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An Australian designed carbon trading system may be key to ensuring economic growth doesn't cost the Earth, according to ABN AMRO Morgans chief economist Michael Knox.
“The Stern Report by the United Kingdom Treasury deals with the economic impact of greenhouse gases and global warming on the world economy,” Mr Knox said.
He suggests the economic impact of global warming could be enough to reduce the world economy by 20 percent in the next 100 years.
“Stern says that we need to do three things. We need to have a market in carbon, we need to have more innovation for the production of energy in low carbon forms, and we need to remove all regulation that stops that happening.”
“Stern says that in order to stop global warming and reduce greenhouse gases, we need to reduce the amount of greenhouse gases being provided by electricity power generation, by as much as 75 percent by the end of 2050,” he said.
Mr Knox suggests coordinating this reduction would be an enormous task.
“We would need every form of low carbon, electricity generation that we can find. We would need every wind farm, every hydroelectric power station, and dare I say it, every nuclear power station.”
Mr Knox said non-coal powered stations are currently uneconomic, being two or three times as expensive to run and install.
“And that’s why we need the market in carbon. Because if we have a market in carbon emissions and that market is operating efficiently, then the price of coal-fired power stations rises above the cost of nuclear power stations and wind farms.”
The European Union has attempted to create an efficient market in carbon emissions.
In 2006 a system was set up by 25 countries in the EU, providing carbon emission allowances. The system which began operating in January last is problematic according to Mr Knox.
“Now Stern says if we’re going to reach our long term goals, we need to be pricing carbon at about $85, or 65 euros. But this market in EUAs started last year at about 20 euros, and gradually started to rise,” he said.
“By about April this year, it went up to about 30 euros. But then what happened was, the market started to crash.”
“And within a month, by the end of May this year, it had fallen all the way down to around 10 euros – a crash of two-thirds. Now what had happened was, the market discovered that most of the countries within the European Union were providing more carbon allowances to their industry than their industry could possibly use.”
Mr Knox suggests an alternative to the EU system which he says is very inefficient.
“In Australia, Warwick McKibbin, who is a member of the Reserve Bank board, has produced together with a gentleman called Wilcoxen, the McKibbin-Wilcoxen carbon trading system.”
“Now I’ve seen simulations of this operating, and it is much more stable than the European system because it’s not an international system. It doesn’t allow foreign countries to compete to drive down the price of carbon emissions for their own national benefit,” he said.
The price of carbon emissions under the McKibbin-Wilcoxen system rises gradually over time, and as a result provides an increasing benefit to move away from high carbon power sources towards low carbon power sources, which according to Mr Knox, is what we need to reduce greenhouse gases.
“It’s quite possible that this Australian-based system will be the system of carbon trading that will be used as the new international standard when the current existing arrangements under the Kyoto Protocol come to an end in 2012,” he said.
“And this may provide us with an eventual solution to how we can still have a strongly growing economy, a lower carbon level and deal with the problem of greenhouse gases.”
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“The Stern Report by the United Kingdom Treasury deals with the economic impact of greenhouse gases and global warming on the world economy,” Mr Knox said.
He suggests the economic impact of global warming could be enough to reduce the world economy by 20 percent in the next 100 years.
“Stern says that we need to do three things. We need to have a market in carbon, we need to have more innovation for the production of energy in low carbon forms, and we need to remove all regulation that stops that happening.”
“Stern says that in order to stop global warming and reduce greenhouse gases, we need to reduce the amount of greenhouse gases being provided by electricity power generation, by as much as 75 percent by the end of 2050,” he said.
Mr Knox suggests coordinating this reduction would be an enormous task.
“We would need every form of low carbon, electricity generation that we can find. We would need every wind farm, every hydroelectric power station, and dare I say it, every nuclear power station.”
Mr Knox said non-coal powered stations are currently uneconomic, being two or three times as expensive to run and install.
“And that’s why we need the market in carbon. Because if we have a market in carbon emissions and that market is operating efficiently, then the price of coal-fired power stations rises above the cost of nuclear power stations and wind farms.”
The European Union has attempted to create an efficient market in carbon emissions.
In 2006 a system was set up by 25 countries in the EU, providing carbon emission allowances. The system which began operating in January last is problematic according to Mr Knox.
“Now Stern says if we’re going to reach our long term goals, we need to be pricing carbon at about $85, or 65 euros. But this market in EUAs started last year at about 20 euros, and gradually started to rise,” he said.
“By about April this year, it went up to about 30 euros. But then what happened was, the market started to crash.”
“And within a month, by the end of May this year, it had fallen all the way down to around 10 euros – a crash of two-thirds. Now what had happened was, the market discovered that most of the countries within the European Union were providing more carbon allowances to their industry than their industry could possibly use.”
Mr Knox suggests an alternative to the EU system which he says is very inefficient.
“In Australia, Warwick McKibbin, who is a member of the Reserve Bank board, has produced together with a gentleman called Wilcoxen, the McKibbin-Wilcoxen carbon trading system.”
“Now I’ve seen simulations of this operating, and it is much more stable than the European system because it’s not an international system. It doesn’t allow foreign countries to compete to drive down the price of carbon emissions for their own national benefit,” he said.
The price of carbon emissions under the McKibbin-Wilcoxen system rises gradually over time, and as a result provides an increasing benefit to move away from high carbon power sources towards low carbon power sources, which according to Mr Knox, is what we need to reduce greenhouse gases.
“It’s quite possible that this Australian-based system will be the system of carbon trading that will be used as the new international standard when the current existing arrangements under the Kyoto Protocol come to an end in 2012,” he said.
“And this may provide us with an eventual solution to how we can still have a strongly growing economy, a lower carbon level and deal with the problem of greenhouse gases.”
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