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Markets bet on carbon repeal …and a new carbon price

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A new analysis from research firm Bloomberg New Energy Finance suggests that the Coalition will succeed in repealing the carbon price after the new Senate sits from July 1 next year, but will come under intense pressure to produce its own carbon pricing mechanism.

The BNEF assessment says that the market is “mired by uncertainty,” despite Tony Abott’s sizeable election victory. Even though Labor and the Greens have vowed to fight the repeal of the current carbon pricing mechanism, energy markets are pricing in an 80 per cent likelihood that it will be repealed within 12 months.

It notes that “Abbott’s crusade” will be bolstered when newly elected senators, including six to eight conservative independents, take their seats in July 2014, even if he is tempted to move earlier with a double dissolution.

There will certainly be plenty of colour and movement. Already, one backbencher from the right of the Labor Party has broken ranks on defending the carbon price, while one of Clive Palmer’s two Senators has expressed support for carbon pricing, so long as the price is right, or low.

The real crunch, however, comes in what follows. Green groups are calling for a “reveal” before a repeal, and it may be that the Coalition will have to complete its white papers on an emissions reduction fund, and the energy market for that matter, before they get support.

Sitting senators such as Nick Xenophon want more details of what the Coalition proposes in its place under Direct Action. He is urging a “baseline and credit” model developed by Frontier Economics that he had previously championed with Malcolm Turnbull.

BNEF noted that “scant details” are available on the Direct Action policy, which it says “lacks a credible mechanism” to achieve Australia’s emissions reduction objectives and obligations under the second commitment period of the Kyoto Protocol.

“The main mechanism for the policy is an emissions reduction fund in which the government buys least-cost abatement, predominantly from the land sector,” it notes. “Elements of a baseline-and-credit scheme have also been mooted to prevent growth in emissions from existing installations.

“It is likely that the new Australian government will come under pressure from some business groups and the international community (particularly the EU) to develop the ‘Direct Action’ plan into a more substantive policy with market-based elements.

“Given the underlying economic imperative to reduce emissions and international treaty obligations, business groups are likely to pressure the government to develop a more credible policy that gives clear signals to investors and alleviates the carbon policy risk that is currently undermining investment.”

Another research firm, RepuTex, has suggested the Coalition’s best opportunity in repealing the carbon tax may, in fact, be negotiating with the ALP.

“The policy transparency of the major parties is likely to make it far easier for the Coalition to negotiate with the ALP then the new Senators in spring 2014 – better the devil you know” said Hugh Grossman, RepuTex executive director of carbon markets.

However, he also said any such agreement from the ALP would be conditional on support for a traded carbon price.

“It would be considered a win for the Coalition to repeal the carbon tax within its first 100 days, even if that means compromising on emissions trading,” said Grossman.

“Given that industry supports the continuation of the carbon price, but at a lower level, a swift outcome to repeal the carbon tax in favour of emissions trading may look very appealing to the Coalition in comparison to 18 months of a high carbon price and potential deadlock with minor parties.

“By late 2014 the Australian market will be only 6 months shy of the end of the carbon tax – so it is a huge risk for the Coalition to take, for little gain, particularly when a quick, palatable outcome is likely to sit a lot closer to home.”

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  • JohnRD

    There is no reason why a carbon price is needed to meet challenging emission reduction. (SAus achieved 31% renewable power in 2012/13 without any help from a carbon price.
    The Greens, Labor and the coalition should all be challenged to come up with a credible plan for meeting their emission reduction targets.

    • RobS

      The coalition don’t have emissions reductions targets, they have said they will put x dollars in and not a cent more if any specific emissions level is not reached. Their energy policy outline released 24 hours before the election did not contain the words renewable or solar once. Wind was only mentioned in the context of their intent to pander to anti wind elements by having mandatory continuous sounds monitoring around wind farms. Their emissions reductions and renewable energy policies are non existent at best. A truly terrifying prospect.

  • Barry

    The questions I would like answers for are as follows
    • Where is the cost benefit analysis into the Direct Action policy – similar to the one the Liberals demanded for the NBN
    • Has anything like Direct Action been implemented overseas, and if so what was the outcome and what lessons can be learnt?
    • Before we get rid of the Carbon Pricing Mechanism, shouldn’t we assess what its actual impact has been – such as on overall prices, on economic growth, on carbon abatements, and investment incentives etc, rather than rely on lobbyists
    • How can we ensure that the abatement purchased under the Direct Action policy will be recognised abroad – and thereby can actually be counted towards meeting our emission reduction targets
    • How can we ensure that Direct Action won’t just pay companies to do things they were going to do anyway, such as energy efficiency improvements – which is the additionality test used in assessing Kyoto offset projects
    • What arrangements will apply beyond 2020, are these costs effective and how will Direct Action dove tail into these arrangements – effectively what is the plan for transforming the economy into a competitive low carbon economy – and what is Direct Actions role in achieving this
    • Shouldn’t the Productivity Commission be asked to make recommendations on the most cost effective way of achieving out 5% reduction target and being able to scale up to higher targets?

  • Peter Hansford

    All great questions Barry but I would not expect a response any time soon.
    As the details of Direct Action start to emerge (and fail to impress) I believe that we need lobbyists and advocates to provide insights that could be used to bolster the current (unsatisfactory) policy responses
    - more rooftop solar and community renewable energy projects could be considered Direct Action
    - support for trade and investment in home grown cleantech companies (rather than automotive companies)
    - replacing the carbon tax with a lower cost floating price via an emissions trading scheme
    Like your questions I doubt that these will get traction but we must try and speak the language of the new government and hope that commonsense and Australi’s long term interests can prevail.