The ripple effect of a carbon price hack

Expectations for the carbon price in 2015/16 have been slashed but Treasury remains confident – perhaps too confident – the price will rise strongly through to 2020. In the meantime, climate programs and assistance will take a hit.

The government has more than halved its expected carbon price for 2015-16 to $12.10 per tonne of CO2, down from the $29 it projected last year, in light of the depressed state of the European carbon market. However it continues to maintain an optimistic view on the carbon price outlook beyond this, projecting a linear rise for the years afterwards to $18.60 in 2016-17 and, ultimately, $38 in 2019-20. 

Estimating the likely European carbon price in 2015-16, let alone 2020, with any confidence is impossible, because the market outlook could entirely change with a single decision of the European Parliament and Council.

Based on a Reuters Point Carbon poll of carbon market analysts the consensus for 2015-16 is a price well below Treasury’s at $8.50 for 2015. Without any major regulatory changes to the EU ETS it is implausible that the EU carbon price could manage to reach the $38 Treasury has assumed.

The European Commission has, however, put forward a series of possible reforms to the market that could quite conceivably restore prices to levels not far off Treasury’s assumptions. These have the support of a number of major European national governments such as the UK and France that carry large voting power in the European Council. So reform is possible in spite of the recent rejection of the backloading proposal in the European Parliament.

Treasury’s estimates are most definitely optimistic but not inconceivable.

Reductions in revenue

Either way, the government faces a lot less revenue from the carbon price than what it had budgeted on last year. Cash receipts from carbon permit sales are now expected to be $3.7 billion lower over the four years to 2015-16.

Compared to the 2012-13 MYEFO, receipts are expected to be $140 million higher in 2012-13, largely owing to lower free permit allocations offsetting reduced carbon emissions. Receipts are expected to be $530 million lower in 2013-14; largely reflecting downward revisions to forecast emissions, and the lower international carbon price associated with the advance auctions of permits.

Following modest growth in 2014-15, carbon pricing mechanism receipts are expected to fall 27 per cent in 2015-16, following the end of the fixed price period in 2014-15 and the link to the European price in 2015-16. Receipts are projected to fall a further 27 per cent in 2016-17, largely because there are no longer any fixed-price receipts.

Tax cuts deferred until carbon price recovers

As was announced a few days ago this means the government will defer its planned increase in the tax free threshold. It states that this will be put off until the carbon price is above $25.40, which current projections suggest will occur in 2018-19.

Significant funding cuts and deferrals to programs

In addition, as climate change minister Greg Combet warned in his press conference a few days ago, this drop in revenue has cascaded through a range of other carbon price and clean energy measures.

This is a summary of the major developments:

-- ARENA has had $360 million of revenue shifted out of the forward estimates and into the never-never beyond 2020, although the government says this does not constitute a reduction in funding, merely a “rephasing”. The $159 million that was allocated for research under Solar Flagships has now been rolled back into the Education Infrastructure Fund from which it came.

--Rather surprisingly the Connecting Renewables program funding remains entirely untouched, this is in spite of there being little evidence of the program being progressed by the department since it was announced in the 2010 election.

-- The government now says it no longer needs the Carbon Farming Initiative non-Kyoto Fund because the measures it would have funded can now be made eligible under the carbon trading scheme. This has saved $234.7 million to 2016-17.

-- The Low Carbon Communities program – which supported energy efficiency in local community facilities and for low income households – has had its funding cut by $46 million.

-- There are no cuts to funding for the Clean Technology Investment program, which subsidises industry energy efficiency improvements.

-- The funding deferral musical chairs for carbon capture and storage initiatives has come to a rude and abrupt end, with $780 million slashed.

-- The carbon pricing adjustment assistance provided to coal mines was reduced by $302 million.

-- Rather bizarrely, the government has chosen to actually increase the amount of assistance allocated to the steel sector (the Steel Transformation Plan) to adjust to the carbon price by $37.5 million. This is especially hard to understand given that one of Port Kembla’s two blast furnaces has been shut, so their carbon price exposure has been dramatically reduced.

-- The car industry has not been so lucky with $61.3 million cut from the Green Car Innovation Fund.