The government today announced its review of the Emissions Trading Scheme. As is clear from the media coverage, this is focused on one issue: forestry. The cor problem is summed up in this graph:
(Note that this chart does not include agriculture, because its currently not part of the ETS)
Basicly, we've planted enough trees already that we're going to have too many carbon credits by the end of the decade, resulting in a falling ETS price, a much lower incentive to reduce emissions, and (eventually) fewer trees. Which is a problem, because we need a lot more trees to meet future climate targets, and (eventually) to draw down carbon from the atmosphere and undo some of the damage we have done.
The review proposes four broad policy options to fix this. The first one - reducing ETS auction volumes - is a non-starter, for reasons which are obvious from the graph above: by the time we have a problem, auction volumes are minuscule compared to forestry removals. The second one - effectively, getting the government to start buying forest credits - is likely to be a part of any solution. In strict ETS terms, this can be seen as offsetting public sector non-ETS emissions (through cancellations) and backing auctions and free allocation units - especially those allocated to agriculture if it enters the ETS. But the real reason is to incentivise the forests we need to keep planting to meet 2050 and post-2050 drawdown targets. The third option is to reduce demand for forest credit by limiting their use and expiring them out of the pool if unused, or just by halving the amount given away. Again, the graph shows why this isn't really going to solve the core problem. The final option - and the one MfE is clearly pushing for - is to split the market in two, and say that polluters can no longer use forest credit to offset their emissions. This has some definite advantages - the ETS cap actually becomes a cap, meaning it drives reductions. But it raises the obvious question of who is actually going to buy forest credits if polluters won't? On this there's the intriguing suggestion of requiring polluters to surrender some proportion (10% say) of additional removal credits in addition to their normal units - effectively legislating for over-performance. But again, looking at the graph above tells us that that's not going to make much difference to the problem, and the ultimate buyer is going to have to be the government. Which Treasury will hate, because it costs money, even if it incentivises the drawdown we need.
Unfortunately, the obvious solution was beyond the scope of the review. The problem is "not enough emissions in the ETS to soak up amount of credits trees are producing". But 50% of our emissions aren't in the ETS. Put them in, and you can make supply match demand by juggling the amount of free allocation and the phase-out rate. On this point, its worth noting that on current policy settings, agriculture enters the ETS at the processor level in 2025, with a free allocation equal to 95% of 2005 emissions, declining by 1% a year. Tripling that phase-out rate means agriculture neatly soaks up the excess credits in 2040 and 2050, assuming it does not reduce its emissions. So we'd really want to set it higher than that if we want agricultural emissions to meet their 2050 target (we'd also face a credit shortage pre-2035 or so, which would mean higher ETS prices, which would help drive the reductions we want).
But even including agriculture simply pushes the problem back a couple of decades, and doesn't solve the eventual problem of too many trees and not enough polluters wanting to buy the credits, which in turn threatens long-term drawdown. Still, that might be enough. And as noted above, there is an obvious solution: if the government wants trees for drawdown, it can always pay for them.
