Carbon price floor at risk of being scrapped

IT WAS MEANT TO BE one of the key planks of the government’s carbon policy – a floor price of $15 when emissions trading starts in 2015.

The price of carbon needs to be high enough to encourage businesses to reduce their greenhouse gas emissions. Credit: Ilya Naymushin (Reuters)

But Federal Labor is now secretly negotiating to dump – or dramatically rejig – the proposed three year floor price.
Three separate sources have confirmed for Radio National Breakfast that the government wants to walk away from the price floor.

One said that negotiations are at “a pretty sensitive stage”.

Crossbench MP Rob Oakeshott said two months ago that he wanted to abandon the floor price.

He said yesterday: “There are rights and wrongs on both sides of this argument. In the end, what I am interested in is how we can get full bang for our buck in regards market confidence, how we can get bi-partisanship built into the Australian emissions trading scheme, and how we can link internationally as soon as possible.

“I am watching closely and listening closely to where a carbon floor price may be working against market confidence rather than for it, and where it may be working against international linking, rather than for it.”

Despite the passing of the original Clean Energy Act in November 2011, it’s now understood that to impose a price floor, new regulations need final sign off by both houses of parliament. So is it a dead duck?

Rob Oakeshott is not sure. “Not necessarily. I think we are still having a conversation amongst friends of an emissions trading scheme rather than any attempt to rip apart emissions trading in Australia or cause political trouble.”

What’s not widely known is that the government has hit a ‘perfect storm’ in trying to nut out the practicalities of delivering a floor price on carbon once trading starts. And it’s not just because business is lobbying furiously to ditch it. In fact, in some ways it’s hard to believe that last year Labor ever agreed to implement one.

It was opposed by Treasury, and the Department of Climate Change – and still is. But the real problem for the government at the moment is what’s called “international linkage” – Australia trading its carbon credits with the rest of the world. Put simply, these markets just don’t like a floor price.

Rob Fowler is the representative for Australia and New Zealand from the International Emissions Trading Association. “There is a really practical challenge in trying to impose a floor price on an internationally traded commodity. The units that are included in the Australian mechanism are often traded overseas, there are many people who own them or trade them on a daily basis. So for Australia to provide a floor price on those units is very difficult from a practical perspective.”

So does this mean Australia can’t impose a floor price on what is an internationally traded commodity?

Rob Fowler: “It’s very complex, it involves a lot more intervention in particular companies activities than what most people like in Australia and so imposing some sort of floor price there is very difficult. There is however the opportunity to impose some form of reserve pricing on the options for domestic units. And that could have a similar impact while not creating the challenges of an international floor price.”

Richard Denniss, an economist with the Australia Institute, says a two-tiered system – domestic credits with a price floor and international credits at a floating price – is fraught.

“It’s going to make the scheme even more complex, administratively and economically, rather than people being able to swap permits that they don’t need with someone who does need them, if there are two classes of permits floating around the market is not going to work as efficiently, so I hate to say it but I think the scheme is turning into a bit of a Frankenstein.”

But Rob Fowler has let the cat out of the bag. He says in 2015, Australia will have different prices for domestic and overseas credits.

“There is an opportunity to be more sophisticated about splitting those two. At the moment we expect that in 2015 if the current policy settings are maintained, we’ll see dual price in the Australian market, with international units trading one way and domestic units trading at a different level.”

Richard Denniss says one of the problems with a $15 floor price is that it’s never been clear what it was meant to deliver. “A price floor can work, but a price of $15 in this instance isn’t going to deliver [greenhouse gas abatement] for the environment and it’s not actually going to lead to more renewable being built … wind or solar. If $29 doesn’t encourage solar, $15 certainly won’t.”

What’s not clear at this stage is why – after digging in their heels initially on a floor price – the Greens may be open to changing their mind.

The speculation is that they will demand a deal to fix the problem with the 2020 Renewable Energy Target of 20 per cent overlapping as it does with the new Clean Energy Finance Corporation.

Renewable energy credits – or RECs – from the Corporation’s $10 billion war chest threaten to further flood the REC market, keeping prices low and making it harder to get up ambitious projects that the Greens want to see, such as big solar. For example, the problem helped contribute to the recent collapse of the $1.2 billion Solar Dawn project near Chinchilla in Queensland.

The EU doesn’t have a price floor, and there’s been considerable debate about the need for one.

Last year, the UK Government announced a carbon price floor of £16 per tonne of carbon dioxide in 2013, rising to £30 by 2020 in 2009 prices. The Chancellor of the Exchequer George Osborne said last year that the aim of the UK carbon price floor is to provide a stronger, more certain carbon price for investors in the face of the weakness and volatility of prices in the EU ETS.

John Connor, CEO of the Climate Institute, said a price floor was emerging as international best practice – California already has one, and China is considering it, with the International Monetary Fund recommending it. Connor says that business who see the opportunities in low- and zero-carbon technologies also support it, including the Investor Group on Climate Change (IGCC) and energy companies like AGL.

Author: Gregg Borschmann
Source: ABC Environment



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