What would an ideal system look like? Mike Young University of Adelaide EMISSIONS TRADING

2 Global warming potentials

3 CO2-e for Australia CO 2 + CH 4 + N 2 O (99.7%)

KYOTO PROTOCOL Negotiated December 1997 Needs 55 country or 55% ratification 6 gases 1990 benchmark 1st commitment period CDMs from 2000

5 Years Cap set for 2nd Commitment Period 1st Commitment Period Australian CDMs with non-Annex 1 countries Assigned amount CDM credits Emissions cap { }

6 Years Cap set for 2nd Commitment Period 1st Commitment Period Australian CDMs with non-Annex 1 countries 1995 Inventory (excluding land clearing) Assigned amount CDM credits Emissions cap { Inventory (including land clearing) }

7 Design Principles Adaptive Framework Clear rights, entitlements and obligations Low transaction costs Minimum legal risk Equity among all sources and sinks

SUCCESSFUL EMISSION RIGHTS SYSTEMS Cap emissions Are designed for adaptation Allocate equitably - via permit auction - via shares - combination of two Are pragmatic Clear rights, entitlements, obligations Minimal legal risks

9 Emissions Trading Shares of Tradeable Amount Permits Permit accounts

SHARES AND PERMITS Initially, shares in each gas Shares have renewal guarantee Fixed share of assigned amount based on inventory CO2 - e Permits last until acquitted Reductions shared pro-rata Windfall gains to Crown

SHARE REGISTER Record ownership Electronic Minimum Trade: 1 share Could be mortgaged

12 Emissions Permit Account

13 A Permit Cheque Pay ____________________________________________ The sum of ________________________________ tonnes CO 2 -e Emissions Trading Australia Signature___________________ ___ : Date ____________ __________t

14 AUSTRALAN GREENHOUSE GAS EMISSIONS

WHAT TO TRADE? Sufficient emissions Sufficient firms Low cost monitoring

PERMIT ACCOUNTS All in C02 - e No charge for trading in Phase 1 Account Fee Full permit trading Penalty - 3 times value after 1 month grace period

HIGH LEVEL ISSUES Windfall gains - 5% return to community Legislation – Parallel in each state Where to acquit – upstream vs downstream? How to allocate shares