It’s tempting to liken Australia’s climate change debate to an episode of Fawlty Towers: just when you think it can’t get more farcical, it does.
Having endured a ridiculous scare campaign about a scheme that is in fact extremely modest, the Australian polity now finds itself embroiled in yet another infuriating debate, this time about whether to scrap the price floor — the legislated minimum price planned for the first three years of the scheme’s floating price phase, starting at $15 per tonne in 2015-16 and rising to $17.05 in 2017-18.
The campaign against the floor, one of the few features that would imbue the scheme with a modicum of integrity, has been led by industry groups emboldened by the extremely low prices for carbon permits in the few significant carbon markets that exist globally. Permits in the EU scheme (which Australia may eventually link to) are trading at around $10, due largely to the European recession and the oversupply of permits. Carbon credits generated under the UN Clean Development Mechanism, or CDM — the main type of international permit Australian emitters can use for compliance after July 1, 2015 — are currently trading at around $5 per tonne.
As ANU climate economist Frank Jotzo recently explained, these “rock bottom” prices are set to continue for the rest of the decade:
“A massive excess supply from CDM projects already under way or in the pipeline is expected. Until 2020, the amount of unsold excess could be several times larger than the total amount that Europe accepts, and far and away higher than Australia’s maximum demand… The price paid for CDM [credits] can fall well below the cost of the projects — the bulk of the CDM pipeline was conceived at a time when expectations were for sustained demand at prices much higher than now, and almost all the cost of typical CDM projects is incurred at the start. A gap has already opened between prices for EU permits and CDM credits, which are now traded below five dollars per tonne. All indications are that this gap will open more widely.”
Similar dynamics have also caused the price of permits in New Zealand’s scheme (under which CDM credits can also be used for compliance, and which may also link to Australia’s scheme in 2015) to plummet to around $5.
Against this backdrop, Australia’s carbon price will initially be fixed at the much higher level of $23 per tonne in 2012–13, rising to $25.40 by 2014–15. Moreover, entities covered by the scheme are prohibited from relying on imported credits (or “offsets”) during this period. While big emitters are unhappy about this price disparity (they claim, among other things, that it will hurt their international competitiveness), the Australian prices areenshrined in legislation and unlikely to be changed by the current government.
Once the scheme turns into an internationally linked cap-and-trade scheme, however, two things will happen: liable emitters will be able to acquit up to half of their annual emissions liability using international permits and the price of Australian carbon units will be set by the market. The temporary price floor is the only thing that stands in the way of these bargain basement international permits. But the price floor will only come into effect if further regulations are gazetted — and with the government’s slender majority in the lower house in constant jeopardy, the big emitters have seen an opening.
They have found a new ally in the form of independent MP Rob Oakeshott, one of the architects of the scheme, who now says he is considering siding with the opposition in a vote to block the regulations. While the Coalition would need the support of one further independent (or Labor) member in order to quash the regulations,* the Oakeshott bombshell has raised the disturbing spectre of a bottomless carbon market.
Scuppering the price floor, thus allowing the price to plummet, would be bad public policy for three reasons.
First, by making compliance so cheap and easy, a weak carbon price would fail to induce a structural shift away from our high carbon economy. At $5 a tonne, the price impact of the scheme would barely register on the radars of the big emitters — especially when most of them will receive masses of “transitional assistance” from the government that will further ameliorate the scheme’s impact on their bottom lines. (The most emissions-intensive trade-exposed industries — including aluminium smelting and petroleum refining — will receive 94.5% of their direct and indirect carbon liability in the form of free carbon units in the first year of the scheme, declining by 1.3% per year.
With a market price of $5 and a price floor, those industries would face an average carbon price of less than 50 cents per tonne in 2015-16.) Instead of investing in cleaner technologies and production processes to reduce their emissions, many businesses will therefore opt for short-term fixes to meet their liabilities: buying up cheap international offsets as much as they can, while dropping some loose change on Australian carbon units for the remainder.
While Australia’s weak “5% by 2020” emissions reduction target may technically be achieved in this way, the much larger emissions cuts ultimately required in response to climate change will be all the more costly because of the carbon-intensive investments that will continue to be made in the interim.
Those marketing carbon credits locally, in order to make a profit will have to produce below the market price.
So lower costs are available immediately for polluters who wish to emulate the others and create their own carbon credits
I understand that a floor has to be put on the price in the build up phase while the credits are being created and before they can be traded unless it is a futures market.
So what are the major polluters afraid of, can’t they run a carbon credit business profitably?
Take away the profit motive and the market will be destroyed, why not just do business instead?
I understand that a standardised accountancy procedure was established by the business community in anticipation of an ETS several years ago when it was politically imminent.
So someone anticipated a “market” and business opportunities then and the only thing that has changed is the politics.
Why, having gone to all this anticipatory, good faith effort does the general business community
continue to support the Abbott economic illiteracy on the ETS?
“Why does the general business community continue to support the Abbott economic illiteracy on the ETS?” Who cares? It’s not about economics. Carbon dioxide is not pollution and there is no human induced climate change problem. This is the most ridiculous load of nonsense since the Salem witch trials. We shouldn’t have the rotten tax or trading scheme in the first place. Talking about what level the “floor” should be is like arguing about how many angels can dance on the head of a pin.
“Why, having gone to all this anticipatory, good faith effort does the general business community
continue to support the Abbott economic illiteracy on the ETS?” Because even if you know what is best and makes perfect sense if one person is asking you to pay and the other is offering you a lot of money for nothing thre greater good goes out the window.
Gregkb – Completely agree that believing that “Carbon dioxide is not pollution and there is no human induced climate change problem. “is the most ridiculous load of nonsense since the Salem witch trials”.
In both cases science and logic wsa thrown out the window!!
Logic has always been scarce and science was “thrown out the window” long ago. Sadly, good science has gone the way of good economics. Like with economics, there is now an industry in science that promotes people coming up with any crazy theory just to get published, notoriety and a career pursing it. What then causes these “ideas” to take hold in society is anything but science, as we have seen with this climate change rubbish. If you doubt that this stuff can become a self-perpetuating industry, just have a look at the number of people that call themselves “climate scientists” and now get paid to devote their time and taxpayers money researching and talking about this stuff. As recently as the 1990s there was no such thing as a climate scientist – where have they all come from? When I went to university there was no such thing as an environmental science degree. Here’s a tip for free – if you want to find out what the reliable scientific opinion is on this you shouldn’t be asking the “climate scientists”. Do that survey and you’d get a completely different picture of what good honest science thinks about this.