National Emissions Trading for Australia: key design issues and complementary policies for promoting energy efficiency, infrastructure investment and innovation

There is growing worldwide interest in emissions trading as an economy-wide policy response to climate change. In Australia, the recent CoAG Energy Market Review has called for a national emissions trading scheme to replace a number of existing greenhouse-related policy mechanisms. In this article we discuss some of the possible limitations with emissions trading, and the potential for appropriate scheme design choices and complementary policy measures to compensate for these. Key design questions for emissions trading schemes include coverage and permit allocation. There are good reasons to include all, and only, industry sectors whose emissions can be easily and accurately measured. In particular, the challenges faced by some energy intensive industries can be better managed through targeted industry support, than any exclusion from emissions trading. For permit allocation, auctioning them has important advantages over grandfathering. There is also a clear need for additional policy measures to reach those areas of the economy that emissions trading cannot, and to drive longer-term transformation of the energy sector. We focus particularly on the policy challenges of driving improved energy efficiency, appropriate infrastructure investment and technological innovation