What exactly is the ETS?

We have all seen the recent high drama in Canberra over the Government’s attempt to legislate an Emissions Trading Scheme (ETS). It has been great fun to watch but there has been all sorts of bullsh*t spouted as to what the ETS and Carbon Pollution Reduction Scheme (CPRS) are actually all about. I came across a pretty good description by “darren” on the JTI blog at The Australian. Here is an edited depoliticised version of  Darren’s post.

The CPRS for Dummies

The CPRS creates a legal right to pollute, measured by co2 emissions. To keep this simple I am going to call that right “permits”. A permit is a type of property that a lawyer calls a Chose in Action. A permit is the same as a Share or a Unit in a fund (which are both simply rights to share in profits of a company or Fund and to vote at meetings of members). Choses in Action form the basis of just about every major market in the world.
 
The permit gives the holder the right to produce a certain amount of pollution per year. As a result a polluter has to buy them, by having a finite number of permits; it is possible to know the TOTAL pollution produced per year. That’s the control mechanism. Over time, the number of permits is bought up (like government bonds) and the total level of pollution is reduced.
 
When a polluter buys a permit they lose NOTHING. In cost accounting terms, the polluter buys a permit by debiting their Cash column and crediting their assets. In other words the net financial position of the polluter is unchanged, because the permit is an ASSET, not an expense. It can be sold for cash. If the polluter is a company that is wound up, the permits would be sold (converted back to cash) and the cash distributed amongst shareholders. Compare that to a TAX – which is basically a permanent removal of cash from the company – in other words, akin to a tax deductible expense.

When the polluters buy the permits, the money they use will be funneled back to them. By funneling the money back, the government is largely alleviating the cost – I say largely because, by taking some cash, the polluters’ cost could go up and some of the money is being funneled to consumers. This is how the GST was implemented. This is not necessarily a good thing because it means that people who get cheaper permits like this will make a windfall from those who come into the market later and need to pay full price – which is exactly why the polluters have been causing so much fuss about it; they want to use it to solidify their market share against possible competitors. When you see INFORMED people talking about rent-seekers in the CPRS, that’s what they’re talking about. The good news is that it’s unlikely that anyone will be rushing to build old fashioned polluting energy generating plants in future.

So there it is the guts of the CPRS for Dummies.

 Permit = valuable asset, NOT a tax