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Creating an Emissions Trading System in ten steps

By Dr Anthony Horton

In order to move to a low carbon future and limit global average temperatures to 2°C, a number of steps are required. Decarbonising electricity production, switching to cleaner fuels, improving energy and resource efficiency, and shifting investment patterns are among them.

According to a joint handbook produced by the International Carbon Action Partnership and the Partnership for Market Readiness, published by The World Bank, carbon pricing is now a key part of the move to a low carbon future. This handbook entitled ‘Emissions Trading in Practice: A Handbook on Design and Implementation’ was produced to help decision/policy makers and stakeholders design an emissions trading scheme (ETS) that is effective, credible and transparent. It draws on lessons from ETSs around the world including the European Union, several provinces and cities in China, Quebec, California, the Northeastern United States, and New Zealand. It discusses the creation of an ETS in ten steps.

Currently operating in 35 countries, 13 states/provinces and 7 cities (and covering 40% of global GDP) an ETS is a policy tool that can achieve a range of environmental, economic and social outcomes. Before one is designed, a Government must decide how much the ETS will contribute to its emissions reductions target, the rate at which it will decarbonise its economy, and how the costs and benefits will be distributed. Other important considerations include a target area’s current and evolving emissions profile, existing regulatory environment and size, concentration, growth, and volatility of the economy.

The ‘Emissions Trading in Practice: A Handbook on Design and Implementation’ published earlier this month contends that a carbon price can direct the flow of private capital, promote actions to reduce and mitigate emissions, and inspire creativity in developing low carbon products. It further outlines ten steps for creating an ETS as follows:

Decide on the scope of the scheme

  • Which sectors and gases will be covered
  • Which industries and companies will be included
  • What thresholds will be set

Set the emissions cap

  • Creating a baseline dataset to determine the cap
  • Determining the level and type of cap
  • Choosing a timeline for setting the cap and provide a long term cap trajectory

Distribute allowances


  • Matching emissions reduction allocation methods to policy objectives
  • Defining eligibility
  • Methods for free allocation and balance with auctions over time

Consider the use of offsets

  • Deciding whether or not to accept offsets from industries and companies not included in the scheme from within and/or outside the geographical area covered by the ETS
  • Choosing eligible sectors, gases and activities
  • Deciding limits on the use of offsets and establishing a system for monitoring, reporting, verification and governance

Determine temporal flexibility

  • Setting rules for banking allowances
  • Defining the terms for borrowing allowances and early allocation
  • Confirming the length of reporting and compliance periods

Address price predictability and cost containment

  • Establishing the rationale for (and risks associated with) market intervention
  • Choosing whether or not to intervene to address low prices, high prices or both
  • Deciding the appropriate instrument for market intervention and the degree of delegation for market oversight

Ensure compliance and oversight

  • Identifying the regulated companies and monitoring their reporting systems, plus managing the performance of emissions reduction verifiers
  • Establishing and overseeing the ETS registry as well as the market for ETS emissions units
  • Designing and implementing the penalty and enforcement approach

Engage stakeholders, communicate, and build capacities

  • Mapping stakeholders and respective positions, interests and concerns; coordinated across departments for a transparent decision making process
  • Designing an engagement strategy for consultation with stakeholder groups specifying format, timeline and objectives in view to creating a communication strategy that resonates with local and immediate public concerns
  • Identifying and addressing ETS capacity building needs

Consider linking their ETS to another Government’s ETS to broaden access to lowest cost emissions mitigation

  • Determining linking objectives and strategy, and identifying linkage partners
  • Confirming the types of link and aligning key program design features
  • Forming and governing the links

Implement, evaluate and improve

  • Deciding on the timing and process of ETS implementation
  • Establishing the process and scope for reviews
  • Evaluating the ETS to support reviews

These ten steps to creating an ETS as outlined in the handbook are straightforward and discussed in detail. Given that this handbook is based on experiences of ETSs from around the world, I would like to think that any Government considering adopting an ETS would review the handbook and make good use of the ten steps to implement it. With each new report written and published on ETSs and the environmental, economic and social outcomes being achieved there is little excuse not to consider adopting an ETS as part of moving to an inevitable low carbon future.

