Oakeshott loses plot and falls through carbon floor

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Rob Oakeshott’s call to dump the carbon floor price would condemn Australia’s scheme to the same fate as that of the EU – it would become economically irrelevant, and make Australia’s transition slower and more expensive. So why has he swallowed the polluters’ arguments?

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Henry Derwent, the outgoing head of the International Emissions Trading Association, got it about right when he was asked the reason for the dramatic demise in international carbon markets over the last few years.

Some of its wounds had been self-inflicted, he told Bloomberg in an interview. But the bulk of its problems came from the peddling of three key lies, namely that climate science is exaggerated, boring and unimportant; that nations shouldn’t protect the climate because others aren’t; and that markets are not the best solution.

“It’s not surprising that those who don’t want to do anything are seduced by the falsehoods,” he said. Derwent has reason to be rueful, the carbon price in the world’s biggest market has slumped from $45 in 2008, when he took up his post, to less than $10 now.

And it’s equally surprising that politicians such as Rob Oakeshott, the independent who was one of the key members of the multi-party committee that framed Australia’s carbon price legislation, the Clean Energy Future package, should be baulking at one of its key elements less than two months before the scheme is implemented.

Oakeshott is now saying that the proposed $15/tonne floor price due to be introduced when the scheme moves from a tax to a fully trading commodity in 2015, should be removed, echoing the claims of business who have been pushing aggressively for a low carbon price – an argument that business groups have prosecuted in just about every jurisdiction that has, or is, considering a carbon price; Europe, Asia, and north and south America.

The principal argument against a floor price is that it interferes with the efficiency of the market. And that is true. And there is nothing inherently wrong with a low carbon price, as long as the policy that it reflects achieves the environmental outcome that it is designed to do.

So far, the policies implemented across the world are well short of what is required. Even the EU, the forerunner of the carbon market and with what was once considered to be a relatively ambitious 20 per cent emission reduction target by 2020, has found that target to be too easy to achieve, particularly in light of its economic problems. Coupled with too many free permits, the price has collapsed to the point that analysts such as Deutsche Bank’s Mark Lewis say it no longer has any economic relevance.

So the argument being put by business groups, and now embraced by Oakeshott, is that Australia should embrace this market failure and allow its carbon price to fall to the levels of Europe and the international offset price, the CERS, which are even lower at around $6.

There are two problems with this. Those countries afflicted by the low carbon price wish it were not so – because, as Lewis points out, it no longer encourages investments in technologies that can reduce emissions. Money instead, is flowing to technologies and projects that will lock in higher emissions, making it more expensive and difficult to unwind in the future.

So a floor price is something you do when you don’t have environmental targets that reflect the ultimate outcome. Australia is the only country that will have a floor price. Actually, that’s not quite true – the UK has a top-up measure on its energy producers to ensure funds are channelled towards clean energy, and China forbids developers of clean energy and emissions abatement projects to sell credits into the international market below a certain price.

Many in Europe wish for a floor price, but instead are forced to seek agreement on either higher emissions targets or measures to reduce the flow of cheap credits. The UK Energy Secretary Ed Davey recently defended the floor price for his energy sector, saying it was required while the country waited for the EU to have a more ambitious emissions target, and a low price provided little incentive for emitters to go green and deterred low-carbon investment.

His preference would be to have a higher EU target. “By going a little faster now, we will make it easier as we near our final goal. The longer we leave it, the more it will cost.”

Australia’s floor price was designed to address exactly this problem. Unless you believe that the climate change issue is a passing fad, and policies will be quietly dismantled in the future, Australia has further to travel than most other countries because of its reliance on coal and gas and its high emissions per capita. It actually needs a meaningful carbon price to begin the transformation to a cleaner future.

No other country will allow its emitters to buy so many of their required credits from overseas markets. The Clean Energy Future package allows Australia’s emitters to account for 50 per cent of their total liabilities overseas – in Europe they only allow emitters to use international markets to account for a portion of their emissions reduction.

That’s not necessarily a bad thing. A tonne of CO2 abated here is the same as a tonne abated there. It adds complications though – a domestic-only market could have an easy price control by setting a reserve price at an auction. Putting a floor on an international price requires a difficult step-up mechanism to be found, and the government is still mulling its options.

And there is another key consideration. The forward budget forecasts are predicated on a floor price – and their removal could remove two thirds of the anticipated $10 billion in revenue from 2015. Indeed, it will be interesting to see what changes in assumptions are made in the budget papers to be released later today.

