Will Australia’s carbon price last?

Australia’s carbon price has now been in effect since July 1, 2012. Yet, with a change of government looking likely after the September 14 federal election, some believe it inevitable that the world’s newest carbon market will not last the distance. This White Paper updates Bloomberg New Energy Finance’s December 2011 analysis – Will Australia’s carbon price last?

– We estimate that there is only a 32% chance that Australia’s carbon price will be repealed after the 14 September federal election. The Coalition will have to win a majority in the House of Representatives and control enough votes in the Senate to successfully pass legislation through parliament to rescind the Clean Energy Act.

– Current polling suggests that the Coalition will win government and Tony Abbott will become Prime Minister. If he secures a majority of votes in the Senate, the earliest he could rescind the carbon price is H2 2014 after the Senate changes hands on 1 July 2014.

– If the Coalition wins government but fails to control a majority of votes in the Senate, it would have to manoeuvre itself to call a double dissolution election and hope to win its majority in a second poll. Usually this process takes around nine months to engineer, making the earliest likely point of repeal H1 2015, immediately before the floating-price period is due to begin.

– Winning a majority in the Senate is difficult as only half the state-based senators contest their seats at each election. If Labor and the Greens win a combined 42.9% of the first preference vote in each state, it would be impossible for the Coalition to control the upper house provided both parties have done a close preference deal.

– Abbott has repeatedly said he is prepared to go to a double dissolution to remove the carbon price, yet a narrow election result would cast significant doubt over his chance of success. There have only been six double dissolutions in Australia’s history and on two occasions they resulted in the sitting government being cast out by the electorate. Having only just been returned to government after being in opposition since 2007, this would be a very bold move.

– Some commentators have argued that if Abbott will not risk a double dissolution, he may try to reengineer the scheme in order to undermine its economic impact. However, the so called ‘Abbott Proof Fence’ appears secure and any efforts to try to push the carbon price to zero, remove the penalty for non-compliance, or adjust the eligibility threshold for liable entities, could be blocked by a hostile Senate.

– While businesses must comply with current obligations under the Carbon Price Mechanism, it must also manage the ongoing political uncertainty. Some firms are actively looking to acquire EUAs while prices languish in record-low territory while others appear to be waiting for a definitive political signal they are hopeful will come in September. Our analysis suggests that if the Coalition gains power, the uncertainty is likely to continue until H2 2014, with government auctions starting earlier in 2014. Hence, for the time being businesses will have to focus on compliance to ensure that trading operations and risk management systems are set up.

To read BNEF’s carbon price white paper in full, click here