Emissions Trading: Harnessing the Power of the Market

Address by the Hon Alexander Downer, MP, Minister for Foreign Affairs, to the ABARE International Conference on Greenhouse Gas Emission Trading, Sydney, 21 May 1998

Ladies and gentlemen.

I am pleased to be here with you today to share with you my assessment of the opportunities and far-reaching role that international emissions trading will play in the successful implementation of the Kyoto Protocol. International emissions trading provides the means of harnessing the power of the market to provide cost effective solutions to emission abatement.

Rio to Kyoto

The Framework Convention on Climate Change agreed at the Rio Earth Summit in 1992 committed action by industrialised countries, to reduce greenhouse gas emissions.

However, by the first Conference of Parties to the Convention in Berlin in 1995, it was apparent that a different more specific and longer term approach was necessary. The Berlin Mandate negotiations were born and we were on the road to Kyoto.

Some argued then, as some still persist in arguing now, that as the science of climate change is still evolving, that we should simply just wait and see before taking action, either collectively or individually, to reduce the level of atmospheric concentrations of greenhouse gases.

Well, let me explain why I and my colleagues in government were not prepared to do that. When I was younger not many of us paid any attention to appeals made to us from various sources to protect ourselves from sun damage. However, over time the strength of the science, and the level of concern, about the link between unprotected exposure and skin cancer grew.

The vast majority now accept the precautionary principle that it is better to "slip, slop, slap" and protect than to risk permanent damage and perhaps even cancer.

In agreeing to play Australia's part in the global effort to reduce greenhouse gas emissions, our government accepted that same precautionary principle. In the face of the current scientific evidence supporting global warming, to do otherwise would have been foolhardy.

The responsible approach, which the Australian government took, was instead to advocate an approach of equitable burden sharing or, differentiation, along with flexible implementation to make the climate change framework workable and sustainable over the long term.

And our efforts, in the leadup to the Kyoto conference last year, were about just that. In the negotiations, Australia played an active and significant role.

A role that was not always popular.

The Australian government left no-one in any doubt about where Australia stood in the leadup to Kyoto. We vigorously and relentlessly pursued an environmentally effective, but fair outcome, sometimes against quite openly hostile opposition. As I made plain then, we were prepared to do this, indeed we had little choice, because the stakes for Australia were far too high for any of us to worry about the personal or political discomfort that we might occasionally encounter in our defence of Australia's position.

In any case, we knew our position was right and fair. And the Kyoto outcome, agreement to negotiated differentiated targets that reflect national circumstances, vindicated Australia's stand.

We now have a framework that forms a sound basis for further elaboration. Securing agreement to an equitable distribution of the effort of addressing climate change through differentiated country targets, was a major step forward for the global community.

And here I want to pay tribute to the role played by Ambassador Raoul Estrada Oyuela, who as chairman of those negotiations, brought us to the successful conclusion in Kyoto.

His personal efforts, commitment and judgement were critical to that achievement.

The Kyoto protocol is a major step forward. It is an agreement which provides the framework for environmentally effective, equitable and durable action to address climate change.

Kyoto though is but one step along the long term path. Critical steps still remain for the future. We need to fill in the details and make operational the far reaching market mechanisms we agreed in the protocol. And we need to take concrete steps towards negotiation of greater involvement by developing countries.

Post-Kyoto negotiations

Much that was agreed to at Kyoto transformed the nature of action to address climate change. The focus of the negotiations in the leadup to Kyoto was on the politically charged questions of "whether" - whether to have collective or differentiated targets, whether to have emissions trading, or whether to allow joint projects with developing countries.

Post-Kyoto, the focus in the negotiations is on the "how" to.

How should we implement the Kyoto agreement?

The resolution of outstanding issues in the on-going international negotiations will impact on the cost-effectiveness of national emission abatement programs. It will be important to ensure that the final design of the Kyoto Protocol is compatible with global economic growth and prosperity.

