Aug 28, 2012

Euro vision: Australia’s new carbon regime explained

Australia has hitched itself to Europe's climate change wagon yesterday in a move which will have far-reaching -- and uncertain -- consequences for the domestic carbon scheme.

Cathy Alexander — Freelance journalist and PhD candidate in politics at the University of Melbourne

Cathy Alexander

Freelance journalist and PhD candidate in politics at the University of Melbourne

Australia has hitched itself to Europe's climate change wagon in a move that will have far-reaching -- and uncertain -- consequences for the domestic carbon scheme. Yesterday's decision to link Australia's carbon scheme with Europe's (and dump the floor price on permits) is a game-changer. Until then we were the southern hemisphere's mouse that roared on climate change. Now we'll effectively be part of a large, entrenched and relatively stable carbon price mechanism, which covers half a billion people. The move probably means the cost for Australia to reduce emissions will come down -- in the medium term at least (say 3-6 years). But actually, costs could go up. The move probably makes it harder for the Coalition to repeal the carbon tax if it wins the federal election. The real significance of yesterday's decision is that instead of Australia tackling climate change by taxing domestic polluters and spending the money on reducing emissions in China, we'll tax domestic polluters and spend the money on reducing emissions in Europe. Either way, the international rules say we can count those emissions reductions ourselves, as if we'd shut down a Latrobe Valley smokestack. (Why can't we just reduce our own emissions? Too expensive. So we're paying our way out of the problem.) So how does yesterday's decision work? The original plan was that once Australia's $23-per-tonne carbon tax switched to an emissions trading scheme in 2015, businesses could meet their obligations in large part by buying up cheap international permits from countries such as China, Indonesia and PNG. These bargain-basement permits used to be a little dodgy. They're better now, but plenty of people will tell you there's still hot air in the system. At $4 or so a pop, they're cheap as chips. The government was worried the ETS would be flooded with these cheap permits, so set a (temporary) $15 floor price to start in 2015. But it was becoming increasingly hard to see how that would work; the floor price seemed arbitrary, and some businesses complained they'd pay more because of it. So the government worked on Plan B; scrapping the floor price and linking the scheme to Europe's ETS (which has been going for longer than ours). That means that in 2015 Australia's floor price will effectively be Europe's permit price -- about €8, or A$9.50, at present. (There are concerns in Europe that the price is too low; it's dropped a fair bit lately). So Australia has not really scrapped its floor price -- it has just switched horses to a new floor price (and a floating one at that). The take-home point here is that if the European ETS price is below $15 in 2015, then yesterday's move makes it cheaper for Australian businesses to comply with our carbon scheme. The kicker is that if the European price is above $15 by 2015 -- and it has been volatile -- then the costs here will go up. You can bet the big emitters are crunching the numbers on this right now. And if Australia's new scheme keeps a long-term cap on the use of cheap permits from China, etc, then costs could be significantly higher by 2020. "It could be cheaper, it could be more expensive; probably cheaper," Tony Mohr from the Australian Conservation Foundation told Crikey of yesterday's decision. Erwin Jackson, deputy CEO of The Climate Institute, estimated the EU carbon price would be $15-20 by 2015; that would make the new scheme more expensive than the original. Other analysts reckon the European price will be $12 in 2015. It depends which crystal ball you're gazing into. The European permit price has been a wild ride since the scheme started; good luck tipping the price three years' hence. Hitching our ETS to Europe's could throw out the federal budget -- if permits do wind up cheaper, that means less revenue for the government, but it still has to pay compensation for the carbon price. Politically, yesterday's move probably makes it harder for Tony Abbott to repeal the carbon price if he wins the election. The decision is to "finalise technical details of the interim link" with Europe by mid-2013 -- say, that's before the federal election is due. The sleeper issue here is property rights. A permit to emit one tonne of greenhouse gas emissions is created as a property right. So if Abbott wants to scrap the tax, he is also scrapping a stack of permits (i.e. property rights). He may have to pay compensation under the constitution. And with more permits changing hands between Europe and Australia, that could get complicated as well as expensive. Mohr says the more connected Australia's carbon scheme is, the harder it becomes to unravel. Another geeky point to make is that yesterday's decision may herald changes to the design of Australia's carbon scheme. For Australia to hitch its scheme to Europe's, the two schemes have to be roughly aligned. That's partly why the floor price has been scrapped; Europe didn't like it. More changes may be needed. Australia allows farmers to voluntarily cut emissions and sell those reductions into the carbon scheme under the Carbon Farming Initiative, but Europe doesn't. So the CFI may have to be changed. And there may have to be changes to industry assistance (although Europe's carbon price is arguably more generous to business than Australia's at present). And taking a macro look, yesterday's decision may mean Australia enters into a "green" negotiating bloc with Europe -- the region that's doing the most on climate change. We might find ourselves forming a common front on issues such as targets to reduce emissions (a hot potato), and the future of the Kyoto Protocol. That would be a shift, because we have been at the centre of the not-terribly-green "Umbrella Group" -- including countries such as the US and Japan -- at international negotiations. Not any more, perhaps? We could even consider a joint EU/Australian carbon tariff, to slap an effective carbon price on imports form countries doing little on climate change, such as the US. A carbon tariff would probably be allowed under international trade law, it would shield industries from first-mover disadvantage, and it would set the hares running among those not pulling their weight on reducing emissions. So what's the verdict on this new approach on Australia's climate scheme? Mohr describes it as "good politics, it's a smart move", and says the domestic scheme would be rendered more stable as a result. "It's a good thing that Australia has linked with the European ETS," he told Crikey. Jackson cautions against focusing solely on keeping short-term permit prices down, arguing this would do little to encourage green investment. He "cautiously welcomed" yesterday's decision as it would "provide long-term stability".

