The government’s draft Emissions Budget gets a few important things right.

It abandons measures like subsidies for electric vehicles that, perhaps counterintuitively, cannot reduce net national emissions.

Every tonne of emissions in the sectors covered by the Emissions Trading Scheme (ETS) requires surrender of a carbon credit. In transport, fuel companies buy and surrender credits on behalf of road users.

Everyone switching to electric vehicles does not reduce the number of carbon credits that the government creates. More carbon credits are left for other sectors to use instead.

Regulations and subsidies targeting emissions already covered by the ETS only change the price of carbon credits and shift where emissions happen.

Also encouragingly, the government has largely resisted pressure to restrict forestry credits.

Our clean ETS recognises that a tonne of carbon dioxide pulled out of the atmosphere by a tree, or by other technologies that may yet emerge, is as good as a tonne of carbon dioxide that was not emitted in the first place.

Reducing global warming requires reducing the concentration of greenhouse gasses in the atmosphere. The balance between reducing emissions and pulling emissions from the atmosphere should depend on what is most cost-effective. The ETS helps discover what is most cost-effective.

Pretending that forests do not sequester carbon would have embedded a fiction into the ETS. The ETS should only care about getting carbon accounting right. If forestry conversion on decent pastoral land causes other problems, those problems should be dealt with directly rather than by skewing the ETS.

But a truly ETS-led approach would expand the ETS to cover all emissions that are easily treated as carbon-dioxide equivalents.

Methane is short-lived and does not face a net-zero target. It would not be easy to include it in the ETS. The government will take some time in figuring out the best approach.

Nitrous oxide emissions from synthetic agricultural fertilisers are long-lived and more easily covered by the ETS. While there are real issues to work through, punting this easier set of emissions out into the further future does not build confidence about eventual agricultural emission pricing.

Within the covered sector, the ETS could be usefully strengthened to make it both more credible and more effective. The Initiative has previously suggested ways of ‘bulletproofing’ the ETS.

Revisiting those kinds of proposals would be worthwhile for a government committed to cost-effective approaches for reaching its net-zero goals.