CLIMATE SPECTATOR: Treasury's carbon price fantasy

Climate Spectator

Government public servants are continuing to put on a brave face about forecasts for the carbon price under questioning from parliamentarians at Senate Estimates.

The Secretary of the Department of Climate Change, Blair Comley, is still defending the 2011 modelling undertaken by Treasury, claiming its forecast of a global carbon price of $29 per tonne of CO2 by 2015 is "not implausible”. And in support, Assistant Secretary James White pointed out the European Union was looking at holding back the auctioning of some permits in an effort to reflate prices above the current level of €7.70.

However, while it might not be completely implausible, it seems an incredible amount would have to go right to support the $29 forecast.

Essentially a significant recovery of the carbon price hangs on two policy changes which the European Commission (the bureaucratic arm of the European Union) has floated.

One is a short-term fix of holding back the auctioning of a proportion of permits until after 2015, as illustrated in the diagram below from the European Commission. So in this case permits currently planned to be sold in 2013, ‘14 and ‘15 would instead be backloaded into 2018, ‘19 and ‘20.


Source: Jos Delbeke of the European Commission (2012)

According to most carbon market analysts this would reflate prices in the short-term provided enough permits were held-over. The European Commission has put forward for discussion three options for the amount of permits to be set-aside: 400 million, 900 million and 1.2 billion. The consensus view is that 400 million would do virtually nothing to improve prices but 900 million could lift prices to between around $13 to $19 (€10 to €15) by 2015. The 1.2 billion figure has largely been discounted by analysts as politically unacceptable.

However ultimately that supply of permits will find itself back in the market and this will influence future expectations, meaning that prices will never get anywhere close to $29 by 2015 or even 2020.

This brings us to the second policy change which would provide a longer-term fix: the permanent removal of some of these permits and/or a tightening of the emissions target in 2020 to say a 25 or 30 per cent reduction from 1990 levels plus locking-in further reductions for 2030.

Neither the temporary set-aside nor the longer-term fix are a fait accompli, with major hurdles to surmount before implementation.

Originally the idea of back-ending the auctioning of permits was favoured because it was thought it could be implemented quickly by the European Commission changing regulations, without having to change legislation known as a Directive.

Changing the Directive requires getting a vote of approval from both the European Parliament via a simple majority and also the European Council (the heads of state for each member country of the EU) which requires not just a majority, but 255 of the 345 votes held by member countries (votes per country are listed at bottom).

Changing regulations alone would instead just require the approval of a group of government officials from the member countries known as the Climate Change Committee. However even this is not an easy task as it also requires 255 member country votes.

The European Commission has since decided that it needs to change a single line in the Directive, so we're now stuck in a lengthy process that requires agreement and coordination between the Parliament, the Council, as well as the Climate Change Committee.

At present the single line amendment is stalled in the European Parliament's Environment, Public Health and Food Safety Committee (different to the Climate Change Committee), and so a vote on the amendment is not due until February 19, 2013. According to Deutsche Bank analyst Mark Lewis, it's likely that the Climate Change Committee would not vote on the regulations until the parliament had approved the Directive amendment, so this would add further delay after February 19.

So we'll be waiting a while before we know whether to expect even a mild recovery in the carbon price.

And as for the longer-term fix, we'll be waiting even longer. According to Jos Delbeke, the Director General for climate policy in the European Commission, it's highly unlikely policy changes could be implemented by 2014. At a conference on October 5, Euractiv reported him as saying:

"Let's get real: We won't be able to do everything by 2014 like we did on the climate and energy package in 2009.”

Observing on the difficulties encountered from the set-aside initiative he added:

"When I see what a limited proposal of a one-lime amendment provokes in terms of emotions, then I'm losing hope that by 2014 we could come forward with a comprehensive climate and energy package”
Sure there's a chance that we could have $29 carbon price by 2015 – Buckley's chance.

Number of votes held by each member of the European Council