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Australia should stick to its fixed tax on emissions or float the price in a domestic market, writes FRANK JOTZO.
As Prime Minister, Kevin Rudd has made his share of bad calls on climate change policy: he wasted the bipartisan consensus for an emissions trading scheme in 2009, then shied away from a double dissolution election. Now he seeks to make his government a smaller target on climate change by trying to seem like he is dismantling Labor’s own legislation.
The government’s plan to link Australia’s carbon price to the European emissions trading scheme a year earlier may look like good politics because it produced the headline “Rudd scraps the carbon tax”. But it is not good policy.
The European carbon price is depressed by the miserable outlook for economic growth across much of Europe. Together with huge subsidies for renewables, energy efficiency standards and other policies, it means that there is little left to do for the emissions trading scheme in meeting the EU emissions target.
So the price in the EU scheme is low, only about $6 a tonne - less than half the price in the Californian trading scheme, and about a quarter of the Australian fixed price. The European trading price is much lower than the actual cost of climate change effort in Europe, and it is far below what a carbon price would be under effective global climate action.
The European price could of course rise in future. Some forecasts predict sharply rising prices, on various assumptions. But futures markets, where companies invest their money according to their expectations, have 2020 EU permit futures at only about $8.
The EU price could even fall. It depends on Europe’s growth outlook and changes to its carbon policy, both uncertain. In Australian dollar terms, the exchange rate matters also.
Australia’s economic situation and outlook is very different from Europe’s. Under a carbon price at current European levels we would meet our emissions targets mostly by buying international emissions units, including European permits.
There is nothing wrong in principle with international emissions trading, indeed it could be an important part of internationally harmonised climate action in the future. But if the price is low, then it will not drive the shift to a lower carbon economy in Australia. We would need to rely on regulatory measures or subsidies for that, and they are typically costly and messy.
Then there is the budget. The government has identified savings to offset the expected shortfall of almost $4 billion in 2014-15, with sensible measures such as the reduction in free permits to power stations and reforms of fringe benefits tax for car use.
Nevertheless, every dollar that businesses and households pay less for carbon is a dollar missing in the budget. Lowering the carbon price means government needs to raise more revenue from other taxes. The bottom line is that a government committed to the carbon price should make sure the price level does not drop too low.
If it wasn’t for the poisonous politics of the “carbon tax”, the best option would be to stick with the gradually increasing fixed price, and keep it for longer. The effect on cost of living from the $23 carbon price has been minor, and most households are better off financially because of income tax cuts and welfare increases.
Impacts on industrial competitiveness have been negligible. Keeping the fixed price would cause no further impacts. The carbon price immediately reduced emissions from the power system, because it made some of the dirtiest electricity plants too expensive to operate. Lowering the price could undo many of the gains, bringing old clunkers online once again.
None of this would be a problem if the government had retained the price floor that was originally legislated. It would have provided a safeguard against excessively low prices under international permit trading, and provided more investment certainty. The price floor was dumped when independent MP Rob Oakeshott withdrew his support. Industries lobbied against the price floor on grounds of implementation difficulties, but international examples show it can be done. Britain has a price floor for its power industry, currently at $26 and rising. California also has a price floor, at a level below the current trading price.
There is one other little-discussed option: to float the Australian carbon price, but only as a domestic market, not linked to the EU scheme. The price would vary according to Australia’s economic and policy developments. EU permits could be allowed into Australia, but with a tight limit so they do not determine the domestic price.
The domestic market option would be consistent with Rudd’s anti-tax stance yet provide stronger incentives for low-carbon investment in Australia. But it would no doubt trigger a ceaseless lobbying effort by industry, precisely because it would mean a higher price.
And so we will probably get legislation to link to the EU market in mid-2014. The change is relatively minor, but is one more instance of moving the goal posts mid-game. Then again, the policy uncertainty created by the opposition’s position is much greater still. Investors are clamouring for stable settings for climate policy, and they are still not getting them after all these years. Australia’s climate policy remains in a difficult spot.
This piece was first published in The Age: http://www.smh.com.au/federal-politics/political-opinion/why-europes-car...