rWdMeee6_pe About the author: Anthony Horton holds a PhD in Environmental Science, a Bachelor of Environmental Science with Honours and a Diploma of Carbon Management. He has a track record of delivering customised solutions in Academia, Government, the Mining Industry and Consulting based on the latest wisdom and his scientific background and experience in Climate/Atmospheric Science and Air Quality. Anthony’s work has been published in internationally recognised scientific journals and presented at international and national conferences, and he is currently on the Editorial Board of the Journal Nature Environment and Pollution Technology. Anthony also blogs on his own site, The Climate Change Guy.


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  1. johnlward010

    The pea and thimble trick, is to strip $1.3 Billion from Australian renewable Energy Agency (ARENA) and call it Treasury money . Then a cool 1$Billion from the Clean Energy Finance Corporation (CEFC) and call it new money for emerging technologies in Clean Energy Innovation Fund (CEIF). The LNP has invented a new entity that invests $100 Million a year only, and strangely, doing what Arena was already doing. In the mean time The Clean Energy Finance Corporation is reduced by $1Billion and ARENA has no fund of its own. Score so far in theory; Gillard, Independents & Greenies (GIG) down $2.3Billion Treasury up $1.3 Bn.

  2. johnlward010

    People in the renewable energy industry are afraid to take on the Government due to their apprehended consequences. [The bullies are winning so far].
    I need help, to back me up by enabling me to run a section 75.v of the Constitution, to get an injunction or a writ of Mandamus from the High court to put these ministers back in their box.
    I believe I have standing. Any negotiations with banks are such, that the Clean Energy Finance Corporation is the preferred lender but the intention of the government to shut it, the CEFC, down has made me read the documents they produced; they appear to be political documents that seem not to match, the public utterances of former Treasurer Hockey and Christopher Pyne but, would appear designed, to cause fear and confusion in the Industry.
    I am amazed that these guys think they could undo an Act of Parliament by ignoring the limits the Act placed on their revoking the previous Government’s investment mandate .
    I seek your advice on the matter of Senator Cormann and former Treasurer Joe Hockey attempt to close down the Clean Energy finance Corporation, by using the Act itself; but ignoring the fact that section 65 of the Act, limits and precisely forbids with mandatory language, the very action they propose. The treasurer and now his replacement have run an outrageous bluff on the renewables industry, and the effect of their public utterances means they have almost got away with it;
    They simply cannot change the Act without going back through Parliament. The original Mandate to the Board of the Finance Corporation was made by section 64(1) of the Act was there for Treasurer Wayne Swan, to empower the corporation, in the first instance, to proceed. Section 64 is not a vehicle for ministers to point the organisation in a direction against the object of the Act or to make or not make a particular investment.
    The object of the Act is to ‘facilitate increased flows of finance into the clean energy sector.
    They have demanded a higher investment return from the corporation to minimise exposure risk of taxpayers’ funds. It appears the direction is actually inconsistent with the object of the CEFC Act.The direction does seem to be transferred across from the Future Fund Investment Mandate Directions 2006.

    The key sections of the CEFC Act are set out below.
    It is worthy of note that the Ministers advisors have studiously avoided section 65 of the Act, which limits the ministers attempts to write a contrary investment mandate. Treasurer Swan and Senator Wong have been prescient in putting an ‘Effects test’ in section 65(a) just as Malcolm Turnbull has recently done in his ‘Competition Policy.

    Section 64 Investment Mandate
    (1) The responsible Ministers may, by legislative instrument, give the Board directions about the performance of the Corporation’s investment function, and must give at least one such direction. The directions together constitute the Investment Mandate.
    Note: For variation and revocation, see subsection 33(3) of the Acts Interpretation Act 1901.
    (2) In giving a direction, the responsible Ministers must have regard to the object of this Act and any other matters the responsible Ministers consider relevant.
    (3) Without limiting subsection (1), a direction may set out the policies to be pursued by the Corporation in relation to any or all of the following:
    (a) matters of risk and return;
    (b) technologies, projects and businesses that are eligible for investment;
    (c) the allocation of investments between the various classes of clean energy technologies;
    d) making investments on concessional terms;
    (e) the types of financial instruments in which the Corporation may invest;
    (f) the types of derivatives which the Corporation may acquire;
    g) the nature of the guarantees the Corporation may give and the circumstances in which they may be given;
    h) broad operational matters;
    (i) other matters the responsible Ministers consider appropriate to deal with in a direction under subsection (1).

