Every Australian has an annual carbon footprint of about 28 tonnes, almost the highest in the world. This means that while the nation makes a small contribution to world greenhouse pollution, we have at the very least personal responsibility to significantly reduce carbon emissions. We can act as a nation helping the Asia-Pacific region & a strong advocate for action at international meetings.

At the Kyoto Protocol climate negotiations, Australia chairs the infamous Umbrella Group of Nations that includes the USA, Canada, Japan, Norway and New Zealand among others. The Group has been a major spoiler to progress at the Kyoto climate negotiations. Indeed, Australia was only a handful of countries that negotiated to increase its emissions for the first Kyoto commitment period. And it was only Australia and the US who then failed to ratify the Protocol.

Australia has at last ratified the Kyoto Protocol, which has led to hopes that Australia will take a leadership role within the Umbrella Group and more broadly at International climate talks. Within our region and through our allies, Australia can be responsible for positive progress being made on an international agreement for the post-2012 Kyoto Protocol commitment period.

Norway, for example, has been showing the way for developed countries at the international climate negotiations by proposing positive policies for international shipping emissions, as well as for adaptation funding for developing countries. Like Australia, Norway has also been actively supporting capacity building efforts in tropical developing countries to provide institutional, legal and policy frameworks to reduce emissions from deforestation and forest degradation.

However, unlike Norway, Australia has not yet shown the leadership required of it at the Kyoto climate talk. This is an opportunity for Australia to repair its international reputation. However, unless we are ambitious with our greenhouse gas reductions at home, we cannot expect our allies and neighbours to do so.

With a new American Administration coming to the Kyoto table at the end of the year, Australia has a key role to play. We must encourage our US ally to make deep cuts in its own emissions and begin to be more proactive on the world stage to encourage others to also do so. But first we must begin to reduce our own emissions. The best way to do this is through a robust and effective emissions trading scheme that leads to deep emission reduction.

Under Articles 6 and 17 of the Kyoto Protocol Parties can trade emission reduction units in any sector of the economy and with any other Party. However, flexible mechanisms such as domestic emissions trading schemes are still in their infancy. The European Union ETS is the largest and oldest, New Zealand has a proposal for an ETS and the USA has a Bill for an ETS working its way through the Congress.

The European Union ETS
The EU ETS is similar to that proposed for Australia in that it is a 'cap and trade' system that caps the overall level of emissions but allows participants in the system to buy and sell allowances as they require. One allowance gives the holder the right to emit one tonne of CO2. The cap on the total number of allowances is what creates scarcity in the market.

The first trading periods (2005 – 2012) of the EU ETS had little effect on emissions due to excessive allocation of free allowances based on emission projections before verified emissions data became available. When the publication of verified emissions data for 2005 highlighted this over-allocation, the market reacted by lowering the market price of allowances.

The EU has an emission reduction target of at least 20% by 2020 compared with 1990 levels, and by 30% provided that other industrialized countries commit to comparable efforts in the framework of a global agreement to combat climate change post-2012. In order for these commitments to be achieved the rules governing EU ETS are to be radically amended.

The main changes are as follows:

• One EU-wide cap on the number of emission allowances instead of 27 national caps. The annual cap will decrease along a linear trend line, which will continue beyond the end of the third trading period (2013-2020).
• A much larger share of allowances will be auctioned instead of allocated free of charge – around 60% of the total number of allowances will be auctioned in 2013 increasing in later years.
• Part of the rights to auction allowances will be redistributed from the Member
• States with high per capita income to those with low per capita income in order to strengthen the financial capacity of the latter to invest in climate friendly technologies.
• A number of new industries (e.g. aluminium and ammonia producers) will be included in the ETS; so will two further gases (nitrous oxide and perfluorocarbons).
• Discussions are under way on legislation to bring the aviation sector into the system from 2011 or 2012.

The proposed New Zealand ETS
There are a number of flaws in the scheme, as proposed by the New Zealand Government. It does not limit the number of permits that can imported into New Zealand and does not include any domestic emission reduction target. It doesn’t require firms to reduce their emissions, as they can purchase unlimited permits from within New Zealand or offshore. As there will be few available permits within New Zealand, most permits will need to be purchased offshore.

In practice the proposed New Zealand ETS will simply operate as a carbon tax with very large tax free thresholds and with the rate of the carbon tax set by the world market for emission permits.

New Zealand has not leant the lessons provided by the European Union ETS, as it plans to give away up to 90 per cent of permits for some industries. By giving away permits to high emission industries, there will be little pressure to limit emissions.

While the New Zealand government acknowledged the need to take urgent action to tackle climate change more than 15 years ago at the Rio Earth Summit and ratified the Kyoto Protocol in 2002, the proposed ETS phases in obligations on sectors. The agriculture sector will not be required to participate until 2013. It is demand from high emission sectors such as agriculture that drives up the price of emission permits that creates the incentives to make substantial reductions in other sectors.

The total cost to the New Zealand economy of relying on imported permits to meet the government’s obligations under they Kyoto protocol will not been known with certainty until the end of the 2012 Kyoto commitment period. It is likely, however, that the impact on the Current Account Deficit will be substantial. For example, if emissions growth is at the higher end of the Treasury forecasts then, at a world price of $25 per tonne, New Zealand would need to import at least $3.1 billion worth of emission permits. This could be avoided if an emissions reduction target were set, and a limit placed on the number of permits available for purchase.