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29 thoughts on “Euro vision: Australia’s new carbon regime explained

  1. Patriot

    Uh, there will be no floor price on the ETS under the government I lead.

  2. Frank Campbell

    You’d never know from reading this confused apologia that the floor price was rock solid govt. policy only a few days ago.

    From Alexander’s disingenuous prognostications you’d never know that the carbon tax is now superfluous. It was a unilateral tax eviscerated by a comical carousel of “compensations” and carte blanche for big “polluters” (94% of emissions gratis). At $23, it was big enough to cause modest economic damage but not big enough to have any significant effect on the current global fossil fuel bonanza- of which Australia is the chief beneficiary.

    The $23 tax (later $25, $27) is now undisguised self-harm.

    Given the decline in climate millenarianism, belated realisation that most ‘climate’ policies are ineffective and/or rorts, not to mention Europe’s parlous economic condition, you can be sure that the “carbon price” (in fact a misnomer as the “market” is artificial) will sink. At the current $7 to $9 range, it is meaningless anyway.

    It’s fascinating to watch propagandists like Alexander and Jackson instantly find that Combet’s backflip is really good policy after all.
    The gymnastics will continue tomorrow.

  3. Andybob

    This is a great decision environmentally, economically and politically (exhibit A in that regard being the post above me). My daughter is in Germany for a year and amazed at the extent to which household solar is used compared to here. She tells me Germans keep talking to her about how solar must be so good in Australia; she changes the topic of the conversation.

  4. Frank Campbell

    Andybob: have you any idea how many scores of billions it cost to put PV panels on German roofs? And who paid this exorbitant amount? Who subsidised whom?

    And for what? 3% of total power production.

    It’s a moralistic gesture, signifying fossil fuel expansion.

  5. Scott

    This is a victory for common sense. Carbon floor was always bad economics and would have just created arbitrage opportunities for finance companies.
    The Europeans, with their larger scheme will always be the price setter of carbon due to the increased liquidity in their market. It was pure arrogance from the greens and labor to believe that we could determine the lowest price for emitting carbon dioxide, which is effectively what the price floor did.
    If we are going to have an emissions trading scheme, let’s have one that is the most efficient and provides the lowest costs for business.
    However it is still naive to believe that Abbott couldn’t decommission the scheme. In fact, it will be easier now that it is linked to the European scheme…business will have a market to sell their prepaid emissions rights when abbot says that it will no longer be accepted in austalia. He won’t be guilty of taking property away if the Europeans can buy them.