    Section 65 Limits on Investment Mandate
    The responsible Ministers must not give a direction under subsection 64(1):
    (a) that has the purpose, or has or is likely to have the effect, of directly or indirectly requiring the Board to, or not to, make a particular investment; or
    (b) that is inconsistent with this Act (including the object of this Act).

    As you will be aware the Clean Energy Finance Corporation Act 2012, is now a trigger for a Double Dissolution of the Parliament although there is a certain reluctance to use it to fight an election. The responsible Ministers, the now Treasurer Scott Morrison and Minister for Finance Senator Mathias Cormann are attempting to take the key investment mandate, which is of course, was the engine that starts and maintains the life of the corporation,they wish to open it up to be a vehicle, a mechanism for the Ministers to have more control of the terms of the board reporting back to them.

    This is an attempt to change the Act without taking that change back through the Parliament. The Arrogance is breathtaking.

    The correspondence to the Board of the corporation from the Treasurer stated, “the Government’s policy is to abolish the Corporation”. As the responsible Ministers Senator Cormann and the Treasurer were defacto Directors clearly acting against their duty to protect the interests of the corporation under their direction; not to cut it down. A reference to ASIC is appropriate?

    The public and verbal instruction to move away from Wind and Roof top Solar, towards emerging technologies was not only against the object of the Act, it had the effect to cause many in the industry to have greater difficulty in attracting investment or gain financing. There are many who could run a class action against this government.

    Lenore Taylor points out that Turnbull has simply taken $1billion from the CEFC and funded his new CEIF and intends to simply have the ARENA act as an administrator.

    From todays Guardian 23 of March 6016. Lenore Taylor writes.
    ”Malcolm Turnbull’s clean energy investment announcement is part good news, part bad news, part ideological shift and part shell game.
    The good news is the Clean Energy Finance Corporation is safe. The $10bn CEFC was derided by the former prime minister Tony Abbott as “Bob Brown’s bank” and was so despised by the Abbott government that trying to stop its lending was one of the Coalition’s first acts after it was elected in 2013.
    Coalition announces $1bn clean energy fund to invest in emerging technologies

    Now the CEFC can continue its highly successful work, which has so far provided $1.4bn in loans to projects worth $3.5bn while at the same time generating a 6.1% return on the lending. It will no longer labour under the uncertainty of a government determined to abolish it, or a government periodically bending to the pressure from climate sceptics or anti-windfarm advocates by seeking to limit its investment mandate.
    The bad news is the Turnbull government seems to be cementing in the $1.3bn in cuts that the Abbott government factored in to its 2014 budget from the Australian Renewable Energy Agency
    although it was never able to legislate them.

    Because those cuts were not legislated, despite being accounted for in the budget bottom line, Arena still has a legislated spending program with $1.3bn in uncommitted funding over the next six years. Presumably the Turnbull government believes it will be able to legislate to change that after the federal election. By ‘retaining it’ as government policy it can continue to book the saving.

    The ideological change comes in Arena’s new role. It is effectively being subsumed into the CEFC, becoming the administrator of the new Clean Energy Innovation Fund, a subsidiary fund of the CEFC, lending money from the CEFC’s allocation. And the final decision on that lending will be made by the CEFC board.
    In the short term it will finish doling out the grants programs it has already announced. In the longer term, instead of giving out grants, Arena will be simply be administering the new fund, which will make loans at a lower rate of return to earlier stage clean energy projects.Clean energy groups are concerned at the abolition of grants funding, saying grants are essential at the earliest stages of technology development. Turnbull says this is a deliberate change in direction.

