Friday, August 12, 2011

USING OFFSET CREDIT TRADING TO DRIVE DOWN NEW CAR EMISSIONS


In a previous post it was argued that the most effective way of driving down the emissions per km of new cars would be to use an offset credit emissions trading system.  The aim of this post is to detail one version of this type of system.
WHAT ARE OFFSET CREDIT TRADING SCHEMES?
Versions of offset credit trading emission trading schemes are at the core of both the Australian MRET emissions trading scheme used to drive investment in renewables as well as the US system for reducing acid rain. Offset credit trading is particularly suited for situations where the aim is to control an average and where there is no shortage of better than target product. 
There is no transfer of funds to the government so offset credit trading schemes are not defacto tax schemes.  If all else is equal price increases will be lower because prices do not have to cover the cost of the defacto tax.
Under an offset credit trading system credits are awarded for better than target performance.  Any entity that wants to perform worse that target has to purchase these credits from entities awarded credits for performing better than target.
HOW MIGHT AN OFFSET CREDIT TRADING SYSTEM BE USED TO DRIVE DOWN THE AVERAGE EMISSION PER KM FOR NEW CARS?
A basic offset credit emission trading scheme for controlling average emissions per km might work as follows:
1.          Government sets target and specifies test procedures.
2.          If a new car with emissions per km below target is registered, free credits would be awarded by the government.  The number of credits awarded would depend on how far below target the emissions were.
3.          Before a new car with above target emissions could be registered enough of these credits generated by the registration of below target cars must be purchased and surrendered to the government. The number of credits needed will depend on how far above target.
In effect, all above target emissions have to be offset against below target emissions so that the average stays at or below target.
The advantages of offset credit trading schemes include:
1.          Do not depend on any change in the price of fuel to work.
2.          Will reduce the price paid for cars with below target fuel consumption.
3.          The target can be as challenging as the government is willing to make it.
4.          Unlike simple cap schemes, it does not completely block the sale of new cars with above target emissions.  (Reduces the impact of complaints from those who really do need cars with above target emissions.)
5.          At a petrol price of $1.50/litre it would actually REDUCE the national fuel bill by $614/tonne CO2 abatement.
In practice there may be a number of modifications to the above system.  For example;
1.          Limiting actual trading to that required by manufacturers/importers whose averages haven’t quite matched the target.
2.          Providing some relief for genuine working vehicles and special cases such as large families.
3.          Extending the system to take account of significant conversions of existing cars.
4.          Controlling fuel consumption rather than emissions so that it is easier for people to understand targets.
5.           Excluding light commercial vehicles from the offset trading pool while giving/requiring similar payments to those in the offset credit trading scheme for below or above target emissions.  (Removes the incentive to argue about whether a vehicle is or isn’t commercial.)  There might be an upper limit on payments to avoid pushing the payments for large trucks up for no real reason.
6.          Have a separate system for commercial vehicles.
7.          Having different targets for vehicles that normally travel long distances or do not have access to clean electricity.  (Vehicles for which plug in hybrid will make little difference.)
At the start of the program there will be plenty of large, second hand vehicles available for those who really need this type of vehicle.  It would make sense to wait and see before introducing special arrangements.

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