Interview: Combet on the new carbon pricing formula

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Greg Combet talks to RenewEconomy about why the floor had to go; why carbon prices will rise; potential links with NZ and elsewhere; and Australia’s stance on the Kyoto Protocol, and a prognosis on the next climate change negotiations.

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Federal Climate Change Minister Greg Combet is confident the price of European carbon credits will rise from their current low levels as the EU addresses various policy issues, particularly the overhang of excess credits.

In a wide-ranging interview with RenewEconomy, Combet said linking with the EU scheme and reducing reliance on international credits – which are at an even lower price – would boost the credibility of the Australian scheme.

“I have confidence that the European price will recover. I genuinely do,” he said. “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. Placing a limit on access to CERs (Kyoto units) and the like was an obvious policy response.”

Combet also said the decision to remove the carbon price floor and link with the EU scheme was an “economic” initiative, rather than a political one, although he conceded that the new-found ability by business to buy credits now to meet future obligations would make the Australian scheme more difficult for a Tony Abbott government to unwind.

He also talked about the possibility of linking to other schemes, the prospect of Australia ramping up its own emission reduction targets, its decision on staying in Kyoto Protocol or not, and progress in international climate talks.

Here is a (lightly) edited transcript:

Giles Parkinson: Is this a political fix or an economic one, or a mixture of both?

Greg Combet: It’s economic, genuinely so. When we announced the package last year, after we had announced the clean energy package, there were two issues. They didn’t get much coverage, but I’ve spoken about them on numerous occasions. One was the design of the floor price, because it was only referenced in the legislation, and the implementation and design of it were work yet to be done, and we had a discussion paper and business consultation, etc.

The other one was the EU linking. We announced the commencement of discussions in September last year. Both of them came together yesterday. Both are economic issues. We want a fully flexible internationally linked emissions trading scheme to achieve the lowest cost of abatement. This biggest market in the world is the EU, and so it was always an objective to link with it and the floor price was an impediment to that, and it was opposed by business. This is a product of both those processes.

GP: The fact that the floor price is removed, companies can now start buying permits now to meet their obligations post 2015. That also makes it harder to unwind by the Coalition, doesn’t it?

GC: I think that’s right. But that was not the purpose of the change. All of it I’ve tried to design to get the best possible outcome, but you are quite right, business can now purchase CDM units knowing how many they can use, and purchase EU units knowing they can use them for surrender. And that’s a big deal.

GP: It is a big deal. I guess the question in their mind is what price those EU units will be. What sort of assurances did you get from the EU Climate Commissioner about the action they will take to get their policies through that they want to impose?

GC: I haven’t got anything other than what the EC has put on the public record, the commitment about their auctioning schedule and the readjustment to limit the number of units being auctioned in the immediate future. That’s what we are conscious of, and they are going about their processes in the EC to implement that. Obviously, when they do implement that, it will put upward pressure on the price.

GP: It’s a bit like the United Nations talks, though – they have to get unanimity of purpose and that’s not easy.

GC: I think the process that they have adopted for that, I don’t believe it requires the assent of every member state, but I’m not an expert on the operation of the EC.

GP: Does this expose Australian companies to too much European climate policy risk?

GC: Look, I don’t think so. We always intended to have an internationally linked scheme. What’s the biggest carbon market in the world? The EU. Linking with the EU ETS was always going to be a key objective with the emissions trading scheme. It was in John Howard’s scheme in 2007. Yes, climate policies and how they are applied in the EU, to the extent that the influence the EU price, are relevant to Australia, but they were always going to be.

GP: Now that we are aligned with their scheme, will we be aligning our emission reduction targets with them?

GC: Well, that’s a matter for the Climate Change Authority to consider over the coming 18 months and make recommendations to government. It’s also a function of progress in the international community and satisfaction of conditions we’ve attached to our target. That’s what we will continue to adhere to regarding domestic policy. The main thing with the EU and us is that we both operate in capped schemes – linking with an uncapped scheme is not really feasible, and that’s the critical issue in linking with the New Zealand scheme at some point. It needs to become a capped scheme.

GP: So who else is the EU talking to, and where are those talks with New Zealand up to?

