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HSBC: Australia risks economic isolation from carbon repeal

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Global investment bank HSBC says the repeal of the carbon price last week leaves Australia’s resource-intensive economy “even more vulnerable” as the world moves in opposite direction.

It says that this will impact not just its energy-based commodity exports, but also other commodities such as agriculture. And it risks being politically isolated in several key international events over the coming year.

RenewEconomy noted on Friday that Prime Minister Tony Abbott had effectively “bet the house” on continuing demand for fossil fuels, just as the market price for thermal coal had entered free-fall.

HSBC agrees, saying in a damning assessment of the carbon price repeal that Australia risked “carbon isolation” because of its “backward move”. Australia is the first and only country to dump carbon price legislation.

“We think this repeal leaves Australia’s resource-intensive economy even more vulnerable to climate change as policies around the rest of the world tighten,” HSBC noted.

“We think that the repeal could leave Australia more isolated over the long term as growth in demand for its carbon (mainly coal) exports could weaken.”

It also said it would affect its international standing, undermine its authority at the forthcoming G20 meeting, and place trade in other goods such as agriculture at risk.

“Carbon isolation may challenge Australia’s international standing and its ability to negotiate in other areas,” it noted.

“Besides the risk of undermining Australia’s authority at the forthcoming G20 meetings in Brisbane, Australia’s economy is highly reliant on trade and as its mining boom comes to an end, policymakers and businesses are seeking to lift growth in exports of agricultural products and services.

“To do this, it requires improved access to international markets; however, the recent World Economic Forum’s Global Enabling Trade Report, published this year, suggests that Australia ranks poorly in terms of ‘foreign market access’, with a ranking of 134 of 138 countries.

And HSBC noted that Australia’s move was not likely to stall the “positive global momentum” towards a climate agreement in Paris in 2015, given the serious intent by China and the US to reach deal. China, it noted, had recently discussed an emissions cap.

“We think that if China announces such a cap and hence a reduction plan, other countries may follow suit. Australia, without any progressive climate policies, would then be left behind.

Australia is heavily exposed to changes in international markets. It exports more than 80 per cent of its energy production, which in turn account for more than one quarter of total exports.

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But its biggest trading partner, China, is increasingly transitioning towards a low-carbon trajectory, and its demand for Australian coal could soften. The US, Australia’s third biggest trading partner, is “also increasingly looking at carbon trading across various states as a means to comply with President Obama’s Clean Power Plan.”

It notes that Australia’s isolation could be felt as early as September as heads of state, heads of government and leaders of business, finance and civil society gather in New York to discuss pledges that will close the emissions gap with UN Secretary General Ban Ki-moon.

Abbott has yet to accept an invitation to that summit. The upcoming G20 meetings in Brisbane could also prove to be difficult for the host nation, as could its refusal to allow the liberalisation of trade in environmental goods to be on the G20 agenda.

It said that despite claims to the contrary by the Abbott government, the overall impact of the carbon price “appears to have been modest”, but its repeal will likely have a negative impact on business sentiment, “with firms waiting for policy certainty before hiring or making significant investment decisions. “

HSBC said carbon pricing was not the only example of Australia’s climate change policy going backwards. It noted the proposed repeal of the Climate Change Authority, the Clean Energy Finance Corporation, the Australian Renewable Energy Agency, and a possible cut in the renewable energy target.

It says the CEFC and the RET were important to retain as “they allow Australia to pursue innovation in renewable energy technologies.”

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