  6. Apollo


    Germany started solar program in early days when it was still expensive and less efficient.

    But today, on some hot summer days solar is able to provide more than 50% of the energy needed during the day. Their total of all renewable energies supply around 20%. Some though are against abandoning nuclear programs because they are afraid enegy cost will go up.

    My cousins in Munich don’t understand why Australians are so resistant to renewable energy.

  7. Suzanne Blake

    No wonder there is NO BUSINESS CONFIDENCE under Labor.

    Last week incompetent Combet and ly ing Gillard said the floor price would stay and nothing would change.

    This week, the floor is gone and the price will swing in the breeze.

    Meanwhile we pay the World’s largest carbon tax.

    Combet just admitted its a FAILURE

    what happens to the compo in 2015, that is based on a $29 price!!!

    absolute clowns.

    Their internal polling must be UGLY

  8. Patriot

    Certainty for business the Labor way:

    No carbon tax, yes carbon tax.
    Yes floor price, no floor price.
    Yes pokie reform, no pokie reform.
    Yes branding on cigarettes, no branding on cigarettes.
    Yes live export, no live export, yes live export.
    Yes insulation subsidies, no insulation subsidies.
    Super Profit Tax, iron and coal Mineral Resource Rent Tax.
    Big Australia, Small Australia.
    Fake Julia, Real Julia.

  9. Steve777

    Good evening Suzanne. I see that you have once again chosen again to grace us lefty heathens with your pearls of wisdom. To address the points that you raise:
    – No business confidence? When Australia has billions in investments in the pipeline and inflation, debt and growth are the envy of the developed world? Interest rates at 50 year lows? AAA Credit rating? In spite of the Coalition’s attempts to ‘jawbone the economy down, we’re travelling pretty well. Of course I’m sure that business would prefer a larger pool of unemployed, but hey, you can’t have everything.
    – Floor price replaced by market value. Isn’t that what business preferred? The decision was made following feedback from affected businesses. Mr Combet made a pragmatic decision to improve the workability of the system, just as, for example, John Howard adjusted the GST in the months following its implementation
    – World’s highest carbon price? No – check Google.
    – In 2015 and beyond, carbon credits can be bought and sold on the market.
    – Talking of clowns, how about Tony Abbott’s recent performances, exposing him as either ig nor ant or economical with the t r uth?

  10. Steve777

    Good evening Patriot. I see that you have changed your avatar from a warrior (Cossack?) to a so ber, suited man at a lectern, no doubt saying something important.

    To address your points:
    – Carbon pricing – the right policy, Labor erred in dropping it after the Coalition reneged on their deal in December 2009. Julia (wrongly in my view) fully intended to defer carbon pricing, but the hung parliament meant compromises were necessary. That’s how parliament works.
    – Floor price – see my previous post
    – Pokie reform – blocked by the Coalition
    – Branding on cigarettes? What’s your point? This is an excellent initiative, with bipartisan support, to further impede the marketing of addictive toxins to chil dren by Big Tobacco.
    – Live exports – OK, a bit of a dog’s breakfast. But cruelty to animals (or people) is utterly unacceptable.
    – Insulation subsidies – could have been handled better.
    – Super profits tax – a great idea to share the proceeds of the mining boom between the owners of the stuff in the ground (Australians, current and unborn) and those with the wherewithal to dig it up and sell it.
    – Big Australia – we’ll see. No one has a long term population policy. Without immigration, Australia’s population would drift up another couple of million then decline like Japan – not a good outcome.
    – Fake Julia, real Julia – I like the one who gave the press conference the other day. She’s a tough lady, she’s had to take a lot of crp and she’s maintained grace and dignity under pressure. Someone I’d want on my side.

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