The CPRS in a Nutshell
The Australian Government released its controversial Carbon Pollution Reduction Schemedraft legislation today and I thought it best to explain as simply as possible how it works.
Download a PDF version of this diagram with more details.
The Government makes the political decision to reduce targets according to some trajectory. Not wishing to pick favourites the Government sets up an artificial market to efficiently allocate the permission to pollute across all of industry. This is done by creating pollution permits, called ‘Emission Units’ by the scheme, and allowing covered industry members to compete at auction for those permits. There are some distortions to this initially as some industries lobby for special privileges in the form of free permits, but over time those free permits evaporate.
Industry is forced to reduce their emissions, either by their own efficiencies, by demand-destruction (ie their customers’ efficiencies), or by outsourcing their emissions reduction via the purchase of Kyoto Units. Each Kyoto Unit is essentially a receipt for the service of having had a tonne of CO2 equivalent removed from, or prevented from entering the atmosphere for you. Each unit means one tonne of CO2e genuinely saved. These units are mostly generated under the auspices of the Clean Development Mechanism which also ties community and other benefits to each tonne of CO2e saved, giving the buyer more bang for their carbon buck.
Each year the targets are hardened, influenced by many factors including, quite critically, the levels of voluntary emissions reduction activity Australians undertake themselves. While individual actions won’t directly impact Australian emission reduction levels, they do help reduce global emissions, and they send powerful signals to the government when it comes around to reassessing the targets. The more the appetite for emissions reduction, the faster the transition to a low carbon economy.
I hope that makes some sense. The devil is of course in the detail. — DS