A Background to Emissions Trading

Carbon markets have experienced rapid growth, worldwide, as governments, businesses and individuals seek to reduce their greenhouse gas (GHG) emissions. In 2007 over US$64billion was transacted in the carbon markets, representing more than a doubling of volume compared to 2006 (World Bank (2008) “State and Trends of the Carbon Market 2008”).

On an international level, the ratification of the Kyoto Protocol has been the keystone policy driver for inter-governmental emissions trading. Regional schemes have been developed, and individual Governments have taken regulatory action. In areas without Government regulation, voluntary schemes have been established. In short, the international market is thriving.

Carbon markets have the potential to achieve emissions reductions at lowest overall cost. As a result, emissions trading will continue to be an important component of global action against the impacts of climate change.

In Australia, the Federal Government has announced the introduction of the Carbon Pollution Reduction Scheme by 2010. This scheme will reduce greenhouse gas (GHG) emissions and fulfil Australia’s obligation under the Kyoto Protocol, using a ’Cap and Trade’ approach. Under the current proposal, the Government will issue a number of ’Australian Emissions Units (AEUs)’, which represent the right to emit GHGs. Each unit is equivalent to one tonne of carbon dioxide. The total number of AEUs sum to the cap amount, which represents the total amount of emissions allowable for a certain sector of the economy. Those operating within these sectors will be required to purchase enough AEUs to cover their emissions and surrender these to the Government once a year.

In addition, participants will be allowed to purchase or trade permits, or to take measures to reduce their emissions if their cost of GHG abatement is low. This means firms with expensive costs of reduction can buy permits from those with lower costs. Each participant would seek the most cost-effective measures to meet their obligation, ensuring that the targets for GHG reduction across the sector are met in the most efficient way possible. And with strong incentives to find better ways to reduce pollution, innovation in new technologies for GHG abatement is expected to follow.

Australian firms are also well placed to benefit from opportunities to link our markets to international and regional schemes.