What an incredible year in the carbon market. After one of the worst cases in rent-seeking this country will probably ever experience, we finally saw a carbon price introduced. Yet for all the concern about how a carbon price might ruin business, by the end of the year it is the carbon market that is suffering, with prices at record lows in the EU, New Zealand and other trading nations.

So how did it all play out? An important look back …

January to June: industry groups claim carbon price will be the end of business as we know it

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In the lead-up to the commencement of the carbon price Australians were bombarded with claims from industry associations — the Minerals Council, the Business Council of Australia, the Australian Chamber of Commerce and Industry, et al — about how the carbon price would lead to widespread economic damage, many destroyed businesses and significant unemployment.

May and June: carbon tax compensation leads to mini retail sales boom

In April shopping centre magnate John Gandel claimed the carbon price would be more harmful to his business interests than the threat of online retailing. Gandel joined the likes of Gerry Harvey of Harvey Norman and Paul Zahra CEO of David Jones blaming their ills on the carbon tax. The very next month, as carbon tax compensation payments hit householder’s bank accounts, consumers splashed out on household electrical goods, shoes, restaurant meals and books with retail sales rising by 0.9% for the month, leading to the biggest annualised gain for nearly two years.

Harvey told The Australian his June sales were even better than May, stating: “Most of the government’s compensation payments started in June and have crucially helped lift our sales, especially in furniture, bedding and whitegoods.”

June: government bails out Alcoa and brown coal briquettes

Just two days before the carbon price was due to commence the government decided to undermine the very purpose of the carbon price — to reduce emissions cost-effectively — by bailing out two of the biggest drivers of carbon emissions: the Alcoa Point Henry Aluminium Smelter and the Morwell Energy Brix brown coal briquette factory and associated power station.

July: carbon price comes into effect (no Whyalla Wipeout)

After one of the most tortured and stretched out gestations and labour involving multiple false starts, a price on carbon finally came into effect on July 1. Its birth was almost as painful as watching Craig Emerson’s embarrassing rendition of Skyhooks’ classic Horror Movie modified to “No Whyalla wipeout there on my TV”. If I’d known the carbon price would have led to this singing episode I would never have been such a strong supporter.

August: floor price dropped, Australian carbon price tied to Europe

After some incredibly fierce lobbying by big business and threats from independent MP Rob Oakeshott, the Labor government wilted to pressure and agreed to drop the $15 floor price on carbon permits. But the surprise twist to it all was that, at the same time, the government tightened restrictions on the use of dirt cheap developing country carbon credits (known as CERs) and announced a two way linkage with the EU’s ETS.

Polluting business interests were not happy because their goal was to drop the floor such that carbon prices would plummet to the CER price — which was $3.40 at the time. Instead Australia’s carbon price fortunes would now be almost completely tied to developments with the EU ETS where prices were also low, but aspirations far higher than Australia. In the same month Gillard turned from defence into offence about electricity prices, criticising state governments for gold plating their electricity networks.

September-October: inflation benign, but Abbott takes his advice from pensioner Hetty Verolme

The ABS consumer price index for the September quarter was released in October showing a jump of 1.5% compared to 0.5% in the prior quarter. The one-off jump was due in large part to electricity prices increasing by 15.3%, of which the carbon price was responsible for about 10% based on subsequent AEMO analysis of the wholesale electricity market. This was all in line with the government’s economic modelling. The Reserve Bank minutes for its September meeting stated: “There was no evidence that the carbon price had raised medium-term inflation expectations.”

Strangely, Barnaby Joyce’s prediction of a $100 lamb roast failed to eventuate. Woolworths told ABC’s 7.30: “While there’ll be a small increase in everyone’s cost of doing business, I don’t think there’ll be an immediate impact on prices to the customer.”

But Tony Abbott was having nothing of this thing called data, taking his lead from 82-year-old Perth pensioner Hetty Verolme. Verolme had written to Abbott complaining how the carbon tax had driven a huge rise in her electricity bill. Abbott then brandished her bill in Parliament while asking Gillard: “With an $800 increase in just one bill of which 70% is due to the carbon tax how can the Prime Minister possibly claim that Hetty Verolme’s compensation is in any way adequate?”

Once the bill was tabled for scrutiny it turned out Verolme’s electricity consumption had almost doubled relative to the prior bill and the bill stated quite clearly that the carbon price was only responsible for a rise of 9.13%.

November: European Commission tables plan to rescue carbon market; California holds first auction

While the Australian media was filled with complaints that our carbon price was too high, the European Commission was busily trying to work out how to revive its own languishing carbon price. In November the Commission announced a two-step process for reviving a carbon market burdened by an expected 2 billion surplus of emission allowances.

The first step was an initial quick-fix to delay the sale of 900 million allowances out to the back end of 2020. This was expected to revive carbon prices in the short term, but because it wouldn’t permanently reduce the surplus it would only shift the pain to a later point in time.

The second step involved more fundamental reform to permanently address the allowance oversupply. The Commission has put forward six options involving such things as: increasing the stringency of their 2020 emissions reduction target, permanent withdrawal of allowances and even putting in a price floor which the Australian government dumped in order to apparently better link with the EU ETS. While Europe was grappling with how to rescue its own market, California kicked off the beginning of its own carbon market, auctioning permits for $10.09 a pop.

December: Kyoto to continue but carbon prices fall

The international climate negotiations in Doha came to very little, but Australia and Europe agreed to sign up to a second commitment period to contain their emissions beyond 2012. Most other major emitters gave no such hard commitments. It did little for carbon prices — CERs have continued a downward spiral throughout 2012 and are now close to worthless at about 40 cents.

NZ carbon units have largely tracked the downward spiral of CERs but have more recently managed to defy the latest grim CER price falls. EU allowances dropped briefly below 6 euros on pessimism around whether EU governments would agree to backload the auction of 900 million allowances, and remain at low levels of 6.50 euros or about $A8.

The real issue now is not about rescuing polluters and consumers from the wrecking ball of a carbon price. Rather it is how we inject a level of confidence and stability into a carbon market that is so weak and unstable it will fail to change investment patterns.

*This article was originally published at Climate Spectator

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Peter Fray
Peter Fray
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