What happens to carbon trading after Durban?
The collapse of the price of carbon permits in Europe tells you everything you need to know about the prospects for international carbon trading. Unfortunately, the government isn't listening.
Earlier this week Climate Change Minister Greg Combet rejected the idea that there are serious issues with international carbon trading and yesterday spoke rosily about the global carbon market's prospects while the EU carbon price crashed.
To support his argument Combet cited the World Bank's Carbon Finance Unit State and Trends of the Global Carbon Market 2011 report that the market has now grown to $US140 billion ($136bn). But he's clearly only read it to recite convenient anecdotes.
According to the report "after five consecutive years of robust growth, the total value of the global carbon market stalled suffering from the lack of post-2012 regulatory clarity".
Meanwhile the price of some emissions permits "fell by double-digits for the third year in a row" and "shrank as well in 2010".
A carbon market recession should hardly come as a surprise.
An international agreement that provides regulatory clarity so countries commit to cutting their emissions is central to the stability and security of a workable global carbon market.
Until now clarity has been provided by the Kyoto Protocol. But on December 31, 2012, Kyoto expires without a successor agreement.
Since the 2007 Bali summit countries have been negotiating a successor agreement but cannot agree on how it is to be achieved, despite it having a huge influence on how we should design our own scheme.
At present, negotiations surround whether countries should seek emissions cuts through a second-generation Kyoto Protocol or a non-binding, long-term co-operative action agreement.
Poor countries want a second-generation Kyoto because it obliges rich countries to cut emissions while they're not bound to do anything. Rich countries want the non-binding agreement because it brings every country into the same tent.
The failure at Copenhagen was about this unresolved impasse.
If agreement eventually can be reached, large emitting countries such as the US, China and other economies will then design their domestic emissions reduction schemes to work within this framework. Trying to do this retrospectively is likely to be harder.
In three weeks countries will descend on Durban, South Africa, for the last opportunity to successfully lock in a post-Kyoto deal before the protocol expires. Not even the Gillard government believes that will be achieved.
A recent survey of carbon traders found that fewer than 5 per cent were optimistic there would be a new global emissions reduction agreement by 2015. Their faith rose only to about 20 per cent for one by 2020.
At least Kevin Rudd realised after Copenhagen's collapse that introducing a carbon price should be deferred until there is greater international clarity.
But the Gillard government appears oblivious as they've guzzled the Greens' carbon Kool-Aid.
As Treasury modelling outlines, Australia will rely heavily on international carbon trading to keep the scheme's cost down.
The point of carbon trading is to facilitate cutting emissions where it is cheapest first and where it is most expensive last. Mapped across a 100-year time scale, emissions in Australia would not be cut until the last decade.
The reason is because the gap between the source of the majority of our emissions from the burning of cheap, plentiful coal for electricity and the next viable alternative in gas is so large.
To make gas competitive requires a carbon tax of at least $40 a tonne. To rely on renewables the carbon price needed is in the hundreds of dollars.
Not that other schemes are providing much confidence.
Before its closure in the middle of last year, the price of voluntary Chicago carbon exchange permits plunged from $7.40 a tonne to a mere 5c.
And Europe's carbon price has not been in parity with Australia's $23 a tonne price since June and now sits at about $10 following a downward price trend.
As long as the EU's emissions trading scheme accounts for 97 per cent of the global carbon market, the price will be set in Europe and a price drop there will significantly influence whether emissions cuts will be achieved in Australia.
Not that Europe is leading by example. China accounts for 40 per cent of Europe's emissions reduction through Kyoto's clean development mechanism that allows developed countries to buy emissions reduction in developing countries and count the cuts against their own register.
At least Europe is consistent. It is going cap in hand to China to finance its debt crisis and then giving it back to China to cut its emissions. It's all becoming a bit of a merry-go-round.
The lesson for Australia should be not to get ahead of ourselves. Talk of climate leadership may be a good sound bite. But it's a global challenge and requires a globally co-ordinated solution to successfully cut emissions at least cost.