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17 Comments
  1. Beat Odermatt 7 years ago

    Actually Oakeshott is right and there should be no carbon price floor. If we drive on the road, we have street signs which indicate at what speed we are allowed to drive. If we drive at or below the legislated speed, we don’t have to pay anything. If we do not respect the speed sign, we pay a very hefty fine and may even lose my licence to drive. The same principle should apply to climate change.
    The Government can legislate for businesses and Government Departments to reduce their annual non renewable energy use by a certain percentage, say 3%. Electricity generators would have to increase the percentage of renewable energy by a given percentage; again I suggest 3% per annum. It would mean that value of renewable energy will increase every year and the value of non renewable energy will decrease. Companies would have the challenge to find a way to meet Government legislations.
    Like on the road, failure to meet the legislated changes would be met by fines and potential loss of licences to operate. It would mean that private companies could use the best possible technologies to achieve their goals.

    • Reuben 7 years ago

      Odermatt,

      You’ve at once suggested that the current scheme is not ‘free market’ enough (i.e. the price floor should be removed), and that it is too ‘free market’ (i.e. that an fixed percentage change per annum in specific sectors should be required). Needless to say, this is inconsistent. Every man and his dog could propose a new possible policy design for decarbonisation – the point is that we should design schemes based on sound economic principles.

      As Giles pointed out, a free emissions market with a cap is theoretically very efficient – but ONLY if the cap reflects a true internalisation of costs (e.g. only if the cap reflects the realistic trajectory to a safe climate that we will adopt on the long-term). The current cap does not. Therefore the market is imperfect. Hence the need for additional market controls.

      Giles covered this (**emphasis added** on the relevant piece):

      “There are two problems with this. Those countries afflicted by the low carbon price wish it were not so – because, as Lewis points out, it no longer encourages investments in technologies that can reduce emissions. Money instead, is flowing to technologies and projects that will lock in higher emissions, making it more expensive and difficult to unwind in the future.

      **So a floor price is something you do when you don’t have environmental targets that reflect the ultimate outcome.** Australia is the only country that will have a floor price. Actually, that’s not quite true – the UK has a top-up measure on its energy producers to ensure funds are channelled towards clean energy, and China forbids developers of clean energy and emissions abatement projects to sell credits into the international market below a certain price.”

      • Beat Odermatt 7 years ago

        Good legislation work far than taxes. I think we had a very successful phase-out of ozone destroying gases in Australia and across the world. Governments did not introduce an “ozone layer protections tax”. The Government took the advice of qualified scientist and made laws to phase out of ozone depleting substances. It worked! Hefty fines were introduced to ensure compliance. Action based on legislation can work and does work. We do not need social justice experiments cloaked as an evironmental tax. Climate change and the environment are far too important than to remain a political football

  2. Arjan 7 years ago

    The low price is hamstringing domestic (ie Australian) offset projects. Forestry offsets need a price of $15+ to even get started; have long lead-times and high up-front costs. The availability of so many low-cost OS offsets (CERs) means only domestic emitters with a medium- to long-term view of this market are considering investing in domestic projects. Political uncertainty makes this investment even less likely. Many domestic offset projects could and would provide employment for rural and regional Australians: if the price signal was both stronger and enjoyed broader support. The floor-price is essential to all these projects as they become un-bankable without it. It is lunacy to get rid of it.

    In addition, more classes of Project need to be admitted into the approved offset methodologies for the compliance market: in particular, “for-harvest” plantation forests. It is crazy that these are not an eligible offset type. We need to be using more wood because of its green credentials. Offset markets could encourage its production and hence use.

    • Beat Odermatt 7 years ago

      The true lunacy is the current carbon tax proposal which will not provide value for money, but which will compensate polluters to pollute. The typical Australian is not stupid and knows that the carbon tax is a scam far worse than the pink bat scheme. Even Julia Gillard know that it is possible to most stupid thing a Government ever do. She has no choice then to stay on her knees and agree with Bob Brown to stay in power. It is all about political survival of an seriously under skilled Government and it has nothing to do with the environment or global warming.

      • Fran Barlow 7 years ago

        The typical Australian is not stupid and knows that the carbon tax is a scam far worse than the pink bat scheme.

        Putting aside the terminology — it’s not a carbon tax but an ETS with a fixed price permit phase — it’s not a scam either. If it were, big business would be all over it instead of pushing Abbott to for relief.

        FTR the Home Insulation Program (HIP) was not a “scam” either. Recent figures suggest that in additon to underpinning employment in regional areas and amongst the low skilled, there is payback in avoided upgrades to electricity infrastructure and further, that the average householder will benefit by between $290 and $370 per annum between now and 2020 in energy savings. Since those upgrade costs would have been passed on to householders, that is additional. It just might be that this program was one of the better pieces of public expenditure, despite the problems at the margin around safety and the trolling by the Murdoch-led media. Your use of the term “Pink bat” (sic) {batt} suggests copy and paste Abbott. Many of the batts were foil, and some were yellow. Pink Batt is a proprietary name, and the troll was only chosen because “pink” things seem effeminiate and ludicrous to many when associated with state policy.

