Power Shift is Australia’s first national youth climate summit. Join with thousands of other young people who are coming together to stand up against climate change and repower our future.


Speakers includie Tim Flannery (Australian of the Year 2007), Simon Sheik (Executive Director of GetUp), Larissa Brown (Young Environmentalist of the Year 2007) and more!
Power Shift will be held from 11-13th July 2009 at the University of Western Sydney Parramatta Campus.

Registration closes very soon so register online at www.powershift.org.au

Contact Ellen Sandell on 0400544754 or ellen.sandell@youthclimatecoalition.org for more information.

Emissions Trading: The Pros and Cons

April 8th, 2008
Posted in: Economics
Relevant tags:

The externality associated with the non-rival and non-excludable costs of the release of carbon dioxide into the atmosphere is inherently difficult to internalise. Emissions trading has emerged as a popular method of achieving socially optimal emissions reduction. The following analysis discusses the flaws in emissions trading – particularly in light of its use in the European Union – and puts forward suggestions regarding policy initiatives that may help overcome these problems.

The recent use of emissions trading has created a Coasian market for ‘polluting property rights’, which has allowed for increased information sharing, preference revelation and signalling compared with approaches based on strict government intervention (DEFRA, 2003). The so called ‘cap and trade’ system has been used to limit total greenhouse gas emissions and grant allowances to companies giving them the right to pollute. Firms wishing to exceed their allowance must purchase credits from those polluting below their allocation or face heavy penalties.

Both emissions trading and conventional Pigovian taxation provide incentives for individuals and firms to reduce their greenhouse gas emissions to a socially optimal level. Pigovian taxes involve the government increasing the cost per unit of ‘carbon inputs’ while the market determines the efficient quantity. By contrast, ‘cap and trade’ emissions trading schemes involve a government set quantity with a market determined price of carbon based on the reallocation of polluting permits (Gittins, 2007). Controlling either variable theoretically yields the same emissions reduction; however the advantage of emissions trading is that polluting rights are allocated through a market to those who can make the most efficient use of them. Companies that can affordably reduce their emissions will do so in order to sell their credits while firms that generate the highest valued output per unit of input will choose to buy polluting rights (DEFRA, 2003).

To further illustrate this point, if two firms were to face a tax, the emissions target (which would equate to the socially efficient level ‘Q*’ where MB = MSC if perfect information were to exist) would be achieved since neither firm will produce when it is no longer profitable to do so. If tradeable permits were used, the firm for which emissions reductions are more costly could buy permits from the other firm, and ‘Q*’ could be reached without sacrificing as much output. Emissions trading schemes arguably have lower administrative costs due to the incentive for firms to negotiate amongst themselves in order to achieve a ‘least cost’ reduction (Pindyck & Rubinfeld, 2005). It also succeeds in promoting the development of innovative ways to reduce the original externality.

Limited knowledge of climate science creates uncertainty surrounding the probability and magnitude of future consequences, making it impossible to measure the size of the externality and determine the socially optimal level of emissions. This presents a problem for any reduction mechanism, and provides a breeding ground for lobbyists to push their own agenda without the scrutiny that might exist if more accurate information was available. This uncertainty is arguably one of the reasons why Australia is yet to establish an effective emissions trading scheme. Given the possible irreversibility of damage to the Earth’s climate, Wills (2006 p. 350) argues that policy makers ought to follow the maximum decision rule and choose a cautious approach which ‘maximises the minimum outcome’.

While the use of markets appears to succeed in making emissions reductions occur at minimal cost, critics argue that trading schemes can provide a short term incentive to over pollute. Harvey (2007) describes how firms that have already reduced their emissions in the past may ‘lose out’ under such a system. This is because many such schemes allocate polluting permits based on the past emissions of each firm. Companies often have an incentive to increase polluting behaviour prior to a scheme’s implementation in order to inflate past emissions data and receive a higher allocation. Michaelowa and Butzengeiger (2005) describe how this process – coined ‘grandfathering’ – may also result in blatant over-allocation, leading to a market with low liquidity and a low permit prices. Policies that provide allocations on the basis of average industry sector emissions rather than those of individual firms could be adopted in order to virtually eliminate the incentives for individual firms to over-pollute as a means of enhancing their entitlements. The use of reputation could also further encourage voluntary compliance, as many consumers arguably place significant existence value on a healthy atmosphere and would be inclined to support like minded corporations.

