May 22, 2012 - 12:00am
This opinion piece was originally published in The Australian on 22 May 2012.
By Erwin Jackson, Deputy CEO, The Climate Institute
Major emitters should be careful what they wish for when they call for the removal of price floors on carbon permits from 2015.
A carbon price exposed to the fluctuations of the international market, does not provide business with the certainty required to make effective long-term investments in sectors such as power generation. A carbon price with a floor offers that stability.
The argument for removing the minimum price on the scheme is superficially appealing. In 2015, Australia will move to a system where the price of pollution will be determined by permit trading. The domestic price is likely to track close to that of the international offset market.
Under the carbon laws, companies must pay at least $15-$18 a tonne between 2015-2018 to promote market stability and encourage domestic investment in low pollution technology. There is also a pricing ceiling.
This is not uncommon. In Britain, the price floor is about $25 a tonne in 2013 and grows to $115 a tonne in 2030. California's market has a price floor starting in 2013 at $10 a tonne and rising 5 per cent a year. China is also discussing including a price floor mechanism under its scheme pilots.
The temptation to do away with a price cap stems from recent reports and speculation that prices in the future could be much lower than Australia's carbon price floor, only $4 a tonne in 2020. Hence, calls for the price floor to be removed.
Putting aside the strong economic arguments in favour of price floors articulated by groups such as the International Energy Agency, let us take that to the next logical step. If carbon prices in 2020 are only $4 a tonne Australia could move to the higher end of the bipartisan supported target range of 25 per cent reductions. The economic impact of a carbon price of $4 a tonne would be imperceptible and the additional demand created by moving to the higher target would be unlikely have a large impact on international prices (all else being equal likely less than a 30c increase, according to Bloomberg New Energy Finance).
The inevitability of a call for greater ambition in response to low carbon prices is one reason why business needs to be careful what it wishes for.
The other even more likely scenario is calls both internationally and domestically for offset limits to be much more stringent, a position supported by the Coalition and the Greens.
In markets where offsets are limited, domestic carbon prices will be higher. For example, present projections would see EU prices of greater than $30 a tonne and Californian prices higher still.
An overreliance on international permits exposes Australia to price risk associated with the actions of other countries. For example, China has signalled it will not export permits from 2015 as it uses them for compliance in its scheme. This, according to Bloomberg, would more than double international carbon prices in a short period of time.
Finally, no financier is going to invest in a new coal plant in Australia due to carbon risks. A domestic carbon price of about $25 a tonne is required before companies will build a new efficient gas fired generator over coal. Very low international carbon prices will just lead to companies building inefficient and costly peaking plants.
International trading is an important part of the domestic policy package and without it there is no doubt Australia's contribution to global emission reductions would be less. However, price floors are an efficient way to manage the risks associated with international trading while ensuring domestic investment in low emission technologies.
Calls for removal of the price floor are an example of some major emitting businesses stepping back from the more strategic approach they took during the development of emission trading policy under the Howard and Rudd governments and being blinded by short-term considerations. As a result they may rue the day they failed to lookup from next year's results and support a certain and steady increase in carbon pricing.
Erwin is Deputy CEO of The Climate Institute. With nearly 20 years practical experience in climate change policy
and research, Erwin has developed and led many national and
international programs aimed at reducing greenhouse pollution. This work
has been undertaken in Australia, Europe, North and South America, the
Pacific and Antarctica. He has represented non-governmental groups and
advised government and business in national, regional and international
fora, including being a non-governmental expert reviewer of the reports
of the UN’s Intergovernmental Panel on Climate Change. Erwin has written, researched and produced many
publications on climate change and energy policy including a number of
review papers in scientific journals such as the Medical Journal of