    “This reflects a very big change in the way the government … is now approaching this type of investment,” he said on Wednesday. “Historically … the federal government has been very much like an ATM, it’s been making grants … without, frankly, a lot of follow-up as to whether it’s effective.
    “We believe … the government should seek to be a partner and investor, seek to get a return. It doesn’t have to get the same high return that a private venture capital firm or a private bank would seek to get. It can get a very long-term return but, in doing that, by ensuring that you take a more economic approach, you will ensure that you have a much more rigorous analysis and that you will get a better quality of investment and a better quality of project.”

    And then the shell game. The “new” Clean Energy Innovation Fund is not “entirely new”, as billed by the government and enthusiastically accepted by some media reporting, but is in fact funded entirely from the CEFCs existing borrowings and is more like another of the subsidiary funds the CEFC has set up – this time with the leeway of achieving a slightly lower rate of return so it can take on slightly higher levels of risk.

    And despite the government’s insistence that Arena has been “retained” as a separate agency, and that it has not been merged with the CEFC, that appears to be the case only in name, if it now functions as a subset of the CEFC and very soon will no longer be making grants with its own money.

    Turnbull’s attitude to the CEFC is big shift from his predecessor – in real terms and symbolically – but Arena appears to have been “retained” in name only”. From the Guardian Australia by Lenore Taylor.

    The main concern I have is, Turnbull, Pyne, Hockey, Cormann and Hunt are trying to convince the public and the Industry, that they and cabinet can ‘re-purpose ‘ the corporation without going back through parliament; in the face of fact of the CEFC Act strictly limiting what changes can be made by the overseeing ministers in the terms of the ‘investment mandate’.

    I remind you again of the limits the Act imposes on the responsible ministers mandate. The responsible Ministers must not give a direction under subsection 64(1):
    (a) that has the purpose, or has or is likely to have the effect, of directly or indirectly requiring the Board to, or not to, make a particular investment; When you examine the behaviourof the cabinet; it is in fact, deceptive and misleading enough, to still destabilise the rntire industry to have bankers and investors become gun shy.
    Turnbull claims he is retaining something he was not able to abolish in the first place; and he still pretends his ministers were able to change an Act of the Parliament by making a change to the investment mandate that was beyond their authority. Turnbull is not, the King he would love to be. He is just a voter, like all of us, who happens to have the privilege to be holding in trust, many of our individual ‘sovereign registered votes’ and therefore to have the authority to occupy the position of Prime Minister; until he loses our trust.

    I say he cannot change an Act of our parliament simply because he is the PM. He has to go back to parliament and get it (both houses plus the Queen) to make the change.
    A lot of people have lost badly in the solar and wind industry and a lot are in Tasmania. There will be a class action that further delays the industry and the public just getting on with moving away from the hugely subsidised coal, gas and oil industries.

  3. Sam_w

    ETS is at this stage is only a miniscule part to any solution because ETS does not work well.

    Take the top 10 single emission sources like brown coal and shut them down. In parallel to this start building base load renewables.
    So you can now push solar to conventional coal Mw range eg: make one big enough and it will generate 600 Mw for whatever heavy industry is nearby.

    Don’t wait around for the debate about what’s to be included in the ‘gases’, ‘eligibility’, ‘industries’ to be included it should be everything or it will be wrong. You build redundancy for worst case scenario into the base line cap on emissions not the other way around.

    Immediately shut down 80% of the mining industry. It does not create enough jobs anyway (when mining industry says you loose 7 jobs for every 1 direct mining job it lied because the methodology involved counting a lot of single contractors and assuming they each had their own staff o 6 people eg: accountants, secretaries etc) The ratio of jobs loss is closer to 1:1 ratio.

    The real battle is here:

    Taking the devils advocate stance empirically no ETS has ever made a dent in emissions and is usually
    based on flat-earth economics which rely on markets being efficient (which of course they are not). Kyoto based thought processes for ETS will fail unless there is a law that actually prevents companies from putting the emission assets through accounting or physical relocation in other countries which dont have an ETS.

    Road to COP21 and Beyond: The Missing Analysis of the Kyoto Protocol and its Failure

    Sorry at this stage people should consider these ETS a train wreck unless the currency issuing government is already getting stuck and doing all the heavy lifting just building the infrastructure that markets dont solve.

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