The European Union Emissions Trading Scheme (EU ETS)

The European Union Emissions Trading Scheme (EU ETS) was the world’s first large scale trading system for carbon dioxide. Ellerman and Buchner (2007) outline the process of allowance allocation in the EU ETS, and argue that a lack of ‘installation-level’ data has had considerable consequences for the cost of enforcing the scheme. The absence of any existing legal authority to collect the data within the desired time frame meant that planners required extensive industry cooperation. While few examples of fraudulent data submissions exist – likely due to incentives for firms to divulge information in order to receive allocations – the voluntary nature of industry participation highlights the potential costliness in monitoring and enforcing any emissions trading scheme on a large scale. The establishment of concise legal guidelines for firms to submit their emissions data is essential for the future enforcement of emissions trading.

Restricting emissions to reflect past levels formed the basis of Kyoto protocol, which used 1990 as its base year. It was therefore desirable for the EU ETS to base allocations on historical levels, so that participating countries could automatically meet their Kyoto targets. Ellerman and Buchner (2007) found that this was not feasible, again due to fact that ‘installation-level’ data from 1990 was impractical and too costly to obtain. Furthermore, significant growth in certain countries and industry sectors since 1990 makes such a historic base year inappropriate. Future international agreements ought to adopt reduction targets based on a portion of current emissions. Collaboration between local policy makers and those involved in formulating international agreements is essential in ensuring that the cost of gathering the information required to implement global emission reduction targets is minimised.

Beauman (2007) discusses other significant hurdles to any emissions trading scheme in the context of the global steel manufacturing industry. Ninety per cent of the sector’s emissions come directly from the primary blast furnace method, which is far cheaper than environmentally friendly alternatives. Given the inefficiency of this method, firms utilising it must purchase carbon credits, adding significantly to their cost of production. This has led many European steel manufacturers to source semi-finished steel from lower-cost locations such as Brazil and Ukraine, which are not subject to the EU ETS (Beauman, 2007). The obvious implication of this trend is that carbon dioxide emissions are not reduced; they merely occur elsewhere instead. This significant flaw is arguably not inherent in emissions trading; rather it is the result of such a scheme’s inability to include all members of the global economy. Given the interconnected nature of world industry, future policy makers must ensure that any emissions trading scheme also encompasses developing nations in some way. Additionally, the ‘carbon inputs’ used in the overseas manufacturing of imported goods could count towards the emissions of importers as a way of preventing the outsourcing of ‘carbon intensive’ manufacturing.

The diverse range of contributing pollutants and industry sectors undermine the efforts of any social coordination systems to accurately target the cause of climate change. Harvey (2007) discusses how greenhouse gases such as nitrous oxide produced as by products of processes used to manufacture chemicals are not included in the EU ETS, despite contributing nearly five percent of total emissions; a proportion which greatly exceeds the market capitalisation of the chemical industry. The difficulty of any one mechanism to fully internalise an externality resulting from numerous causes could be aided significantly if future emissions trading schemes were to merely measure the effect of various greenhouse gases in terms of their ‘carbon dioxide equivalent’, or the amount of carbon dioxide that would have the same global warming potential. Adopting such an approach could prevent certain industries from avoiding their emission reduction obligations.

The use of emissions trading is an effective means to encourage industry to reduce its greenhouse gas emissions; however flaws in its implementation need to be addressed in future policy initiatives. Any emissions trading scheme needs to be carefully integrated with international agreements to ensure consistent targets, minimal information costs and the possibility of permit exchange between regions. Given the uncertainty over the likelihood and magnitude of future events, policy makers ought to adopt a cautious approach given the irreversibility of climate change damage.


