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Emissions Impossible?

It's dominating the headlines, but what exactly is an Emissions Trading Scheme?

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What exactly is emissions trading?

Emissions trading schemes (ETS) create a new (and artificial) economic market to put a price on carbon dioxide (CO2), one of the most important gases behind global warming.

Companies buy and sell permits to emit a fixed quantity of CO2 with the idea that high carbon emitters are penalised and encouraged to reduce their greenhouse gas emissions.

That could slow climate change, right?

That's the idea. Smaller and medium-sized companies not covered by an ETS can also be rewarded for reducing their emissions by creating offset credits which polluters can purchase to meet their obligations. In some industries, it might be cheaper to buy offsets than to reduce emissions.

So what's all the hoo-ha about?

Putting a price on the right to emit greenhouse gases is contentious for a whole bunch of reasons - the politics are awkward, the science of climate change is intensely scrutinised and there have been big scary warnings from carbon-intensive industries like electricity that they will have to pass the costs on to consumers.

There are also concerns that some industry sectors will be given 'free' permits to pollute, undermining the integrity of creating an ETS in the first place.

Sounds scary?

Complex, yes. Scary, not really. Europe has already introduced its own scheme.

When might this happen in Australia?

The Federal Government has committed to a 2010 starting date for an emissions trading scheme and has economics professor Ross Garnaut advising it on climate change and the ETS.

What sort of price rises might we face?

It's not entirely clear what the price impacts of an ETS will be, but economics commentator Ross Gittins says petrol could rise 2.5 cents a litre and electricity could rise by $1.30 a week if carbon is priced at $10 a tonne.

The government has committed to compensating low and middle-income households for the price increases and offsetting petrol price rises by removing taxes (which kind of defeats the purpose). Inflation could go up, too.

But if an ETS will have an impact on our economy, shouldn't we abandon it?

Eminent economists like Garnaut and Britain's Nicholas Stern point out that a little pain in the hip pocket now could prevent a whole lot of pain in the future.

Garnaut has warned that climate change could cut $400 billion in today's dollars from Australia's GDP by the end of this century. Besides, what price are we prepared to pay to insure icons like the Great Barrier Reef and the Murray Darling basin?