KEY POINTS:
The Australian Government has firmed up its plans for an emissions trading scheme and several features of it will be seized upon by business lobby groups here as aspects ours should replicate.
In particular, they are likely to like the modesty of its environmental ambitions, its approach to
allocating free emission permits to large trade-exposed emitters and its "safety valve" price cap.
National's policy, reiterated by Prime Minister John Key in Parliament on Tuesday, is that our scheme should be "aligned as appropriate" with Australia's.
The qualification is important.
There are some big differences between Australia's starting position and ours, differences which a cash-strapped Finance Minister will be acutely aware of and taxpayers should be.
Chief among them is that Australia is on track to meet its rather lenient target under the Kyoto Protocol and consequently will not need to import large numbers of carbon credits from the rest of the world.
It can afford to have a scheme which does two things. It gradually introduces a carbon price into the economy to encourage the investments, large and small, which will reduce future emissions.
And it is fiscally neutral and redistributive - taking money (via the auctioning of permits) from emitters and doling it back out to groups it considers would be unfairly impacted otherwise, ranging from low-income households to the owners of coal-fired power stations.
In some cases they are robbing Peter to pay Peter. Bizarrely, transport fuels will be in the scheme from its outset on July 1, 2010, but for the first three years its impact on prices at the pump will be offset cent-for-cent by a reduction in other fuel taxes.
New Zealand, by contrast, is expected to exceed its Kyoto target by some 25 per cent. When the time comes for the Government to square accounts with other Kyoto countries post-2012 it will need to hold enough carbon credits to cover the overshoot.
The three potential sources are forest sink credits generated by forests planted since 1990 on land not previously forested, CER (certified emission reduction) credits generated by UN-certified emission-reducing projects in developing countries or surplus units allocated to other Kyoto governments, especially those in eastern and central Europe.
In any case they will cost money, of course, so the question for the designers of the New Zealand scheme is: how many will emitters be required to pay for and how many will taxpayers have to pay for?
Australian emitters, like their counterparts here, will be able to buy CERs on the international market and use them to meet their obligations to the Government. Canberra has dropped the Green Paper's intention to limit their ability to do that.
It means that carbon prices in both countries are likely to be set by the CER market.
The Australian Treasury acknowledges this. The figure of A$23 ($27.50) a tonne being bandied about as an initial price in the Australian scheme is its indicative guess, and probably about as reliable as the $15 a tonne its New Zealand counterpart trotted out a year ago.
The essential difference is that in New Zealand there will have to be a net inflow of credits into the country; in Australia there will not.
At least not for the period until the end of 2012. Beyond that it will depend on what emerges from the big Copenhagen conference in a year's time about the international regime post-2012.
The Australian scheme elaborated in this week's White Paper has been seen as a vote of no confidence in the prospects for Copenhagen. It is committing to a unilateral reduction in emissions of 5 per cent from 2000 levels by 2020 come what may, but up to 15 per cent if there is a good enough intention outcome at Copenhagen. That falls well short of the 25 to 40 per cent range seen as necessary if global warming is to be limited to a still-risky 2C.
It ill behoves anyone on this side of the Tasman to be scornful about that, however. At least the Australians have an intermediate target. We have none. At least they have a climate change policy. Ours is in shambolic limbo.
The Australian scheme covers 75 per cent of the country's emissions. Deforestation is not included, nor at this stage is agriculture. The White Paper acknowledges the desirability in principle of including agriculture but points to the practical difficulties of measuring emissions at a farm level. A decision on including agriculture is to be made in 2013.
As in New Zealand, to address the risk of "leakage", where emissions-intensive activities like making steel or aluminium migrate to countries where there is no carbon impost, emissions-intensive trade-exposed emitters will get a free allocation of credits. For the most emissions-intensive it will cover 90 per cent of emissions, for moderately emissions-intensive firms 60 per cent.
An intensity-based, rather than absolute, approach to free allocation is also permitted under the New Zealand scheme, but only within an overall cap which is to be phased out within 12 years starting in 2019.
By contrast the Australian scheme envisages a much gentler phase-out, initially 1.3 per cent a year. And its intensity-based approach to allocation is such that the proportion of credits in circulation which have been allocated free could well rise from 25 per cent initially to 45 per cent by 2020 if these industries continue to grow at the same rate as the rest of the economy, the White Paper says. Evidently the Rudd Government is okay with the fiscal implications of that.
Another feature of the Australian scheme which has its advocates here is a price cap.
It is intended as a transitional measure only, for the first five years of the scheme. It will start at A$40 a tonne rising in real terms by 5 per cent a year.
At the moment, high-quality (low-risk) CERs are trading for around $33 a tonne.
On the assumption that carbon prices, like other commodity prices, will rebound at some point over the next six or seven years, that safety valve may well be triggered. Again, that has fiscal implications.
Carbon prices will, of course, reflect the flux of expectations about the post-2012 global regime.
The economic stakes are such as to make the Doha trade round look like a doddle.
But it is worth noting that the European Union has just reaffirmed its unilateral unconditional target of a 20 per cent reduction in emissions from 1990 levels by 2020.
And US President-elect Barack Obama has named as his Energy Secretary Steven Chu, who has
a Nobel prize in physics and impeccable credentials in green technology.
Key and Kevin Rudd use identical rhetoric about the need to get the balance right between environmental and economic priorities.
But while the onset of global recession changes a lot of things, it does not change the laws of nature or the laws of arithmetic.
Given the countries' different starting points, Australia's mid-century target of a 60 per cent reduction in emissions from 2000 levels is similar to National's 50 per cent from 1990 levels.
But while Rudd is taking at least baby steps in that direction, Key is performing some kind of pirouette.