Beauman, Chris (2007), “Climate change poses stern challenge” in Financial Times. London (UK): Oct 8, 2007. pg. 4

Ellerman, A. Denny and Buchner, Barbara K. (2007), “Symposium: The European Union Emissions Trading Scheme: Origins, Allocation, and Early Results” in Review of Environmental Economics and Policy, Winter 2007, v. 1, iss. 1, pp. 66-87

Freebairn, John (2003), “Principles for the Allocation of Scarce Water” in Australian Economic Review, June 2003, v. 36, iss. 2, pp. 203-12

Gittins, Ross (2007), “Carbon trading v taxes – a winner eases ahead” in The Sydney Morning Herald 31/03/2007 viewed 10/10/2007 <http://www.smh.com.au/news/business/carbon-trading-v-taxes–a-winner-eases-ahead/2007/03/30/1174761748992.html>

Harvey, Fiona (2007), “Doubt about regime” in Financial Times. London (UK): Sep 18, 2007. pg. 3

Michaelowa, Axel and Butzengeiger, Sonja (2005), “EU Emissions Trading: Navigating between Scylla and Charybdis” in Hamburg Institute of International Economics; Climate Policy, 2005, v. 5, iss. 1, p. 1-9

Pindyck, R. & Rubinfeld, D. (2005) “Microeconomics” 6th ed. Pearson Prentice Hall New Jersey p. 642-653

Stern, Nicholas (2007), “The Economics of Climate Change – The Stern Review”, Cambridge University Press

Wills, I. (2006), “Economics and the Environment: A signalling and incentives approach” 2nd ed, Allen & Unwin NSW p. 5, 240-260

(UK) Department for the Environment, Food and Rural Affairs (2003), “Emissions Trading Schemes”, viewed 03/09/2007 <http://www.defra.gov.uk/environment/climatechange/trading/index.htm>

European Commission (2007), “The Kyoto Protocol – A Brief Summary”, viewed 03/09/2007 <http://ec.europa.eu/environment/climat/kyoto.htm>

Intergovernmental Panel on Climate Change (2007) “Climate Change 2007: The Physical Science Basis” in Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change

Author unknown (2006), “Govt rules out carbon tax” in ABC News Online 09/11/2006
Viewed 09/10/2007 <http://www.abc.net.au/news/newsitems/200611/s1785099.htm>

Entries and nominations are now invited for the Young Leaders in Environmental Issues and Climate Change prize, one of 20 prizes on offer in this year’s competition and one of only two in the category of Science Leadership!

Sponsored by the British Council, the Eureka Prize for Young Leaders in Environmental Issues and Climate Change is awarded to a young Australian aged 21 – 30 for scientific or technological leadership in responding to the challenges that threaten our environment and our climate.

The prize is intended to benefit outstanding young people who have demonstrated:

  • scientific or technological leadership which aims to improve the environment or reduce the impact of climate change, and
  • the potential to accelerate quickly into leadership positions in fields relevant to this prize.

The winner will receive a $10,000 study tour to the United Kingdom, organised by the British Council.

Entries close 2 May 2008

For further information on the prize, judging criteria, and how to enter, go to australianmuseum.net.au/eureka or email eureka@austmus.gov.au

The following list consists of photos I have gathered from around the internet, the subject matter of which relates to climate change, its causes and its effects.   If you find these photos interesting, please bookmark this site as I will make similar posts in the future.

Perito Moreno Glacier, Argentina
The Perito Moreno Glacier is one of the most important tourist attractions in the Argentine Patagonia. The terminus of the glacier is 5 km wide, with an average height of 60 meters above the surface of the water, with a total ice depth of 170 meters.

Night shift
A dramatic shot of a refinery in action!

Vanishing City by Priya Verma
One of the winners of the top prize for the 2006 British Council USA Climate Change Photo Competition

Shanghai: Central intersection
Intersection of the Yan’an and North-South elevated roads in Shanghai. This particular section brightly violet illuminated at night.

London climate change demonstration
A sea of people protest at the London Climate Change Demonstration in December 2007

Smog City
The urban landscape of Shanghai disappearing in smog.

Darkness, Earth Hour
A comparison of the Sydney CBD during and immediately following Earth Hour 2007.

