Link with the EU changes some investment fundamentals Opinion Article

Aug 29, 2012 - 2:33pm

By Erwin Jackson, Deputy CEO of The Climate Institute

Australia’s carbon laws are designed to do two things, reduce pollution to levels consistent with avoiding dangerous climate change and drive low pollution investment in Australia. With this in mind The Climate Institute cautiously welcomed yesterday’s announcement by the Government to join Australia’s carbon price to the European Union’s.

Much of the recent political debate in Australia has suggested that our carbon laws have been more ambitious than those in other economies. Some businesses have been calling for the minimum price floor of $15/tonne of pollution from 2015 to be removed despite that fact that many advanced economies have carbon prices in place higher than this level (Californian permits have been recently trading at $16-$21/tonne). For example, the statement by the Business Council of Australia that firms in Australia are paying the world’s highest carbon price appears increasing political as it is not supported by evidence.

As we have argued alongside other policy experts, the Institute’s preference is for a longer term price floor because of the predictability it provides investors and because it helps avoid locking in highly emission intensive technologies that need to be shut early as we implement stronger policies in the future. It is one of the reasons the UK and California has a price floor and why China is considering floors in their emerging pilot schemes.  As an alternative, linking with the world’s biggest carbon market with the inevitable limit on international permits is welcome so long as it is combined with strong policies for clean energy and energy efficiency. 

Credible carbon laws are needed to unlock investment in clean energy, drive domestic emissions down, and build political support for market-based mechanisms. No other major economy has coupled its domestic carbon price wholly to the international offset market.

The EU has strong limits on international offsets, while California and South Korea appear likely to ban them all together until at least 2020. These are countries seeking to ensure they transition their economies at home while at the same time supporting global solutions.

Without a carbon price floor or strong limits on the import of international offset credits from developing countries, Australian carbon prices would have fallen to single digits in 2015. Australia then could have bought a credit from a country like China for a renewable energy project that they had built for around $5/tonne.

A single-digit carbon price risked locking in the polluting technology of the past and does not prepare Australia for a low-carbon economy.

Linking with the EU’s carbon laws and limiting the use of carbon credits from developing countries should help to ensure Australia’s carbon laws don’t become a toothless tiger in 2015. Based on current forecasts and assuming, as expected, the EU takes action to increase their carbon prices, Australian companies would be paying roughly the same as European companies of around $15-$20/tonne in 2015. Deutsche Bank and other analysts have said that the price could be on track to reach up to $30/tonne by 2020.

Speculation around forward EU prices is interesting and the impacts on the budget in three years’ time politically fascinating. The EU price has been over $30 in the last three years. All we can really be certain of is that the forecasts will be wrong but this is not the main issue. What we can be confident about as we move forward Australian prices will be substantially higher than the recent forecasts of $5/tonne in 2020 have suggested.  This fundamentally changes the way firms will look are investments over the next few years.

Indeed yesterday’s announcement was predicted by BHP CEO Marius Kloppers in late 2010 when he predicted a world with an emerging mosaic of linking schemes as the pathway to a global agreement.

That said, these prices still don’t reflect the long-term benefits associated with reducing emissions and driving investment in clean energy today. This is why additional policies such as the Renewable Energy Target and the proposed national Energy Savings Initiative are required to ensure we transform Australia’s high carbon economy. These policies, combined with the carbon price, ensure a more optimal and early level of investment in clean energy and carbon solutions than a carbon price by itself.

With a credible carbon price and effective clean energy and energy efficiency policies, Australia can join other nations in addressing climate change. While more time to digest and analyse the changes is required, including how it influences Australia’s climate diplomacy, a cautious tick should be given the decision by Australia and the EU to continue to expand global carbon pricing.

Erwin Jackson

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 Australia.
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