The overwhelming reaction to news that Australia is to ditch its carbon floor price – in response to a push by business and as a condition to linking with the European Emissions Trading Scheme – has been one of relief. Surely, the argument goes, the carbon price must go down.
But what if it didn’t.
There is a strong conviction that once the fixed price comes ends at the conclusion of the 2015 fiscal year at a price of $29, it will likely fall by at least half. That may still be the case, depending on the course of European climate change and carbon policies, but the changes introduced by the Labor government means that over the medium to long term, the carbon price will be higher than it would otherwise be.
That’s because under the original proposal, once the proposed carbon price floor ended in 2018, the local price would then match that of the Kyoto credits, also known as certified emissions reductions, which are units generated from abatement projects in developing countries under the Clean Development Mechanism. These are currently trading around $3.50. Under the new arrangements, those credits will no longer be the effective floor, because while Australian companies can buy 12.5 per cent of their liabilites through that market, most of their credits will come from Australian or European units, which will effectively set the price. And the EU units will have a substantial premium to the Kyoto credits.
In an interview with RenewEconomy, Climate Change Minister Greg Combet agreed that the European price would be the driver for the Australian scheme, and was confident that this would rise as the EU solved various policy issues, particularly the overhang of excess credits. “I have confidence that the European price will recover. I genuinely do,” Combet said. “Over the course of the next three years it is imperative that the debt crisis is resolved, that there is greater confidence in the markets there and I know from my own engagement with the Europeans their determination to support their price.”
He also suggested that Australia’s decision to link with the EU was motivated by concerns that the credibility of its own market would be undermined if it relied too much on the Kyoto market. Under the previous arrangements, the floor price imposed from 2015 was due to expire in 2018, when the Australian price would effectively be set by the Kyoto price.
“We wanted to be part of a linked arrangement with a capped scheme that was credible – with the largest carbon market in the world, that was the key goal,” Combet said. “Placing a limit on access to CERs and the like was an obvious policy response. The EU were also interested in having a limit on our scheme too.”
Market participants also pointed to the likely rise in prices over the medium term.
The Australian appetite is not likely to make much of a difference to the EU price as such. Australian businesses might buy 100 million credits, but the EU market is currently suffering an overhang of 1.2 billion credits. The removal of that overhang is the key to its price recovery. Combet recognised the difficulties in getting European agreement on some key policies, but believed a different process would be used to reduce the overhang of credits. A resolution to the debt crisis, growing economies and more ambitious climate change policies would also have a significant bearing. However, it remains to be seen if the EU price rebounds to the price anticipated by Treasury, which is around $30/tonne.
Deutsche Bank predicts a price of €11 ($13.25) in 2015, only slightly below the now defunct floor price. However, it suggests that if the oversupply is removed, the EU carbon price should be headed for €20-€25/t by 2020, implying a €15 price in 2015.
Carbon brokers are pleased with the new policy because while it does restrict the amount of credits that can be bought from developing countries, it does add certainty, and reduces the complexities that threatened to dog the projects if there was a step-up mechanism for a floor price. And some predict that Australian demand could represent some 200 million credits – a reasonably substantial sum in the international market.
Another listed broker, Carbon Conscious (CCF.AX), also said the new rules would allow emitters to hedge their liabilities into the longer term to mirror more effectively the assets that they own and operate. It also agreed that the effective carbon price would rise because Australian liable emitters will need to secure more carbon credits from the higher priced European scheme or from Australian sources such as carbon forestry.
“Whilst the European forward price for 2015 is approximately $12 at this time, a number of initiatives are expected to be enacted by the European market regulators over the coming months which are expected to have a positive impact for the forward carbon price,” it said.
However, Carbon Conscious shares this week have been rocked by news that Origin Energy, the country’s largest energy utility, has decided not to exercise $163 million of options on forestry credits with Carbon Conscious. The company has previously contracted 10,000 hectares of forestry plantings in WA, but has declined to move forward with a further 32,000 hectares of planting.
Carbon Conscious shares have slumped 30 per cent in the past two days, to a record low of 7.4c, well below their 52-week high of 42c. The company is now valued at just $5.8 million, despite anticipating net profits of $3.5 million in the most recent financial year. The contract of founder and managing director Peter Balsarini was not renewed, and he has left the company.
CO2 Group’s Grant, however, said that the outlook for the market for offsets was sound, particularly given the changes announced this week.
In one door, out the other
Meanwhile, the Australian Institute has published this info graphic, noting that only two months after the carbon price was introduced the government is already tinkering with it.
“The carbon floor price has been removed, potentially with a big impact on the budget, yet very generous subsidies for polluters remain,” it notes. “Under the carbon price the government will collect more than $7 billion in revenue by encouraging Australians to reduce their emissions, yet at the same it will pay almost twice as much in subsidies to encourage the use of fossil fuels.
“If subsidies are greater than penalties, how effective are current policies as tools for changing behaviour? Is it really a case of “polluter pays” or more like “pay the polluter”?