GC: I spoke with my New Zealand counterpart on Tuesday. We’ve got officials talking and we’ve identified all of the issues, and a cap on their scheme is one of them, and that’s going to take a fair deal longer. Now that we have got this linking with the EU, linking with New Zealand is an issue that the EU will take an interest in too, so that becomes more of a three-way conversation in the future.

GP: Are they also talking to the Asian nations and California?

GC: The European nations are very active in China, in particular – they actually have a team of people pretty much based in China working with National Development Reform Commission and various provinces and cities. And we’ve got a pretty close engagement, too, with the Chinese about their schemes. China, needless to say, for the EU and ourselves, is a very, very important field for the development of carbon pricing and a credible emissions trading scheme. We will both continue to engage with them for that reason.

GP: Let’s go back to the EU and their policy; if they don’t manage to implement the policies they want to and the price continues to flounder, won’t that be a worse situation than having a floor price, because we will have a lower price?

GC: The price floor was generating uncertainty for business about their capacity to buy into international markets now, and the design of it was going to be a complex issue and invited participants in market to game the market when a price floor was in place. We’re much more comfortable having a fully flexible price. The carbon price is not the only policy tool available to us; we have the Renewable Energy Target, we have got the Clean Energy Finance Corporation, we’ve got the Climate Authority able to make recommendations about caps – there’s a range of measures available to achieve the transformation that we need.

Having said all of that, I have confidence that the European price will recover. I genuinely do. 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.

GP:  I guess the flip side is that even if we do have a lower price post-2015, the result of this particular policy is that post-2018, when the carbon floor price ended anyway, we will have a higher carbon price than otherwise because the price will be set with the EU price rather than the Kyoto price. Do you agree with that?

GC: I agree that the EU price will be a driver in our scheme. We had to carefully think through access to the CDM and whether that would be a price driver …

GP: Was there concern that the CDM would be the price driver and it would be too low?

GC: If you had no limit on it and you were allowing liable entities to surrender up to 50 per cent of their international units, then if there was a price for CERs they would clearly be preferencing them. 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. 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.

GP: Have you any views on REDD (forestry schemes) credits – are they likely to come into the scheme any time soon?

GC: No time soon, I think.  There’s lots of work to be done, you know the complexities in getting REDD schemes going and having them operate in the international system – even just resolving land title issues in Indonesia so that REDD schemes can operate there is a complex and difficult issue. We’d like to see that mature as soon as possible – you’ve got business with the capacity to surrender up to 50 per cent of its liability on international units, as those markets mature, and they are proven to be credible, and we decide to admit them to the scheme, we will be able to admit them to the scheme. But at the moment, they are not ready for that.

GP: What’s the prognosis for the Carbon Farming Initiative?

GC: It’s not adversely affected by it at all. The CFI projects will take some time to come on  and generate a sufficient volume of Kyoto-compliant credits that can be utilised even just during the fixed price period. During the fixed price period an entity can use up to 5 per cent of its liability by surrendering CFI units. There’s not enough volume of CFI Kyoto-compliant units to satisfy that demand, so I don’t see any problems for CFI Kyoto credits over course of next three years, and after  that Australian business will be able to use any number of them. So I think the CFI will be in a good position. It will be an issue for us to discuss with Europeans in context of two-way link. We’ve already taken the Europeans through the legislation and I think already we’ve already addressed a number of issues they have.

GP: And what about the Kyoto Protocol, you can’t very well link up with a scheme that supports Kyoto and you don’t?

GC: We haven’t resolved our position on Kyoto. We’ll be looking at it in coming months, certainly as I head to the next COP (Conference Of the Parties, the UN climate talks) in December. I’ll be further resolving our position in relation to the 2nd commitment period. That shouldn’t be taken to mean anything one way or the other. Our principal policy position remains, and will continue to remain, that we want to see a deal where all the major emitters are in it, and the KP2 doesn’t represent that. There’s got to be progress on the involvement of China and the US and the other big emitters in a wider deal. That is critical.

GP: And what are your expectations of Doha and the next climate change conference?

GC: From our point of view we want to see progress in that negotiation that everyone committed to in Durban, to achieve an agreement by 2015 that can be implemented from 2020 that binds all the major emitters. That’s the main game.

GP: How are you reading developments? Is it backwards, forwards ….?

GC: As you know, these are slow and difficult and torturous in the UN context, but it’s the only game in town, and we will support the process and work as hard as we can to get a productive outcome.

GP: Thanks very much for your time.

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