The current economic downturn we are witnessing in our region, with its implications for global growth, is a timely reminder of the importance of nurturing economic growth through sound institutional structures. Our negotiating strategy is guided by our assessment that the Kyoto Protocol, if it is to deliver a sound institutional structure for global emission abatement, it must meet one overriding principle - it must allow all nations equal access to the most cost-effective means of emission abatement.

The stakes are high for Australia. While the Prime Minister's November package takes us a long way forward, meeting our national target of 8%, above 1990 levels by 2008-2012, will still be challenging as it demands a substantial reduction in our business-as-usual emissions. The choice we face in meeting this challenge will be either to buy emission credits or take additional abatement action, which may prove more costly. Moreover, the resolution of outstanding issues in the on-going international negotiations could impact on Australia's emission abatement task and the measures required to meet our target. So while Kyoto is over the task of protecting our national interests is not.

Emissions trading: harnessing the power of the market

The provision in the protocol for emissions trading has altered production fundamentals. Greenhouse gas emissions, a by-product of many production processes, will in the future come with a price tag.

Indeed some Canadian and US utilities are already participating in hedging arrangements, exchanging carbon emission rights, although the rules for trading are yet to be determined by the Parties to the Kyoto Protocol. Thus it is not yet clear which firms, or sectors, will participate in emissions trading, or on what basis.

Of vital importance is the key role that the Kyoto Protocol has assigned to the private sector. In providing for flexibility mechanisms, in particular emissions trading among industrialised countries, the Kyoto Protocol determined what would be the key driving force behind global emission abatement action.

Thus the Kyoto Protocol gives the private sector, a key stake-holder, an opportunity also to be the key player in driving the fundamentals of global emission abatement action.

Commonsense, as well as business-sense tells us that a transparent, unimpeded market offers the best prospect of delivering low-cost, non-distortionary outcomes. Outcomes that match the priorities of the private sector and reduce the level interference imposed upon the market in meeting new challenges - in this case the challenge of moderating our impact on the environment.

Australia's key negotiating objective will be to develop and design, in consultation with others, an emissions trading framework that does not impede the power of the market. Rather, we will be advocating a regime that harnesses the power of the market. A regime that empowers the private sector to use flexible and innovative approaches to emission abatement.

Emissions trading: competitiveness issues

The stakes are high. A well-designed, competitively-priced international emissions trading regime will deliver the flexibility necessary to achieve emission reductions at the lowest-possible cost. It also provides a strong incentive for achieving the maximum level of emissions reductions.

A competitively-priced emissions trading regime will also minimise the impact of emission abatement action on firms, nations and global growth.

In these negotiations, the government will be attaching the highest priority to ensuring that Australia's competitiveness is maintained. We are an efficient producer of many energy-intensive goods. A competitively-priced emissions trading framework will protect Australia's international competitiveness.

We made it clear at Kyoto and we will continue to make it clear to our negotiating partners - Australia will not accept any outcome that seeks to disadvantage us simply because we are a competitive, highly-efficient producer of energy-intensive goods. Of course we must be allowed to continue doing what we do well. The global environment will be no better off if second-rate producers, using second-rate technology are able to appropriate our legitimate production activities. Such an approach is wrong-headed. Such an outcome would be wasteful and costly.

A well-designed, competitively-priced international emissions trading regime will, however, by minimising costs will also minimise the risk of greenhouse-intensive industries relocating away from industrialised countries, such as Australia, to those without any target commitments under the Kyoto Protocol.

Prospects for US ratification: the competitiveness issue

Maintaining international competitiveness is also an issue that ranks highly with the United States Administration. Unless the issue of competitiveness is adequately addressed in the on-going negotiations, it may be difficult to secure the required support to ratify the Kyoto Protocol in the United States as well as elsewhere.

