This paper focuses on pollution pricing mechanisms and an approach to setting scheme caps and targets, and proposes moving to cap and trade system within three years.

It comes on the back of recent proposals from Professor Garnaut, comments from the Coalition on robust governance structures and the release of an economists letter calling for effective pollution pricing.

The core of the paper proposes moving to cap and trade system within three years. The initial cap would be based on recommendations from an independent authority. The cap must be declining and would be three years in length. If Parliament disallowed the cap the initial fixed price would escalate by default.

This is slightly different to what both the MPCCC and Garnaut have proposed as it distinguishes between setting national targets and setting pollution caps for covered sectors. The Climate Institute does not support setting national targets in advance of the finalisation of the current round of international talks. These negotiations, under the existing agreements, are informing domestic action in developed and developing countries and are ongoing. 

The Climate Institute does support the introduction of a declining cap consistent with at least current international commitments in 2015.

This proposal is also very mindful of the fact that the credibility of any final pollution package requires an unrelenting focus on both pollution reduction and domestic clean energy investment. The two key elements of this proposal that address these issues are:

1. In 2014, a declining three year cap should be set at least in line with any international commitment that exists, presently the bipartisan backed range of 2020 reductions of -5 to -25 per cent of 2000 levels by 2020.
2. A default pollution price (floor) and associated complementary measures should be agreed at the outset and be consistent with driving domestic transformation and ensuring an ongoing decline in domestic pollution levels.