Confusion rules in climate debacle
A bipartisan policy on carbon pricing is essential, writes Peter Hannam.
A fter another week of heated debate over carbon, many investors, businesses and voters probably wish policy making could approach the certainty held by climate scientists.
"We know climate change changes everything," said David Jones, head of climate monitoring at the Bureau of Meteorology, after another unusual spell of warm weather gave Melbourne its highest July maximum in more than 150 years of records, while Sydney notched five straight days of 20-plus temperatures for the first time in 85 years.
"It changes the humidity, it changes the temperature, it changes the wind, it changes the pressure patterns, it changes the sea-surface temperatures," Jones said. "In Australia, it's just a case that the whole distribution of temperature is now moving to a higher level."
What doesn't change, though, is the early prospect of an accord between the major political parties about what Australia should do, other than aim for a cut of at least 5 per cent from 2000 greenhouse gas emissions by 2020.
This week, the government announced it would end the fixed-price period for carbon dioxide emissions, currently $24.15 a tonne, a year early. The shift to an emissions trading scheme will now start next July - provided Labor wins re-election and can get legislation amended in both houses.
Frank Jotzo, director of ANU's Centre for Climate Economics and Policy, had been considering updating a paper on "Policy uncertainty about Australia's carbon price" published last year, but decided the effort would be pointless given the latest policy revision.
Associate Professor Jotzo co-authored the report, which surveyed 76 carbon specialists. "Really the defining feature we got from these responses was confusion," he said.
The government's revised plan still leaves much unsettled before investors can assess whether the carbon price will really fall to $6 a tonne a year as the government predicts.
Key is the "cap" or limit on emissions that will determine permit supply. The government has asked the independent Climate Change Authority - which the Coalition vows to scrap if elected - to recommend the cap for 2014-15.
The authority's recommendation, along with suggestions for caps for the 2015-16 to 2019-20 years, may not be available until its final report is completed at the end of February, and may yet be rejected.
Then there is the proposed price ceiling intended to prevent price spikes before Australia's market becomes open to European buyers from mid-2018 - assuming those negotiations continue as planned. The government will set that ceiling by next July "following consultation".
Advisers on major energy investments are left with little clarity on what carbon price - if any - to recommend. "It depends to a large extent on the weekly to and fro of the polls," Jotzo said.
Estimates for the floating carbon price aren't much help. Futures on the European Emissions Trading Scheme are running at $6.10 per tonne for December 2014 - roughly in line with the government's forecast - and $7.95 by 2020.
RepuTex, an advisory firm, predicts prices will trade at 30-40 per cent below Europe until 2016-17, and average $11 through to 2020.
"Demand for European permits will be minimal in the first couple of years," said Hugh Grossman, executive director of RepuTex. Any delays in development of Australia's liquefied natural gas projects, which together will swell annual emissions by 40 million tonnes, have the potential to sap permit demand further.
Tim Jordan, a carbon analyst at Deutsche Bank, is more circumspect. "It would be surprising ... if we ended up with a big discount to the European price," he said. "If we see a $6 price in Australia, you might see emissions rebound."
Bloomberg New Energy Finance, which takes a bullish view about tighter caps in Australia and Europe as nations agree on tougher climate action, predicts a price of $70 a tonne by 2020, or a bit more than double the Treasury's forecast of $38.
The $3.2 billion Direct Plan to pay polluters to reduce emissions also stokes uncertainty. Firms would have to set an emissions baseline and then bid for funds to pay for abatement.
"It's going to be quite a task (for the government) to make sure that [what] they are buying are not emissions reductions that would have occurred anyway," Grant Anderson, head of the climate change group for the Allens law firm said.
Jotzo doubts a Coalition scrapping of the carbon price would settle the issue.
"It will give Labor a hook for differentiating policies for the next election so it just continues until there is bipartisan support," he said. "It's almost certain that there will be continued policy uncertainty."