The real hole in global carbon trading

Europe’s carbon price collapse gives Australia an opportunity to scoop up permits with abandon after 2015, but if our economic fortune reverses a floating price will place us in a very tight spot.

There is fuss and hullabaloo aplenty today over the collapse of the price of carbon permits in Europe. Industry bodies such as AiG, ACCI and BCA are gnashing their teeth over that fact that a tonne of continental carbon costs about $4, whereas a tonne of carbon australis costs $23.

The power cost increases being experienced by the industry groups’ members are real, large, and largely driven by non-carbon-price factors. But the industry groups’ complaints are that Labor, at the Greens’ behest, locked the nation into a high carbon price for four years when a floating price would have been much easier to handle.

The committee of Labor, Greens and independent MPs that designed the Clean Energy Future package shook hands in 2011 on a tax grab that did two things – tried to buy support for carbon pricing by creating ongoing tax cuts and pension increases for lower socio-economic groups (something that took half the revenue, but that hasn’t worked terribly well) and kick-start the renewable energy sector via a system of grants and co-investments.

That last bit has Greens fingerprints all over it – they knew that if the renewable energy capacity wasn’t built quickly, we might never make the transition to low-carbon energy sources.

So when a firm’s accountants calculate how much the carbon tax is costing (remembering that it is only a fraction of the surges in power bills seen over the past couple of years), they should know that half of the impost is flowing into the pockets of the poor, half is being poured into a ‘direct action’-style public/private renewables industry, and the entire amount is a pricing signal to incentivise the reduction of their own carbon footprint.

Reports today suggest that $2 billion to $3 billion a year of revenue built into the forward estimates of the federal budget is about to evaporate once we shift from a fixed price ($23 at present headed for $29 per tonne in 2015) to a floating price.

There almost seems to be a perverse longing for the price of carbon permit ‘assets’ to rise – like the gold price or the Australian dollar.

No, no, no! When economies collapse – and Europe has plenty of those – the carbon price is supposed to collapse too. Long-term carbon budgeting means that over all the business cycles ahead, suitably strict emission targets are set around the world, and the trading of permits help shift the cost of emissions abatement to economies that can afford it. The booming economy buys more permits, so picks up more of the gross carbon bill - that's the theory anyway.

But back to Australia, where Labor's carbon pricing experiment seems to be drawing to a close. Few commentators expect Labor’s plans to survive far into 2014, with Tony Abbott absolutely bound by a promise to junk carbon trading, and shift to a bureacratic system of ‘buying’ pollution reduction from major emitters, funded from consolidated revenue.

So let’s compare and contrast.

Labor’s scheme squeezes as much money as politically possible from emitters (passed through to all power-consuming firms, and from there to consumers) for four years, then, if international prices are still low, watches all that lovely revenue disappear – despite being locked into the ongoing ‘bribe’ of lower taxes and higher pensions.

The Coalition’s policy is not to gather the additional tax revenue in the first place, but to cuts costs elsewhere in the budget to allow a couple of billion dollars a year to be taken from the federal coffers and handed to farmers to plough carbon back into the soil, and to power generators to shut their dirtiest power stations.

Had Labor not linked carbon revenues to ongoing tax cuts, their plan would have been far superior. And if the international carbon price recovers to something like its former levels of, say, $20 per tonne, it will still be superior.

But the current European situation reveals a weakness in linking to global markets. One of the crushing problems for economies such as Italy and Greece is that when their economies struggle, they have no control over monetary policy to kick-start a new round of investment, employment and growth.

Likewise, a small satellite economy to Europe’s carbon trading scheme, Australia, needs its economy to function at roughly the same level as Europe’s, or better, to make use of carbon trading.

Why? Because if, in an unimaginable future, Australia is falling behind economically, it will be buying permits at too high a price from abroad – the reverse of the current situation in which, if we had a floating price, we’d be buying European permits with abandon and burning everything we could get our hands on.

Australia has no influence, or even a particularly cyclical dependence, on Europe’s economies. There is huge potential for Australia to exploit Europe’s misfortune after 2015 by scooping up cheap permits, and potentially to be in a reversed situation five or 10 years down the track – having to buy permits that have become inflated due to Europe’s success (not impossible!).

The ETS schemes being trialled in China might seem to offer a better source of internationally traded permits, and one can only hope they spread to control the colossal emissions of the world’s most populous nation.

But it must be remembered too, that if global carbon trading ultimately fails, that the domestic, autonomous plans – like the Coalition’s Direct Action policy – can only be co-ordinated globally via stronger treaties, including all the usual chicanery as signatories try to find ways around their treaty commitments to keep gorging on cheap power.

Carbon trading isn’t dead, but it’s going to need some major revisions.

The alternatives are far less attractive – treaty-based domestic schemes, with all the usual politiking and rorting, or the immoral decision to shift the huge social cost of carbon pollution onto our children’s shoulders.

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