The Emissions Trading Scheme (ETS)

Under the ETS, emissions permits will be auctioned off by the government.

Companies will initially have to bid and pay for their original allocation of permits and then subsequently buy permits from other companies if desired. Heavy polluting companies may find the need to buy more permits than light polluters while they work out strategies how to cut their future emissions. Companies would also be allowed to hold the permits for future trading or setoffs.

A reduction or removal of emissions from activities in one sector of the economy can be used to counter balance, or offset, emissions in the other sectors. Emissions reductions in sectors not covered by the scheme could be eligible to create offset credits. These offset credits would generally be treated as substitutes for permits, and could be used by parties covered by the scheme to meet their obligations.

The Government can also release permits by allocating them free to a range of potential recipients. Revetec believes that free permit allocations would be issued
to companies which can demonstrate the use or adoption of emission reduction technologies.

The report states the ETS will operate in a similar fashion like the gold market. Permits which will be traded with a “spot” price, or at a price as judged by the market on that day or in the short-term, but there will also be a “futures” price in which traders can trade on the future price of the permits. So if some unexpected environmental event giving rise to a sudden increase in emissions occurs, there will be a greater demand for the permits, resulting in a sudden increase in the price of the permits. The market force of supply and demand will be the driving factor.

The report further says a free market approach should be adopted to permit the ETS to operate with minimal government regulations. But it also considers the need to set up an independent regulator, the Independent Carbon Bank to monitor the process. This independent regulator will be utilized as a Central Bank for carbon, issuing extra permits to control the price where necessary, although the review says that any intervention may result in problems.

Fines for non compliance of Emissions Trading Scheme
It is envisaged that the independent regulator would have the power to penalize Industries by imposing heavy fines where they exceed their permitted level of emissions. Such fines are expected to be substantial enough to force compliance.

As many sectors of Industry will have difficulty adopting measures to reduce and meet emissions targets wide spread business failures will occur as a result of the huge fines.

Effects of the Trading Scheme on the wider community
The implementation of the Scheme will certainly affect individuals as well as Industries. The implementation of emission trading schemes world wide is expected to disrupt some industries and will inevitably cause intense competition resulting in reduction of profit margins as costs may not be able to be passed on to consumers.

With the increase in costs and reduction in profits experienced by Industry, it is expected the community at large will experience countless job losses through relocation of businesses to low polluting countries in order to avoid compliance.

To mitigate hardship on the communities and industry the government will also be forced to provide substantial financial assistance toward retraining for entire communities to cope with the massive number of job lost.

There are already reports by financial analysts evaluating significant company profit write downs of certain heavy polluting businesses. Companies who do not have the strategy or means to deal with the ETS will be severely punished by the market discounting their share prices.