This was a major factor behind the push for developing country involvement in the global emission effort. While the Kyoto Protocol does not provide for developing country commitments, it does include provision for a clean development mechanism. The design of the clean development mechanism provides industrialised countries with the potential for low cost emission reductions, as well as providing significant economic incentives for developing country participation. Along with the US and others, Australia is working hard to ensure that an economically efficient and environmentally effective mechanism is developed.

The competitiveness issue is also an important element in the design of an international emissions trading regime. Therefore the many countries are attaching a high priority to making early progress in the development of a framework for open, transparent, cost-efficient international emissions trading.

Australia attaches considerable importance to emergence of the umbrella group at Kyoto. The group includes the Asia-Pacific group of countries - Australia, New Zealand, the United States, Canada and Japan - who were joined in Kyoto by Russia, the Ukraine, Norway and Iceland.

The umbrella group, is an influential like-minded group of countries, which affords its members an important opportunity to advance and protect their common interests in establishing a cost and environmentally effective international emissions-trading regime.

Emissions trading: unresolved issues

The right of parties to engage in emissions trading, for the purpose of fulfilling their abatement commitments, is enshrined in the Kyoto Protocol, but the operational details have been left unresolved. Australia, along with others, is now working to flesh out those details in the short time remaining before the Conference of Parties in Buenos Aires in November this year.

Australia's view is that the international emission trading system should be economically efficient, have open and non-discriminatory access to participants and not compromise the environmental effectiveness of the Kyoto Protocol.

Australia wants, first and foremost, a trading system does not compromise the environmental effectiveness of the Kyoto Protocol. We also seek an international emission trading system that is efficient and enables the lowest cost abatement options to be realised. We want Australian participants to be able to trade on equal terms to other parties and a framework which ensures that transactions costs are kept to a minimum possible. In all of this we need to make sure that the competitiveness of Australian industry is not undermined. Australian industry faces particular trade competitiveness concerns because of the importance of their competitors based in developing countries, with the risk that loss of competitiveness could lead to carbon leakage.

A final issue, which i'm sure will be the subject of much domestic debate, will be how any international regime might link with any domestic trading regime.

These issues, and others, i'm sure will form the basis of much of today's wide-ranging discussion on emissions trading.

Business: the key stakeholder

I am heartened today to see so many industries represented. I recognise that your attendance reflects your keen interest in pursuing a business-friendly emissions trading regime. Such a regime could harness the power of the market to provide Australian industry with cost-effective solutions to emission abatement.

The future of emissions trading is almost here. In the short time remaining, before November, we will need to work together if we are to present a common front in the international negotiations. This is a time for cooperative effort, sound analysis and the development of practical solutions if we are build a framework for emissions trading that is business-friendly.

Business is afterall a key stakeholder in global environment negotiations.

My government has always been a strong supporter of market-driven outcomes. We recognise that markets often know better than governments. We also recognise that harnessing market power will allow for low-cost 'greening of the market'.

Concluding remarks

The challenge the government faced in the leadup to Kyoto was twofold: to contribute constructively to an outcome that deals with the problem of global warming and simultaneously to protect Australia's national interests. The Kyoto outcome has, I believe, the potential to deliver on both fronts.

The challenge was never simply to negotiate a treaty. The challenge was to negotiate a treaty that could be implemented and that could do the job at hand. Namely averting the threat posed to the world community by climate change.

The impetus that Kyoto has provided will lead to increased efforts on all fronts - by governments, firms and individuals- to address the greenhouse problem.

It is individuals and firms who will bear the brunt of global environmental change. Ultimately it is also individuals and firms that need to act if we are to avoid the risks posed by climate change and if we are to meet our international commitments.

In making my concluding remarks I would like to emphasise that in the ongoing climate change negotiations Australia's key objectives will be to ensure that the design of the international emissions trading regime:

This conference and the range of participation here today presents a good opportunity to develop ideas and pose further questions. I would encourage you to use the chance to put your views to governments and regulators who need to know your concerns if they are to negotiate outcomes and implement policies which meet those interests while at the same time protecting australian trade and trade competitiveness interests.

Statement ends

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