matters is ZERO, as soon as our economy can achieve it. The reason for this is simple: in order to prevent icecap and permafrost thaw and sea level rise, and runaway warming due to rising methane from thawed permafrost, we need an atmosphere of not more than 350 ppm CO2 as quickly as can be achieved. Among other things, this means TOTAL cessation of fossil fuel use.

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    1. James Hill

      Industrial Designer

      In reply to David Arthur

      David,regard the legend of Cassandra, who foretold the fall of Troy and no-one believed her.
      It suggests that it is every man woman and child for themselves as far as any unified political action is possible.
      Even allowing that there is no government, only the marketplace and profit, then can no-one can postulate a profitable method of saving the planet?
      Rather pathetic of the marketeers to be so cravenly negative about the power of profit.
      If they have stopped worshipping the god of profit then which god are they worshipping now?
      Now there is a way of foretelling the future.
      A new Noah is coming?
      Or the Apocalypse?

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