Rumours that the government may ditch the carbon floor price once the emissions trading scheme begins in 2015 is of concern to economic and energy experts, who tell Crikey the decision would ignore the long-term need for investment in renewable energy and actually raise costs for business overall.

Radio National Breakfast yesterday broke the news that the government is “secretly negotiating to dump or at least dramatically rejig” the current plan of a floor price for the first three years of the ETS, after criticisms from the business community that the $15 price is too expensive. Independent Rob Oakeshott has been pushing for the carbon floor price to be re-examined, although he agreed to it during the hung parliament of 2010.

Tony Wood, the energy program director at the Grattan Institute, outlined to Crikey the three key reasons Australia should maintain the floor price. “If this was a perfect market already, you wouldn’t need a floor price because the market would set the price and if the price was low so be it,” he said. “The problem is this isn’t yet a stable market, it’s created by government and it’s going to take a while to get the rules right both domestically and through international linkages.

“Secondly, if the price of the permits was to drop very low, then you would be more likely to get investment in things which are probably too emissions-intensive now. Which might get us going now but would be a problem in the long term, rather than getting investment in technologies which would be lower cost in the longer term.

“Thirdly, if the international market in CDM [clean develop mechanism] credits itself was a stable market, then that would be fine. But because it’s not yet and because of a whole lot of other changes, there’s a significant oversupply of international credits. It means that our price would be inappropriately linked to that.”

Current oversupply is mainly due to China creating a huge amount of CDM credits and economic issues in Europe. The European Union’s ETS does not have a floor price and currently sits at just under $10 a tonne. When the $15 figure was first chosen for Australia’s scheme, the cost of European carbon credits was about $14.

However, the low price in Europe also reflects the current economic problems there — recession, high debt levels and low investment. Europe is currently meeting its emissions targets but only because of slow growth and recession. And while the EU scheme does not have a floor price, it does have limits on how many permits can be acquired internationally at a low price.

A carbon price and ETS have long- and short-term goals. “Obviously a carbon price is meant to work both in the short term with substitution effects in limiting coal and gas, but it’s also trying to set up a long-term investment by this long-term pricing signal,” said Dr Paul Twomey, from the Centre of Energy and Environment Markets at the University of NSW.

But Richard Denniss, executive director of The Australia Institute, says an emissions trading scheme won’t increase investment in renewables, because the price will be too low. “Does anyone in Australia think that $15 is the difference between a wind turbine and a brown coal station?” he asked.

“The objective of emissions trading is to deliver least-cost abatement,” Denniss told Crikey. “And least-cost abatement in Australia takes the form of imported credits, not renewable energy. If you want to have renewable energy, you probably don’t want emissions trading.”

The impacts of a floor price are also limited, says Denniss, who instead supports a set price on carbon. “At most the floor price will have some impact on emissions from industrial processes,” he said. “But it won’t have any impact on emissions from energy.”

Despite protestations from some corners of the business community, Wood says a floor price keeps costs down —  although it sounds counter-intuitive. “Businesses don’t necessarily want absolute certainty about a number, because businesses make money on uncertainty,” he told Crikey. “But what you want to know is with some degree of predictably about how this will work … [without a floor price] companies will still make decisions but they will make much more risk-averse decisions which tend to be more expensive, so overall costs will be higher.”

Although the policy will affect each business differently. “Companies investing in low-emission technology, because of the somewhat higher risks in the first years, will put a higher risk premium on their investments,” said Wood. “There’s another side of this coin, for companies who have a liability domestically, they will be less likely to invest domestically and more likely to buy international permits if they think they can buy them for $5 rather than $15 or $20.”

Twomey says the Treasury and the Department of Climate Change’s stance on a floor price — they’ve always been against it — makes sense logically but not practically. “In the ideal rational economic model, it shouldn’t be a problem [a low carbon price],” he said. “The signals should be there, investors should realise it’s a temporary low because of a recession and when the recession is over then the price will come back up.

“But in the real world uncertainty does scare investors and investors do have short-term investment horizons and if they can see that the price in 2020 will still be quite low because an overhang from recession, they are not going to be investing or not using this price signal to invest in low-carbon technologies.”

The UK is also talking about introducing a floor price. As Twomey told Crikey: “It’s more problematic there because they are just one country under a European wide scheme, and effectively further reducing emissions in one European country (UK) releases permits for other EU countries to use. But the positive long-term effects of greater low carbon technologies for the UK will still be there, even if in the short term there is no change for European wide emissions.”

Peter Fray

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