Combet's carbon tax game-changer

Minister for Climate Change, Greg Combet, today announced some major changes to the operation of the carbon pricing scheme.

The key changes are:

-- The $15 floor price on Australian carbon permits will not be implemented.

-- Companies will be allowed to use CERs up to a maximum of 12.5 per cent of their liability, down from 50 per cent.

-- From 2015-16, companies will be able to use European ETS allowances to meet their liabilities under the Australian scheme up to a maximum of 50 per cent of their liability (minus any CERs they might also wish to employ).

-- The Australian government and the European Commission are negotiating on establishing a two-way link to commence no later than July 1, 2018. This would mean Australian government carbon permits could be purchased by companies overseas to meet their liabilities under the EU ETS.

-- The ceiling on the price of carbon permits will be set with reference to the EU emissions allowance price instead of CERs. While the government has not provided explicit guidance on this issue, based on prior policy this should mean the ceiling price will be set at $20 above the expected EU emissions allowance price for 2015-16 and will rise by 5 per cent in real terms each year.

In addition to the points above, Combet restated that the fixed price period for the first three years of the scheme will remain in place. He also advised that no further changes to carbon pricing were being negotiated.

Some of the key implications are:

-- Australia's carbon price may well be slightly lower as a result of these changes out to 2020.

The European ETS is substantially oversupplied with emissions permits all the way out to 2020 and prices, currently at €8.15 (AUD$9.80) are expected to remain low without significant intervention from the European Commission. However the European Commission, in conjunction with the dominant national players of Germany, France and the UK, are quite keen to tighten the stringency of the scheme to lift prices so they provide a stronger incentive for investment in low carbon emission technologies. A number of proposals are being actively considered but to-date Poland, in particular, has managed to block progress.

-- The two-way link proposed for 2018, where Europe would allow the use of Australian permits to meet liabilities under their scheme, would be a game-changer.

This is still not a done deal as negotiations are still to be finalised, but it would essentially mean Australia's carbon price would be largely decided by Europe. Suddenly the lobbying power of many Australian companies and industry groups will become greatly diminished. Europe has an extraordinarily different outlook to Australia, seeing clean energy as a major opportunity for development of new industries and jobs.     

More commentary on the changes can be found here and here.