Prime Ministerial task group on emissions trading

There is a growing consensus that the anthropogenic contribution to climate change could pose serious risks to future generations and that coordinated action is needed to manage these risks. However, uncertainty continues to pervade the science and geopolitics and, notwithstanding the Stern Review, the economics. This is leading to divergent views about when and how much abatement effort should be undertaken.

To be fully efficient and effective, greenhouse gas (GHG) abatement must occur globally. Effectiveness increases with the coverage of emissions and of emitting countries. Below a certain threshold, any abatement action will have little effect.

It is in Australia's interest to participate in the design of a multilateral framework - for example, pressing for:

• emission caps for all major emitting countries that are supported by strong verification arrangements, and can react flexibly to new information;
• allowance to gain credits for emission reduction projects in other countries and also flexibility in rules on land cover change.

Independent action by Australia to substantially reduce GHG emissions, in itself, would deliver barely discernible climate benefits, but could be nationally very costly. Such action would therefore need to rest on other rationales.

• Facilitating transition to an impending lower emissions economy is the strongest rationale for independent action, but it is contingent on the imminent emergence of an extensive international response.

Current climate change policy in Australia is a disjointed, fragmented patchwork of measures across sectors and jurisdictions. The potential impact on resource allocation (for example, firm location) underscores the need for a national approach.

A national approach should be based on GHG pricing - through an emissions tax or an emissions trading scheme. Due to its administrative simplicity, a tax has some merit as a transitional tool and could be introduced in a revenue neutral way.

If it were decided to introduce a national emissions trading scheme:

• to constrain costs, the emissions price should be kept modest via a 'safety valve' until a multilateral regime that comprised major emitting countries was in place;
• to limit adjustment costs and international relocation of production, it may be appropriate to mitigate the most adverse competitive impacts on energy-intensive producers until an international regime is in place;
• existing regulations that substitute for emissions trading should be discontinued.

Other policies may be warranted to address related market failures. These include support for relevant technological development and deployment, addressing barriers to energy efficiency and carbon capture and storage, and research into adaptation strategies. To optimise use of the community's abatement dollar, all policy proposals should be subject to comparative assessment - such as cost per tonne of GHG emissions reduction or storage.