As we foreshadowed a week or so ago, Australia has decided to export much of its sovereignty over carbon pricing to the Sejm, the Polish lower house, and to Donald Tusk, the Polish prime minister who makes the election of Tony Abbott almost redundant because his climate change and renewable energy policies are born from the same ‘it’s all too hard’ and really bad for coal conservative policy.
When the Scandinavians describe something as being like a “Polish Parliament”, it is not meant as a compliment. It means chaos or disorder, or a situation in which no real decision can be reached. This derives from the 18th century, when any member of the Polish parliament had the right of veto over any legislation. As it happens, that is exactly what Poland holds now in the EU, where it has thwarted all attempts to introduce more ambitious climate change, carbon pricing and renewable energy policies. Australia’s decision to link to the EU emissions trading scheme means we should be hearing this expression, just like a Polish parliament, more often. And we’ll either nod wisely or shake our heads in dismay.
Not so exposed
One happy group of campers who stand to gain from the decision to link with the EU and remove the carbon floor price are trade-exposed industries. Deutsche Bank analyst Tim Jordan reckons the new-found ability to buy lower priced Kyoto credits means that emissions-intensive, trade-exposed industries such as steel, cement and aluminium will have their rate of protection boosted even beyond the current benchmark of 90.9 per cent.
That’s because, under the new arrangements, those firms can swap some of their free units for lower-priced Kyoto units in the market, delivering a higher, more effective level of shielding from the carbon price (and presumably some profits, in the true tradition of the EU scheme). Jordan says the benefit of that trade depends on the ratio of Australian/European prices to the CER (Kyoto unit) price. As this table shows, if the Australian carbon price is around $30 – as Treasury predicts – and the Kyoto units (generated from projects in developing countries) are around 10 per cent, then the level of protection for trade-exposed industries is effectively 100 per cent.
Do the renewable traders know something we don’t?
Most of the talk around the carbon price is that the linkage with the EU means it will fall below what would have been the carbon price floor of $15 a tonne come 2015. Most of that is talk, and while there is no real futures market to test the theory, one interesting indication is coming from the market in renewable energy certificates, the currency used to account for the 20 per cent renewable energy target.
The carbon price and the RECs make up the difference between the wholesale price of electricity and the price needed to get wind farms and solar farms built. The higher the carbon price, the lower the RECs. Jordan noted that the forward price of large-scale renewable energy certificates (LGCs) fell 7 per cent for 2015 delivery, and 8 per cent for 2016 delivery, suggesting that the renewable energy market is expecting higher carbon prices around middle of the decade.
Origin Energy’s carbon clean-out
Origin Energy continued the clean-out of its clean energy and carbon exposures last week when it told the listed carbon offset developer Carbon Conscious that it would not go ahead with a proposed $163 million contract to extend planting of mallee trees over the coming three years. The move follows Origin Energy’s decision to cut its losses at Transform Solar – leading to a write-off of $154 million – and to write off the remaining value of its investment in hot rock geothermal, adding $44 million to a previous write-off of $200 million. Origin Energy told analysts that continuing with Transform could have left it facing a $500 million bill to build a manufacturing facility it was no longer confident could match it with Chinese manufacturers. That means its total write-offs and savings amount to nearly $1 billion – money it intends to reserve until it completes its massive LNG plant in Gladstone around 2016.
Shock and awe tactics from green campaigners
Green NGO Friends of the Earth ruffled a few feathers last week, issuing a fake press release that purported to say that Victorian premier Ted Baillieu had proposed a funding package of $552 million as compensation for losses to the wind energy industry as a result of his government’s policy on renewables. RMIT University journalism academic Alex Wake was quoted in one local newspaper as saying that producing fake press releases was “despicable”, and that “parody and satire” had little place in the news.
“It is not appropriate to mimic media releases in this way,” Wake said, pointing out that journalists are “time poor and working in badly resourced newsrooms”. Energy Minister Michael O’Brien said it was the first time he had agreed with a journalism academic. Not that state governments or corporates would ever seek to take advantage of such bad resourcing by flooding news-rooms with bland statements. So the stunt may not save the wind industry, but it might cause a few journalists to at least read to the end of the press release before they start typing.