Is the carbon tax a waste of time?

Some contend Australia's carbon pricing scheme is a waste of time due to its reliance on the importation of international carbon credits to achieve emissions targets. Such conclusions are far too premature.

A number of people have expressed the view that the Australian carbon pricing scheme or carbon tax is a waste of time because it will largely rely on the importation of international carbon credits to achieve emissions targets.

If you look at the government’s own Treasury modelling it suggests that the carbon pricing scheme will indeed be heavily reliant on international credits to achieve emission targets, accounting for 97 million of the 152 million tonnes of abatement required by 2020 and around half of the abatement out to 2050.

Source: Australian Treasury (2011)

Considering this modelling doesn’t take into account the bargain basement prices that analysts are now expecting to prevail for international carbon credits, the concern that the carbon pricing scheme will do little to reduce Australia’s emissions becomes especially great.

There are real risks with an excessive reliance on importing international credits, but it would be wrong to think that the carbon tax or pricing scheme is therefore a complete waste of time.

First and foremost it’s important to remember that it is still very early days in the formation of carbon trading initiatives around the globe. Predicting what will happen several years from now is subject to incredible uncertainty and nothing should be treated as a fait accompli.

For the first three years of the Australian carbon pricing scheme there will be a fixed price without any allowance for use of international credits until July 2015. Quite wisely this will allow us some time to build experience in a more controlled and predictable environment without trading volatility and international influences beyond our control. Also the price has been set at a level which is high enough to begin to shift investment decisions towards low carbon alternatives, but not so high that it would represent a significant economic shock.

After a couple of years experience with this fixed price regime we are likely to be in a much better position to evaluate how the carbon pricing scheme should evolve, and how much we want to rely on international credits. We will have a much better idea of how the carbon price is impacting upon the economy and also the cost of emission reductions here in Australia.

The hysteria around a carbon price is likely to have died down as people come to realise that its impact is not as severe as imagined. Also business will have incorporated a range of initiatives and systems into their business processes to manage and mitigate the effect of the carbon tax which they’ll find annoying to unravel. This should help facilitate a far more rational debate around policy (provided Tony Abbott has held off on rescinding the scheme altogether).

In addition we’ll be in a much better position to evaluate the state of international carbon markets. Europe will have most likely resolved what to do about its systemic oversupply of permits. New Zealand and California’s emissions trading scheme will have been operating for several years. Also California’s scheme may have been joined by other US and Canadian states. South Korea will be well underway with preparations to commence their carbon trading scheme. And some time will have passed since the break point of 2013 when Europe ceases to buy carbon credits from new projects established in countries such as China and India that fall outside the UN's definition of 'Least Developed Nations'.

This will allow us to see what this means for the supply and price of international carbon credits.

A carbon price of $23 per tonne of CO2 falls well short of what’s required to seriously decarbonise the Australian economy, but it represents a very useful starting point. At the very least it will serve as a shot across the bows of anyone who might consider financing a new pollution-intensive facility that makes the task of decarbonisation even harder. While present circumstances suggest the scheme will outsource a large proportion of abatement effort to overseas once trading commences, a lot could change between now and July 2015.

Conclusions that the carbon pricing scheme will do nothing to reduce Australian emissions are far too premature.

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