The Climate Change Minister Greg Combet announced yesterday that the carbon floor price will not be implemented when the carbon pricing scheme enters into the floating phase on 1 July 2015. The Minister said that this was to facilitate Australia’s linkage with the European Union’s ETS market which will take place on 1 July 2015. Is this a good news for the carbon pricing scheme, or is this a grim reflection of political reality?
Under the carbon pricing scheme as it currently stands, from 1 July 2012 to 30 July 2015, the price of carbon permits is fixed by the legislation — at $23 per tCO2-e in 2012/13, $24.15 per tCO2-e in 2013/14 and $25.40 per tCO2-e in 2014/15. Then from 1 July 2015, the scheme is to enter a so-called “flexible charge” or floating charge period, when the price of carbon permits will be determined by the market. However, for the first three years of this flexible price period, the government had intended to have a carbon floor price which would stop the price for carbon permits from dropping below a particular floor price. The floor price was to be $15 per tCO2-e in 2015/16, $16 per tCO2-e in 2016/17 and $17.05 per tCO2-e in 2017/18.
The carbon floor price was incorporated into the scheme in recognition of the need for “safety valves” to avoid price spikes or plunges in the new market. When the carbon pricing scheme was first legislated, the government was of the view that a carbon floor price will reduce the risk for businesses as they gain experience in having a market set the carbon price.
This was a justified position given that new markets tend to operate in highly unpredictable ways. For instance, at least before the significant reforms in 2010, the market for renewable energy certificates in Australia failed to attract investment in large-scale renewable energy projects due to the low prices of renewable energy certificates caused by the excess issue of the certificates. It is equally possible that the issue of free carbon permits under the government’s generous assistance schemes such as the Jobs and Competitiveness Program will result in the plunging of the carbon permits prices once the carbon pricing scheme enters the flexible price phase on 1 July 2015. This problem is compounded because from 1 July 2015, liable entities under the Australian scheme will be able to acquit up to 50% of their carbon liabilities with eligible international emissions units, which are likely to be significantly cheaper than Australian units.
This was the carbon pricing scheme as originally legislated. But the fate of the carbon floor price was first seriously questioned in May this year, when the independent MP Rob Oakeshott threatened to block the floor price. Early this month, there were signs that the government was changing its mind regarding the floor price. Then yesterday, Minister Combet announced that the government will not implement the carbon floor price when the carbon pricing scheme enters the flexible price period in 2015.
According to the Minister, the scrapping of the floor price is to facilitate the linkage of the Australian carbon market with the European market. Also, it is argued by supporters of this new arrangement that a floor price will no longer be necessary because Australia’s carbon price will be “effectively the same” as the European emissions units price. Although the European units are currently trading at low prices, many expect that the European prices will be above A$15 per tonne by the time Australia enters the flexible price period and links its carbon market with the European one.
This means that unlike the original version of the scheme, the future of the Australian scheme will depend on the health of the European market in 2015. If by July 2015 the European emissions trading market is trading at prices above A$15 per tonne, the Australian government would be justified in scrapping the carbon floor price. However, if the European market is still trading at low prices in July 2015, the lack of a floor price in Australia would mean that the Australian carbon price would also plunge, risking the achievement of Australia’s 5% emissions reductions target by 2020.
Given the severe economic problems currently faced by Europe, it may seem highly optimistic to bank the fate of the Australian scheme on the European emissions trading market. If the recession in Europe spreads to more major European countries, the governments there would face an increasing pressure to issue more free units to ease the strain on the economy. It is therefore unclear if linking with the European market without the floor price as the “safety valve” will be good for the Australian carbon pricing scheme.
Nevertheless, the reality is that if the European emissions units continue to trade at low levels, even if the Australian government remained committed to a floor price, it would be very difficult politically for the government to implement the floor price which is significantly higher than the emissions units price at the biggest ETS market in the world. There would be a strong argument put forward by industry groups that the floor price will unduly penalise Australian businesses and deter foreign investment. Yesterday’s decision to scrap the carbon floor price seems to reflect this political reality.
On a brighter note, tying the fates of the Australian and European emissions trading schemes may induce both governments to pressure each other to protect the integrity of their respective carbon markets. Those who believe in human-induced climate change should closely monitor not only what the Australian government does but also what the European governments do in relation to their emissions trading schemes.
Albert Yu is a Law Graduate at Allens