        • Beat Odermatt 7 years ago

          I agree that energy conservation is one of the best strategies. Energy conserved is by far the best option as even the best renewable energy will leave a “carbon footprint”. Whenever we have a highly unskilled Governments handing out Billions, we will have con artists lining up for their share of the booty. The carbon tax will not provide any real environmental benefits; as well over 85% of the taxes will go into administration and “social justice experimentation”. The carbon tax is not necessary and we had many good examples where good environmental policies gained bilateral support by all parties. The removal of ozone destroying substances did work and did not require massive taxes with. Laws to protect our natural resources and bio-diversity did not require new taxes and gained large support by most Australians. Australians are not stupid and they know that the carbon tax is just plain stupid. True environmentalism is almost dead because we have a selfish group of power hungry politicians misusing the issue of “environment” to push their political agenda.

          • Fran Barlow 7 years ago

            as well over 85% of the taxes {revenue from the carbon price!!} will go into administration and “social justice experimentation”.

            That’s simply an unsupported claim. The carbon price revenue is largely returned to the public as compensation to low income households arising from the tripling of the tax free threshhold, and direct payments.

            The removal of ozone destroying substances did work and did not require massive taxes (sic) with.

            Different entirely because DuPont developed and alternative to CFCs and was keen on that being made mandatory. CFCs were in a different category to CO2. Significantly tvhough, the same campaign was run against this measure as was with CO2 until DuPont jumped ship and sacked Fred Singer, whose new industry backers then simply globally replaced CFC with CO2 in his propaganda.

            FTR, the carbon price is about 1/4 the magnitude of the G&ST, and somehow, the world didn’t end with that.

            Australians are not stupid and they know that the carbon tax {price} is just plain stupid.

            Sadly, many Australians are stupid and easily fooled by populist propaganda. Many are simply tribal conservatives and it’s unclear what they really think — but they know that shouting tax as often as possible is a loively dogwhistle.

            As far as I can tell, most people understand that putting a price on pollution is an important element (though not the only one) in moving the economy away from reliance on combustion of fossil hydrocarbons. At one point, even your side of politics recognised that — and Shergold reported to Howard on that basis. Now of course, your side just wants to play silly games so as to wangle their way to power. Curiously, they say they are wanting to fork over large wads of cash to big polluters without any serious program goals at all. Go figure.

          • Beat Odermatt 7 years ago

            I am sure you know that Julia Gillard is actually opposed to the carbon tax herself and made it in one of the main re-election items. She was forced to make a deal with the high priest of Australian loony policies and give her thumb up to a tax she knew was just plain stupid. She hoped that the deal would give her some time and let her to be the PM for at least a few years.
            Nobody with an understanding of our environment can stand in the way of a low carbon economy. The issue is the way some stupid people have found the most complicated and expensive way to achieve this.
            The environment is not an issue which should be used for political survival. The environment is an issue for which most Australians deeply care. The introductions of laws to protect out natural heritage, air, water; ozone layer etc. was enabled in most civilized countries and had support by the large majority of people. This was the case in the USA, most European countries, Japan, Australia etc. People do support good environmental laws, but not political games of survival using silly ideas such as the carbon tax.

      • Fran Barlow 7 years ago

        @beatOdermatt

        I am sure you know that Julia Gillard is actually opposed to the carbon tax herself and made it in one of the main re-election items.

        Which is why we are having an ETS (or as she put it, “a CPRS” “a market-based mechanism” instead. But you knew that, didn’t you? So did Tony Abbott, in the days before he became leader and decided calling it a tax would be more useful than substituting a “simple carbon tax” for the “speculators picnic” of an ETS (October 2009)

        She was forced to make {persuaded that she could now implement} a deal with the high priest of Australian loony policies {the Greens} and give her thumb up to a tax {method of pricing carbon emissions} she knew was just plain stupid like that in Shergold and which she outlined on August 20 2010 before the election}.

        There, fixed that for you, removing the Murdoch/Daily Terror wash. Structurally, the current “CEF” is indeed identical to the policy rejected by the Parliament in December of 2009 and exactly what she said she’d implement.

        Nobody with an understanding of our environment can stand in the way of a low carbon economy.

        I agree, but propaganda such as you are iterating here is part of the contect in which someone with zero understanding, not only of the environment, but zero interest in it, and more, zero interest in even the long term economic sustainability of Australia is leading the polls and may well wreak havoc between 2013 and 2016 if not longer.

        The issue is the way some stupid people have found the most complicated and expensive way to achieve this.

        It’s an oddity, isn’t it, that folks such as McKibben, Shergold, Garnaut and the Grattan Institute have failed to listen to people such as you who are obviously far better credentialled on this issue than they are. What a shame they didn’t turn to you in their hours of need.