Quixote’s Nightmare
The San Gorgonio pass, home to the Palm Springs windmills, creates a perfect wind tunnel, allowing for energy production upwards of 300 days a year. This photo shows a spectacular view of the wind farm at sunset.

This amazing shot shows a barren, devastated landscape used to fuel a coal fired power station in the distance. An all too familiar scene throughout the world today.

  • On March 29 at 8 pm cities around the world will plunge themselves into darkness as a gesture in the fight against global warming. At a similar event in 2007, Sydney residents and businesses demonstrated their concern about global warming by switching their lights off for one hour. The Earth Hour campaign was launched by the World Wide Fund for Nature Australia (WWF) and the Sydney Morning Herald, and was part of a larger effort to reduce Sydney’s annual emissions by 5 per cent. The event reduced electricity consumption during the hour by 10.2 per cent, and nearly 2.5 million people (57 per cent of Sydney’s population) are believed to have participated. In 2008, Sydney will not be the only city participating. The following is a list of cities taking part in the event:

    San Francisco
    Tel Aviv

    (Source: Earth Hour official site)

    The actual reductions in carbon dioxide emissions as a result of Earth Hour will be negligible (less than one hundredth of a percent of Sydney’s annual emissions). Caroline Overington (The Austrailan) criticised Earth Hour in 2007 saying that it was a “monumental flop”. Readers should however note that The Australian is owned by News Limited (a rival of the newspaper that sponsored the event). One prominent neo-conservative blogger (whom I will not dignify with a link) has even started an ‘Anti-Earth Hour’ campaign in which she encourages readers to turn on as many household appliances as possible during the time when Earth Hour is scheduled.

    Despite the criticism of a handful of individuals, the overall reaction by the world’s media last year was overwhelmingly positive. Whilst I agree with critics who make the somewhat obvious statement that actual emissions reductions will be negligible, I think the event is worthwhile for a few reasons:

    • It has received and will continue to receive a large amount of publicity. It is a very cost-effective way to promote the cause of preventing climate change.
    • It will raise the awareness of individual participants regarding the household activities that cause carbon emissions. People will feel empowered to make small changes in their daily lives on an ongoing basis (eg to switch unnecessary lights off every night!)
    • It sends a message to governments and political parties that this is an issue that people are concerned about. 57 per cent of the population is enough voters to win an election!
    •  It could lead to future events that are larger in scale and scope

    I strongly encourage all readers to participate in Earth Hour 2008 by switching their lights off for an hour at 8 pm on March 29. Please send photos (eg of your city’s darkened skyline) and I’ll be glad to post them here!

    For more information, please visit the Official Earth Hour site or any of the following blogs with useful information and discussion about Earth Hour:

    Join Earth Hour on March 29 – Powerfull Living

    The City of Ottawa Signs up for Earth Hour Green Living Ottowa

    Water, rivers and climate change are inextricably linked, and are ringing warning bells across the world. More than ever before, the global water situation is uniting people in hardship, with billions being spent to protect water supplies, livelihoods and, ultimately, lives.

    In Australia, one of the driest continents, a growing population and drying climate is challenging environmental scientists, water managers and politicians to find short and long-term solutions to the growing crisis. And answers are not cheap or easy, often being social problems that require political action.

    The statistics alone are frightening. Of the water available for Australians to use, one quarter of the rivers and lakes are already used for drinking, industry and agriculture, and one third of underground water is being pumped to the surface and used for the same purposes.

    If you ask Australia’s national science agency, the CSIRO, about climate change, the outlook is bleak. By 2030 rainfall on the major capitals (except Hobart) could drop by 15 per cent. According to the 2001 report, Climate Change Projections for Australia, Perth could loose up to 20 per cent of rainfall. At the same time, rising temperatures will increase evaporation, further reducing water supplies in dams, rivers and reservoirs.
    In another recent scientific report by the same agency, which examines water price implications for each of Australia’s main cities and regions in 25 years’ time, the real price of water could skyrocket.

