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Rudd should scrap, not hasten, EU carbon linkage


This post is part of the Lowy Institute Poll 2013 debate thread. To read other posts in this debate, click here.


12 July 2013 09:36

This post is part of the Lowy Institute Poll 2013 debate thread. To read other posts in this debate, click here.

Fergus Green is a researcher specialising in climate change policy.

Here we go again. The Labor Government is contemplating weakening the carbon scheme for what must be about the seventh time since Rudd Mk 1 was elected in 2007. Rudd cabinet Mk 2 is rumoured to be considering curtailing the current fixed price phase of the scheme (the so-called 'carbon tax') and bringing forward the commencement of the floating price phase ('emissions trading scheme' or 'ETS') from its currently mandated start date of 1 July 2015.

The politics might be irresistible, but this would be a bad policy.

Under the existing arrangements, the switch to the floating price phase will entail a link with the European Union's ETS, enabling liable Australian firms to acquit up to 50% of their carbon liability using internationally sourced allowances from Europe (or from the Kyoto Protocol's Clean Development mechanism, up to a 12.5% limit). The effect is that the European carbon price will effectively set the price of Australian carbon units as well.

The problem is that EU carbon allowance prices are farcically low (currently trading at around €4.50 or A$6.30) and likely to stay low for at least the remainder of the decade. Prices this low are nowhere near the 'true' cost of carbon and fail to induce structural transformation in relevant sectors of the economy.

In a recent article I discussed the reasons behind Europe's low carbon prices and analysed the prospects for price-boosting structural reform of the European ETS. The European Commission is pursuing a two-stage approach. First, it wants to defer the release of 900 million EU allowances until towards the end of the decade (when the Commission assumes European economic growth and hence demand for carbon allowances will have risen). This would smooth the price and buy time for the proposed second stage, which would involve deeper structural reform (such as cancelling surplus allowances, removing them from the scheme altogether) to push prices higher overall.

In April, the European parliament failed to pass the first stage of the reforms, known as 'backloading', and it was unclear whether the European Council, represented by member states, would accept the backloading proposal. This fuelled my pessimism about the prospects for European carbon price reform, and hence about Australian carbon price projections.

Since I wrote that article, the European parliament has passed the backloading measure (on its second attempt, last week). However, the European Council has yet to vote on the matter and crucial member states, including Germany, remain undecided. It is thus far from clear whether backloading will gain the qualified majority needed for passage through the Council. While the parliament's support for the measure at least keeps hopes of reform alive, the backloading measure itself is not expected to have a substantial impact on prices, and the road to deeper structural reform will be longer and bumpier.

As such, Australia's carbon tie-up with the EU remains deeply problematic. The Australian floating carbon price will remain hostage to EU politics of the sort currently playing out. Why let something as important as the Australian carbon price — and, through it, the composition and emissions profile of Australia's industrial economy — be determined by the intricacies of EU law-making processes, or domestic politics in Germany?

Carbon trading enthusiasts will resort to the ideology of 'lowest cost abatement': the argument that emissions reduction targets should be met at lowest possible cost, wherever in the world that may be. But this is only plausible if the targets equate to a defensible climate objective, which they manifestly do not. What is needed is deep structural change towards a zero carbon world, not the precise hitting of a meaningless target at the lowest possible cost.

Deep structural change requires a steadily rising long-term carbon price that generates confident market expectations of a very high future price, along with a host of regulatory measures (which I have discussed elsewhere).

An alternative answer is that accelerating the floating price and associated EU linkage is politically appealing, since it will mean the cost of carbon in Australia is extremely low. But, one year in, the fixed $23 carbon price (now $24.15) has not caused the economic armageddon or popular backlash claimed by the Coalition and other opponents of the scheme. The Lowy Institute's polling shows that popular opposition to the scheme has fallen over this period, while serious concern about climate change and associated support for strong action (even at 'significant costs') has risen for the first time in six years. While a narrow majority of Australians, on this measure, still oppose the carbon pricing scheme and remain less concerned about climate change, these results suggest that weakening the scheme now is hardly a political necessity. More detailed polling on attitudes to climate policy undertaken by the Climate Institute reinforces the conclusion that public hostility to the scheme itself is relatively low.

Moreover, the earlier we shift to an EU linkage, the lower Treasury's receipts from the scheme will be, and so the more problems this poses for the politics of fiscal management in future years.

It thus seems that the political 'justification' is a much shorter-term one: it will allow Rudd to distance himself from the 'carbon tax' through a superficial exercise in pre-election rebranding.

On climate change, yet again, short-term politics appears set to undermine long-term policy.

Photo by Flickr user Andrea Kirby.

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