        • Beat Odermatt 7 years ago

          The Government did a good job in finding the most complicated most unworkable and expensive path to achieve nothing.

  3. Fran Barlow 7 years ago

    Actually Oakeshott is right and there should be no carbon price floor.

    That would be OK if there were clear rules on what permits counted excluding all credits that failed a robust methdology for calculating LCEs, how much and if there were a serious cap. None of therse apply, and moreover, guessing what prices will be given the politics attending the matter makes it likely that many will assume a low price and under-invest.

    If we drive on the road, we have street signs which indicate at what speed we are allowed to drive.

    Yes, but we also define the carriageways, the lanes, the road shoulders, special lanes that are bus only. We say “keep left unless overtaking”. On expressways, we often ban slow vehicles such as bikes. Road tolls are fixed and not auctioned. Not sure where the analogy goes.

    The Government can legislate for businesses and Government Departments to reduce their annual non renewable energy use by a certain percentage, say 3%.

    I’ve no philosophical problem with this, though it might be tidier to require them to reduce their lifecycle emissions of CO2e (Scopes 1,2,3) per unit of turnover. Requiring renewables is one thing people can do. Business process re-engineering is another.

  4. Peter Smith 7 years ago

    If the EU “has found that target to be too easy to achieve”, the answer is to make the target sufficiently difficult to achieve that the price will rise automatically.

    The message from the low carbon price is that CO2 reduction is easier than we thought. This is not a reason to hold back – it is a reason to go for it.

    The same applies to complaints that the price for peak electricity is falling. Is this not what we want?

    It seems to me that once we stop faffing around and start taking the first obvious steps we will find ourselves looking around and wondering where the problem has gone. All the mine workers will be busy manning geothermal drills or assembling wind and solar farms, and we will still be complaining about insufficient qualified manpower.

    I am sure the accountants can find creative ways to deal with Stranded Assets.

  5. Fran Barlow 7 years ago

    Another approach might be to progressively diminish the tax deductibility of “dirty energy”. Right now, all of your energy expenses were deductible against taxable income but if the one could no longer deduct these costs — effectively requiring businesses to meet these costs out of after tax income, then there would be a strong imperative to reduce energy usage or go renewable.

    You probably wouldn’t want to bring that in in one fell swoop, but if the state published a schedule for the years between now and say, 2025 by which time it was non-deductible the demand both for clean energy and energy-saving measures would rise sharply. For our purposes, “clean energy” could be defined as any source of energy either producing in lifecycle terms zero emissions or only emissions that had been fully offset under some robust scheme (i.e. the energy supplier had bought properly accredited permits fully offsetting all of their emissions). Dirty energy would be defined as energy the average lifecycle CO2e intensity of which was within 10% of the industry average for the energy type and usage (stationary or transport).

    Allowance could be made for partial deductibility of relatively clean energy — thus, in a year in which dirty energy were 60% deductible and someone was using energy that was 40% cleaner than the industry standard, they would get to deduct 84% (i.e. 60 * 1.4). Businesses not in the dirty 250 (i.e smaller polluters) could also buy accredited permits directly and trading losses on these would be deductible. At their discretion, they could surrender these permits to the state and be credited with offsets of their dirty energy, allowing them to define the energy as “clean” for tax purposes and claim deductions.

    Funds raised by the state in this way would be hypothecated and passed onto consumers either in the form of tax cuts, direct payments or payments in kind (essential services such as health, housing, after school care, purchase of food and grocery staples) with a means-tested stored value card.

  6. Mr Rob Consistant Oakeshott 7 years ago

    Well here’s a chance for Oakeshott to stand in front of the nations cameras, enjoy the lime-light while puffing hot air for another 30 minutes :-\

  7. rob oakeshott 7 years ago

    Thanks for the article, and rest assured I haven’t lost my mind, nor am I trying to rip down an ETS – something I have fought hard for. What I am looking for (in the most considered way possible in a torrid political climate) is some sensible consideration of whether we’ve got it right on the floor price, and the implications of any changes. For me, its not a dealbreaker in any way if successful in getting a relook at this or not, but it is certainly something that deserves some serious thought and reflection. Thanks for a good read and for the follow-up commentary.

    • Chris Fraser 7 years ago

      Rob, i have certainly watched with keen interest the good work the Multi-party committee has done and congratulate them all for the near impossible task of getting this through in what i agree is a torrid situation. But given the level of support from all but a few, i am certain that the fledgling abatement industry needs a hand in the early stages, as it has been for all new industries, in all developed countries, in all of history. For this perhaps consider banning the sale of permits unless the balance making up $15 (or better still $23) is paid to the CEFC for investment in Australia.

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