Carbon trading without a floor price is “second best policy” that will see Australian carbon prices tied to the European economy says John Daley, chief executive officer of public policy analysis group the Grattan Institute.
Emissions trading by Australian companies will not commence until 2015, but yesterday the government agreed to remove the controversial $15 floor price as a result of a decision to link Australia’s future emissions trading system with Europe’s existing system.
“Linking the Australian and European Union systems reaffirms that carbon markets are the prime vehicle for tackling climate change and the most efficient means of achieving emissions reductions,” Climate Change Minister Greg Combet said.
The link has a deadline to commence of July 1, 2018, with interim arrangements planned for 2015.
“First best would be a floor price, but much worse would be open slather for any kind of international linking, where there may not be proper controls around the quality of the permits that are involved,” Dr Daley said.
He added that the benefit of the floor price was it limited the downside for businesses making investment decisions, something that was critical for banks in particular.
“The track record of these schemes is they have tended to have some kind of price crash or a series of price crashes,” Dr Daley said.
The consequences of removing the floor price include a lower incentive for developing low-carbon technologies, and greater uncertainty for business, said Alex Lo, lecturer in environmental economics at Griffith University.
“There will be greater uncertainty because the Australian carbon price would be subject to price fluctuations in international market,” Dr Lo said.
Despite the European system being “inherently a high quality scheme”, Dr Daley said linking to it means the Australian government will have relatively little control over Australian carbon prices and to some extent policy.
“It does mean that future Australian carbon prices are primarily going to be a consequence of whatever Europe decides to do. If the European economy goes downward we will see Australian carbon prices going down. ”
The man who helped design the floor price, Frank Jotzo, writing for The Conversation, asked: “Is it really a good idea to enter a market that is dominated by a larger partner, with a combined price that is much more influenced by policy decisions made in Brussels, Berlin and London than in Canberra?”
“If European policymakers make the carbon target more restrictive that will flow on directly to Australia,” Dr Daley said.
Nevertheless, Dr Jotzo believes Australia’s carbon pricing scheme now has a better chance of survival under future governments, because repeal will now also mean severing the connection to the world’s largest carbon market.
Dr Daley said linking to a relatively high quality scheme does send a powerful message.
“What it has done is reinforce the point that Australia is far from acting alone here. It makes a powerful rhetorical point that we are in this together with a number of large countries.”