Published by the ABC, Australia’s National Broadcaster.

Fresh questions about the efficacy of an emissions trading scheme have been raised, after a new analysis by the UK-based non-government organisation, Sandbag, revealed major flaws with the European Union’s emissions trading scheme. This comes as the debate about climate change policy and carbon pricing gathers pace in Australia.

The Cap or Trap? (pdf) report finds that the second phase of the European ETS will fail to deliver significant carbon reductions. This will be a surprising outcome for many Australians who have been led to believe that emissions trading is ‘decarbonising’ Europe. According to report author Damien Morris:

…the ETS is on course to require savings of, at best, a miniscule 32 million tonnes of emissions between 2008-2012, despite covering 12,000 installations and 1.9 billion tonnes of emissions annually. Regulating a single power station over the same period could have had a greater impact.

So why is the European ETS performing so badly? Sandbag attributes the failure to the combination of a weak cap, an over-allocation of carbon permits, and inability of the scheme to cope with the 2009 economic downturn. As Morris explains:

An already weak cap for this period (2008-2012) became a severe over allocation of pollution permits when the recession caused a sharp drop in production and therefore carbon emissions. These lower emissions, far from helping Europe towards a low carbon future, may actually trap it into continued high carbon economy because the ETS allows the huge volume of unused permits to be carried over into the next phase of the scheme that runs from 2013-2020.

Morris says the on-going availability of cheap offsets “could allow Europe’s domestic emissions to grow a staggering 34 per cent from current levels by 2016″.

The Gillard government’s new cross-party Climate Change Committee aims to spearhead carbon-pricing legislation in the next term. The narrow terms of reference mean that it will recommend emissions trading, a carbon tax, or a combination of the two.

Sandbag’s research will make it difficult for ETS advocates of to present real-life examples of effective trading schemes. This could help tip the balance in favour of carbon taxation which has been which has been gaining momentum of late and boosted by the support of BHP chief executive Marius Kloppers.

Is carbon taxation a better option than emissions trading?

A long-standing argument against carbon taxation is that it cannot guarantee emissions reductions. Cap and traders say that emissions trading is superior to a carbon tax because it is a quantity instrument: it allows the market to price carbon at the level required to meet desired targets. While it sounds good in theory, when we consider the result of Europe’s ETS, the value of achieving notional carbon reductions without domestic carbon abatement is questionable.

Although a carbon tax cannot ‘guarantee’ specific targets, it can guarantee revenue. This should be viewed as strength and an opportunity. A hypothecated carbon tax — a tax dedicated to a specific purpose — has excellent potential to accelerate decarbonisation. This can be achieved by investing the revenue raised by taxing carbon emissions (or fossil fuels) in renewable energy and clean technology research, development, demonstration and deployment.

India has implemented a version of this by imposing a levy on domestic and imported coal. The revenue generated is earmarked for India’s National Clean Energy Fund. Although the levy on coal is small, around 50 rupees a tonne (approximately AUD$1.15), it will generate nearly $633 million for clean energy investment each year. The pool of money will help India achieve its goal of leading the world in deployed solar technology-set out in the government’s Jawaharlal Nehru National Solar Mission.

Australia could follow India’s example and establish a National Clean Technology Fund. An Australian version might incorporate and build on existing Commonwealth initiatives like the $1.5 billion Solar Flagships Program and $652 million Renewable Energy Future Fund, and build on them with secure long-term funding. The national fund could also finance new and upgraded transmission lines, the rollout of electric vehicle recharging infrastructure, and perhaps even high-speed rail between capital cities.

If, however, the committee opts for emissions trading alone, it will have to demonstrate how Australia will avoid the problems facing the European model. As I have noted previously, the worst climate policy Australia can hope for is one that gives us the impression of reducing carbon emissions while maintaining business as usual.