Australia will pay a heavy price for carbon

Heather Ridout, chief executive of the Australian Industry Group, on the passage of the carbon price legislation and the implications for Australian manufacturers.

In recent weeks, European Union carbon permits in the EU emissions trading scheme were being traded at less than €10, or about AUD$13.50. 

The price has been driven down by Europe’s ongoing debt crisis and economic malaise, which is sapping growth and energy demand and adding to global economic uncertainty.  That’s the way their scheme is meant to work: the carbon price flexes to match macroeconomic conditions, falling in a recession and rising during a boom.

Australia is about to get an emissions trading scheme too, but for its first three years the scheme allows no price flex at all: carbon costs are fixed, come what may.  While there may be sound arguments for a fixed priced period with a reform as complex and long-term as this – the price set must be sensible, reflecting domestic conditions and international prices.  Starting at $23 a tonne, the Clean Energy Act’s fixed-price phase fails that test. 

It also has to be remembered that the explicit fixed price comes on top of the already high implicit price imposed by the plethora of carbon reduction measures in operation at both State and Federal levels. An economy such as ours, whose apparent prosperity is averaging out between boom and gloom, clearly needs a gentle transition that provides the ability to respond to global conditions. 

Manufacturing and trade-exposed services like tourism and education are struggling against the intense headwinds of the high dollar, fierce international competition and global economic turmoil. 

The energy efficiency investments that should help them weather higher electricity prices can take years to put in place, even with the capital grants that the Australian Industry Group has fought for.  Yet instead of a gentle ramp-up, these vulnerable industries will be immediately exposed to the full force of the carbon price.

That price is significantly out of line with current international carbon prices.  While prices have been higher at times – including in thin early trading for California’s imminent scheme, and in fixed prices in some Canadian provinces – the carbon markets that are broadest and deepest are the EU ETS and the UN’s Clean Development Mechanism (CDM).  As we’ve seen, EU carbon allowances are running at less than 60% of the Australian price.  And offset credits under the CDM are cheaper still, trading this week at less than €7 or about AUD$9.30. 

That matters even more than the EU price, because the Australian scheme will be linked to the CDM from 2015-16: liable businesses will be able to use CDM offsets to meet up to half their liability each year to 2020, and 100% thereafter. 

The CDM price is expected to temper the Australian carbon price.  With credible overseas abatement available at a low price, why would businesses bid much higher at Australian carbon auctions?  Access to genuine overseas offsets is absolutely fundamental to achieving least-cost abatement for Australia, where the marginal cost of cutting carbon is much higher than in many developing countries.

Under the Clean Energy Act, though, Australian businesses don’t have access to those offsets until 2015.  In the meantime the carbon price won’t be tempered at all: it will be fixed, and fixed at a price much higher than would be imposed if full international trading were allowed from day one.  There are practical problems with hastily setting up a trading platform, of course.  But there is no reason whatsoever that the fixed-phase carbon price cannot be set at a much lower level that reflects economic vulnerability and low prices overseas. 

Ai Group has always held that if a carbon price is introduced in Australia it should start low and slow. There are many options for doing this. The fixed prices could be replaced with much lower ones. The old CPRS would have started at $10 a tonne, then floated with full international linking.  New Zealand amended its ETS in 2009 to halve effective liabilities; they are now considering a very gradual phase-in to full liability. 

Instead, the Government has so far chosen to hope that the transition will be easy and that international carbon prices recover to levels that make the fixed prices look reasonable.  Will that happen?  With the global economy beset by so much fear and uncertainty, it’s the worst time to be locking in three years of carbon prices that are among the highest in the world.  The Government must be ready to revise its approach swiftly if it is mugged by reality. 

At the very least, the Government should be open to lowering the legislated prices in the initial fixed price period and it should immediately slash the tangle of existing climate regulations, policies, subsidies and schemes that add to the compliance burden on business.

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