Oakeshott loses plot and falls through carbon floor

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.