    The 2006 report, Without Water: The economics of supplying water to 5 million more Australians, says if governments do not act to expand water trading and access ‘new’ sources of water such as building desalination plants, establishing large sewage recycling schemes and making use of storm water, the price of water would increase by between five and ten times in large cities to manage demand.

    Internationally, the situation is not much better, and in many areas is far worse. The United Nations describes the global water situation as a “crisis… essentially caused by the way in which we mismanage water.” The U.N. is so concerned about water, it has named 2005 to 2015 as the Decade of Water.

    More than 2.7 billion people will face severe water shortages by the year 2025 if the world continues consuming water at the same rate, the United Nations has warned in its annual World Water Assessment Program report.

    The looming crisis is being blamed on mismanagement of existing water resources, population growth and changing weather patterns. The areas most at risk from the growing water scarcity are in semi-arid regions of sub-Saharan Africa and Asia.

    “Even where supplies are sufficient or plentiful, they are increasingly at risk from pollution and rising demand,” says U.N. Secretary General Kofi Annan.

    Extremes in water supply deliver unacceptable shocks to the developing world, explains World Bank Senior Water Advisor, David Grey. “Monsoons, droughts, depleted groundwater resources, and typhoons devastate poor countries because they’re in too deep a hole economically to reduce their risk,” he says.

    Grey, soon to visit Australia as a keynote speaker for the International Riversymposium, sees a strong link between the sophistication of a country’s water management and its economic health. He says investors are avoiding countries with unpredictable food production, health problems related to poor water quality, and unreliable electricity supplies.

    “Investment doesn’t flow to places where catastrophic water events cause huge social and economic problems and large-scale losses of life,” says Grey.

    Like many international water experts, Grey believes Australia must take a lead role with international assistance, training and capacity building for river management, particularly in the Asian Pacific region. He’s impressed by organisations such as the International Riverfoundation which has set up ‘twinning’ programs to help developing countries better manage their river catchments.

    Partnerships and community action are critical to managing water and protecting rivers. Many will be highlighted at the coming International Riversymposium in Brisbane in September.

    The theme, ‘Managing rivers with climate change and expanding populations’ will investigate the challenge of meeting human needs for water under changing climatic conditions. It’s an opportunity for hundreds of people to share ideas, case studies and examples on how to tackle threats to rivers and catchments.

    “Local communities can do amazing things,” says Riversymposium chair Professor Paul Greenfield of the University of Queensland. “There are many positive stories showing how science, public policy and community action are addressing river and global warming issues.”

    “For example, the Bulimba Creek Catchment Association, typical of many local conservation groups throughout Australia, has an outstanding record of revegetating bushland and improving water quality in a network of Brisbane creeks,” says Professor Greenfield.

    “The association coordinates Waterwatch, supports 23 local Bushcare groups, provides training programs to volunteers, and involves students and community groups in practical conservation projects.”

    “Since 1999, the group has involved the community in rehabilitating 46 sites within the catchment, and four sites outside it with support from Landcare, the Natural Heritage Trust and local leaders.”

    Each year, the symposium highlights new international and Australian industry practices, government regulations, technology and community education programs to sustain river water supply and quality. The four-day event also includes the prestigious Thiess International and National Riverprize.

    The prize, regarded as the ‘Noble prize for saving rivers’, recognises outstanding achievements in river conservation and management. There are overseas nominations from Israel, U.S.A., Kyrgyzstan, China, and Canada vying for the $225,000 Thiess International Riverprize. There are also nominations from Australia competing for the $75,000 Thiess National Riverprize.

    While Australia may not yet be experiencing some of the more dramatic and life threatening situations as many river systems overseas, the clock is ticking, particularly in relation to the current drought and low levels in large dams that supply water to major population centres.

    The 9th International Riversymposium will be held at Brisbane’s Convention & Exhibition Centre from 4 -7September as part of the city’s annual Riverfestival. Other activities include Riverfire, Riverfeast and post-symposium study tours.

    Regular updates on international river issues, such as water scarcity, estuary flows, wastewater treatment, community consultation, legal frameworks, damming rivers and water policy, will be published in free e-newsletters. For more information please visit the following websites:



    This article was written by

    Don Alcock
    International Riversymposium Media