Thursday, 13 September 2012

Who's Afraid of Low Carbon Prices? Part 3: Not Australia

Last week I attended a briefing at the Australian High Commission in London.  The Victorian Government (the Australian state, not the 19th century ruler) hosted a session for carbon market participants to present the latest updates to the country's ambitious greenhouse gas cap-and-trade scheme.

The Australian carbon pricing initiative begins as a straightforward carbon tax, set at A$23 (€19), indexed to inflation and payable by the largest 500 or so industrial polluters.  European carbon allowances, by contrast, were trading below €8 yesterday. That price difference initially attracted howls of protest from industry lobbyists.

From July 2015, however, Australia switches from a carbon tax to a cap-and-trade scheme linked to the EU-ETS.  That means Australian companies will be able to buy European credits (EUAs), and to an extent UN-issued CERs to comply with up to 50% of their carbon reduction obligations.  Similarly, Europeans will be able to buy Australian Allowances to satisfy EU abatement requirements.

The EU-Australia linkup is not a marriage of equals, however.  The EU is directly responsible for 11% of global greenhouse gas emissions, while Australia emits just 1.5% of the global total - about the same as the United Kingdom.  The additional supply of relatively cheap EU allowances is expected to dwarf the additional demand for allowances generated by Australia's emissions-intensive firms.  If the business-as-usual EUA price remained at €8 in 2015 and all else being equal, we should expect the carbon price for the linked systems to equalise much closer to the EUA price - somewhere around €9.30.

This analysis indicates that linking the two carbon trading schemes might cut the Australian carbon price in half.  In reality, the EU expects the carbon price to rise by 2015, but still much lower than the Australian carbon tax level.  Isn't that bad news for Australia? Surely we need high carbon prices to drive emission reductions?

That might be true if the Australians had magically built a dome over their country and were the only people affected by the carbon emissions.  The reality is that Australia's greenhouse gas emissions contribute to climate change across the planet.  Similarly, the CO2 from a Polish or American power station adds to the global atmospheric buildup contributing to droughts and flooding in Australia.

Global atmospheric circulation means that an emission reduction anywhere helps the climate everywhere and vice versa.  If we need to save 1 million or 1 billion tonnes of CO2, it doesn't matter too much where that savings happens.  What is important for climate change is that this savings happens sooner rather than later.

As I discussed in an earlier blog post, the emissions trading scheme is a price discovery mechanism that helps us identify the most cost effective emissions reduction opportunities across the entire scheme.  So a relatively low carbon price for a combined Australia-EU trading systems means there are significant opportunities to reduce green house gas emissions with minimal economic impact.  It means the Australian Government can make its contribution to curbing global climate change even cheaper and faster than before. The market can work, and that's a good news story.

It also means that there are still major carbon reduction opportunities that we (including Australia) are not pursuing.  And that's bad news.  One analysis says that global greenhouse gas emissions need to peak by 2015 and then decline year on year if we are to limit average global temperature increases to a damaging but not wholly catastrophic 2 degrees.  A low carbon price means we continue to fight this battle with one arm tied behind our collective back.  It means governments are still failing to set sufficiently ambitious targets to set us on a path towards a low-carbon future.