Big Sister’s Carbon Tax, a Catalyst for Cowboys?

Cowboys and Car Crashes

Back in 2009, we had several  heated debates about carbon trading which involved among others Dave Sag of Carbon Planet, reporter Illya Gridneff, Paul Oates and supporters of Carbon Cowboy, Kirk Roberts.

The main opposing views were that on the one hand Carbon Trading would be the saviour of PNG forests and it would deliver billions of Kina to PNG landowners so we had to sign up agreements with landowners pronto without any legal compliance and on the other hand the other view was that we had to take our time and set the legislative framework and processes for such trading to be conducted.

For the sake of clarity, I’ll call the former school of thought the Blue team (because pies in the sky are blue) and the latter school of thought the Brown team, (to represent the earth and stability).

The Blue team came out with a string of media announcements about how they had been conducting their own scientific quantification’s of carbon in their targeted forests but it’s amazing how 2 years on the silence is now deafening as to whether they actually achieved anything. This was all happening while in the background PNG’s Office of Climate Change was heading for a collision as it crashed under all sorts of ridiculous corruption allegations.

Overseas more ludicrous events were happening with Carbon Planet going topsy turvey. This was supposed to be the company that would buy and trade the carbon credits that Kirk Roberts was busy quantifying in the forests of April Salumei. I think as even as late as last year Kirk Roberts was still boasting his stance with landowners.

So after all that HooHa where have the crash victims gone? They are now no longer on the road but it looks like the carbon trading agenda may be making a comeback.

Big Sister and Carbon Tax big redhead sister has finally come out with her Carbon Tax plans, which I personally feel is a step in the right direction. Australia is the developed world’s worst per-capita greenhouse gas emitter because of its heavy reliance on cheap coal for power generation so emissions are likely to rise in their currently booming economy.

Big Sisters’  Carbon Tax is not law yet and will need to be taken to a parliamentary vote before the end of the year but in the interim its value for us in PNG lies in the fact that we finally have a comprehensive road map of how a carbon tax could work.

This is potentially important for PNG because the fixed price Carbon Tax if implemented will end up leading to an Emissions Trading Scheme (ETS) in 3-5 years time.  This means potentially heading back to the issue of carbon trading in PNG which our Blue and Brown teams (as mentioned above) were having a go at initially. The only difference this time will be that at least the Australian legal framework would have slowly grown with the market to ensure a more robust and trust worthy trading environment. But more on PNG’s intersection with Big Sisters Carbon Tax below.

The currently planned  Carbon Tax will therefore require each Australian business, that generates greenhouse gases in its production processes, to purchase one permit for every CO2 equivalent emitted. So businesses will be able to purchase these permits from Big Sister at a fixed price. This is similar to an ETS, except the price is fixed by Big Sister and not determined in the market place.

There is no cap on emissions in the currently proposed Carbon Tax system. So everyone will be free to emit as much or as little as they like, but if they do emit, they must pay the tax. An ETS on the other hand will have Big Sister setting limits on the emissions while leaving the market to set the price. (If you’re still confused like I was, read more here and here).

PNG and Emissions Trading Schemes

PNG comes into this picture when Big Sister eventually switches to an ETS because the carbon policy will have leeway for Australian registered companies to buy carbon credits internationally as well. If the carbon cowboys are any indication or for that matter just Australian companies operating in PNG, we will see a demand for carbon trading again in PNG.

This is where the Brown team needs to have processes in place to meet this looming challenge and by this I mean more so the Office of Climate Change in PNG. Kevin Conrad our man in the US looks set to be let loose of his green duties to PNG, so with the last governments infrastructure being unraveled we really need a policy and plan for the future.

PNG by virtue of having the third largest rain forest in the world will be a huge target for carbon trading.

What Exactly is Carbon Trading?

Carbon trading dates back to 1989 when it took took off as a market mechanism intended to tackle global warming after the Kyoto Protocol was signed. The Kyoto treaty came into force in February 2005.

Among the array of greenhouse gases carbon dioxide is the most common and which is mainly emitted by burning fossil fuels. Under the Kyoto Protocol, each participating government was to set its national targets for reducing carbon dioxide emissions. (Other reduction initiatives – not part of the Kyoto Protocol – include company-based schemes, which also have specific targets.)

