Australia’s Kyoto Liability

When the Government signed up to Kyoto it risked exposing the Federal budget to a massive financial liability. That is, the liability incurred from not achieving the Kyoto target in reducing greenhouse gas emissions.

The liability is calculated by pricing carbon, which is currently around $40 per tonne in Europe. Achieving Kyoto was never going to be a great achievement for the Rudd government, given that the previous government was already on track to meet Australia’s target. The target is to achieve an emission by 2012 of 108 per cent of 1990 greenhouse gas levels.

The ALP’s objective though is not to meet Kyoto. It has set its own greenhouse gas emissions target, which is to reduce greenhouse gas levels by 60 per cent by 2050, with 2000 being the reference year. So what is the potential financial liability from setting such a goal and what is the liability right now?

To give you an idea of the potential figure, in New Zealand the current liability from just meeting Kyoto is over NZ$1 billion:

The liability is an estimate of how much New Zealand will have to spend to buy carbon credits if climate change emissions are not reduced to levels agreed to under the Kyoto Protocol, or offset by tree plantings.

When the Government signed up to the international agreement it estimated that New Zealand would be in credit by $500 million, but deforestation and an increase in emissions reversed that position earlier.

Under the Kyoto Protocol, New Zealand committed to reducing its average net emissions of greenhouse gases over 2008-2012 to 1990 levels or take responsibility for the difference.

Based on the latest cost per tonne of carbon, a 2000 carbon emission level of 551.5 Mt CO2-e and a linear decline of around 4.1 Mt CO2-e per year to 2050, the liability to 2005 is over $3.9 billion. That is $3.9 billion worth in carbon emissions above the Government’s target. There is no accurate estimate of future carbon emissions, which means the Government is entering into an unlimited liability. However, if the Government misses its target by just 5 per cent, it will result in a liability of over $43 billion, based on the latest price of carbon. If the 2050 target ever became legally binding, it would also provide cause for the national audit office to qualify the Government’s financial statements as being in breach of the Government’s own financial management legislation. So much for the Government’s claims to fiscal conservatism.