Why it would be a mistake to drop the price floor

The government is coming under heavy lobbying to drop the $15 carbon price floor. Here's four reasons why the government would be best served to ignore them.

As discussed yesterday in Climate Spectator and on Friday, the media has been rife with conjecture and opinion about the government dropping the three-year fixed price period and the subsequent floor for the carbon price. And today the Energy Supply Association chief Matthew Warren has attacked the carbon price floor in an opinion piece in the AFR.

Yesterday, I pointed out that the fixed price period is likely to stay. But I’m less confident that the $15 floor on the carbon price will stay intact because while it is referenced in legislation, it requires regulations to be passed to bring it to life. Both the Greens and Combet’s office have said that negotiations have not canvassed the idea of abandoning the floor price. However, some sources hold concerns that the regulations might contain a loophole you could drive a truck of cheap international carbon credits right through.

Implementing a floor price is extremely straightforward if Australia’s scheme were to only employ Australian government issued permits – they simply refuse to sell the large quantity of permits to be auctioned at a price less than $15. The complication is the scheme allows for companies to meet half of their emissions permit liability through the use of international carbon credits (CERs), which analysts forecast will only sell for $5 out to 2020.

To address this loophole, the government proposed in a discussion paper that where a company acquitted its liability through a CER, it would need to pay a top-up fee. Several options were proposed by government for how to implement the top-up fee. The most transparent, least open to rorting and straightforward to implement was that the top-up fee be based on the difference between the spot price for CERs on several reference exchanges (such as www.eex.com  and www.bluenext.eu/) on the day or month prior to acquittal, and the floor price of $15.

Under such a regime, businesses would still be free to use CERs and the price risks they would face would be pretty much the same as if the price floor did not exist. In light of this I’m really struggling to understand why there might be a great deal of angst around designing effective regulations to implement the price floor. 

Yet the government is likely to be under severe lobbying pressure around the price floor by a combination of polluting companies, CER abatement project developers, and banks. If the government were to yield to this lobbying pressure, they would be making a major mistake based on the four points below.

1. It would mean the carbon price becomes impotent in changing investment decisions

Without a price floor Australia’s carbon price will drop to such low levels that it becomes almost meaningless for investment decisions over the next decade. Current projections for international credits are that they will cost somewhere in the realm of $5 per tonne out to 2020. No one has any line of sight on what the price might be beyond 2020. Five dollars would do little to improve the attractiveness of just about any abatement project you might name in Australia – whether it be capturing and avoiding fugitive emissions, industrial energy-efficiency, and even just fuel switching from brown to black coal.

Most importantly, it sends completely the wrong long-term signal to investors that the Australian government isn’t really serious about decarbonising its own economy. This could encourage investors to continue to gamble on new carbon intensive assets.

A $15 carbon price is not great either, but it sends a far more credible signal that government is serious, and it would be extremely unwise to invest in carbon-intensive assets such as coal-fired power stations. In essence $15 helps stop things from getting worse in terms of Australia’s asset base, even if it falls short of being a major driver for improvement.

2. It makes the Coalition’s Direct Action policy look far more appealing to the electorate

A carbon pricing scheme that is perceived to be a new tax, that does little to abate emissions in Australia, and involves sending hundreds of millions of dollars overseas to fund abatement projects in other countries is not a good political story. It certainly doesn’t match-up with the government’s effort to spin the carbon price as being about Australia creating a “Clean Energy Future”.

Don’t get me wrong, there are abatement projects funded through sale of CERs that are truly wonderful. Some are making a genuine difference in reducing carbon emissions and enriching the lives of desperately poor people. Also a range of important reforms have been made to address rorting of CERs, particularly removing recognition of PFC and N2O destruction projects. But there are also plenty of horror stories of rorting that the Coalition can draw from too, even if some are a relic of loopholes that have since been closed down.

Also a range of companies that have invested considerable effort into projects and technologies to abate emissions in Australia, may find they face better prospects under the Coalition’s Direct Action policy, rather than a carbon price of $5. If they go public in supporting Direct Action, the government’s effort to sell the carbon price to an already sceptical public will be completely sunk.

3. It will do little to address the public’s concerns around the cost of living

The public’s concerns about the carbon price’s impact on the cost of living are built on tabloid mythology rather than reality. The vast majority of the electorate have an incredibly poor understanding of the carbon price and how it will affect them. For example, 22 per cent of Australians think interest rates would ‘increase a lot’ because of the carbon tax and another 18 per cent thought rates would rise ‘a little’. Yet RBA board members have publicly advised, on numerous occasions, that the carbon tax will not affect monetary policy.

I would dare suggest that the vast majority of Australians wouldn’t even know about the existence of a floor price for carbon. The idea that dropping this will make any difference to public perceptions is fanciful. 

4. It puts the budget surplus at serious risk

As outlined in Climate Spectator on May 9, if the carbon price were to drop to the CER price in 2015-16, the government’s projected budget numbers would be blown out of the water and the surplus would become wafer thin.

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