The Kyoto protocol required that all industrialized countries cut down their emissions by some percentage or be liable to heavy fines. In order to measure how much less a country was polluting each ton of reduced CO2, was measured as a unit. There are various ways to aggregate these units called “CER” or “Carbon Emission Reduction” units, either:

  1. Invest in CDM/JI Projects, or
  2. Buy these credits from the market.

CDM/JI Projects: CDM or Clean Development Mechanisms are executed in developing countries where these countries cannot, on their own, introduce or change technology and/or infrastructure to reduce carbon emissions. For example, a company in a developed country can give money to a company in a developing country to buy the necessary technology and in turn own the carbon units generated by bringing that technology change and thus meet the targets set by their governments. This will help developing countries to get the much needed financial help and in turn help the developed countries to meet their emissions targets or if they end up with surplus units, they can sell them for a profit.

JI or Join Implementation is a similar approach, but differs in that both the parties involved are both from developed countries.

Carbon Trading: the second option for companies in developed countries is that if they fall short of their emissions targets, they can buy more from the market from another organisation who has been successful in meeting their targets and who would therefore have a surplus of carbon units to sell. The idea is that it’s not important that someone is doing more to reduce carbon emissions or someone else is just buying the rights to pollute the air. What’s important is that overall, there are restrictions to carbon emissions and someone is made financially liable for falling out of these targets.

How Big Is this Carbon Trading Market?

A BBC article states that the World Bank, one of the main players in carbon financing, estimated the value of carbon traded back in 2005 to be about $10bn. The World Bank further believes the carbon market has the potential to bring more than $25bn (£14bn) in new financing for sustainable development in developing countries.

Therefore, as always, Trading firms, brokers and banks are among those organisations who will make the most money through commissions for organising carbon deals.

To get an idea of how large this market is, the World Bank’s own carbon finance fund more than doubled from US$415m in 2004 to US$915m in 2006 alone. This year in 2009, the Carbon Fund is now worth now more than US$2.6 billion. (More on the World Bank Fund can be read here).

So what about globally? The global carbon market generated almost as much money in the first half of 2008 as it did throughout the whole of 2007, according to Point Carbon. A total of 1.8 Gt CO2e was traded globally in the first half of 2008, bringing it to be valued at some $59 billion in the first half of 2008 alone, compared to $63 billion for all of 2007.

With that sort of money being involved you can see now why saving our forests is not just to protect plants but is being seen as an economic issue for countries like PNG.

What is REDD?

The topic of reducing emissions from deforestation and forest degradation in developing countries such as in PNG was first introduced at the eleventh session of the Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC) in Montreal (December 2005).

The Climate Change Conference in Bali, in December 2007, opened the possibility of developing an incentive mechanism for Reducing Emissions from Deforestation and Forest Degradation (REDD). So REDD is a form of a Clean Development Mechanism (CDM). One example of REDD in action is the Forest Carbon Partnership Facility (FCPF). Some REDD mechanisms already feature in the voluntary carbon markets. And it is important to note here that Kevin Conrad played an important role in effecting the political climate at Bali and in so doing to help negotiations move forward with appropriate ratifications.

REDD mechanisms can deliver multiple benefits. In addition to mitigating climate change, REDD can support livelihoods, maintain vital ecosystem services, and preserve globally significant biodiversity. Discussions on the linkages between REDD and biodiversity conservation are increasing and is paramount to PNG’s stand in the world carbon markets principally because 80-90% of our population are rurally based.

REDD is therefore now recognized as a vital component of a comprehensive solution to the climate change problem. (More on the practical applications of REDD in PNG and the past climate change offices projects can be read here).

Looking Beyond the Trees

With the fast spreading worldwide trend for going ‘Green’ and with international legislation and polices catching up to this ‘Green’ public sentiment, the business environment will become more conducive for investment in Carbon Trading.

So again we are faced with the challenges of protecting our resources and laws from abuse.

PNG has a long history of landowner relationships with large mining companies and large scale logging and that experience alone should inform us on our dealings with investors for these resources including agriculture, fishing and now possibly carbon trading.

This is especially important when the resources sought are tied to customary land. Interest in the Pacific’s investment potential is growing rapidly now and even our cousins in Vanuatu have their own carbon cowboys in the form of Eco2 Forests.

Some troubling stories surfaced about Eco2’a  operations here and here around 2009 about how the land in question was not “deforested” as claimed, how for the 20,000 acres of land they paid the customary landholders, through their local go-betweens, a total of approx. USD20,000 and a Toyota Hilux SUV. On top of that and among various other worrying issues, in Vanuatu, all land belongs to the customary landowners and can only be leased out for a maximum of 75 years.

So yes we have allot on our plate at the moment but the billion dollar carrot of carbon trading will rear its head again and Big Sisters carbon tax will most certainly be a catalyst for it.

The vigilant attitude in our current talks of increased landowner equity should also be employed when dealing with carbon trading and more urgently we need to monitor what these ‘Carbon Cowboys’ are doing right now.