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Carbon price shift to tie Australian govt to European policy

Carbon trading without a floor price is “second best policy” that will see Australian carbon prices tied to the European…

Linking Australia’s emissions trading system to Europe’s will mean our carbon price and policy will rely on the European economy, experts say. AAP

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.”

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  1. John Newlands

    tree changer

    Whether this a copout by Australia depends upon Europe toughening its rules. Supposedly EU permits will be auctioned not 'grandfathered' and the use of offsets restricted. However I suspect they will adopt half measures. A valid offset in my opinion should create a worldwide CO2e reduction below a flat baseline. That disqualifies most CDM and forest preservation offsets.

    A possible good outcome from the alliance was suggested by one of the daily papers. Australia, the EU and some other countries could create a customs union to impose carbon tariffs on the greenhouse non-triers. China for example emits nearly a third of world emissions so their goods could slapped with a punitive tariff until they fall into line. It will hurt us not only because imports will be more expensive but we will sell less coal from Alpha and other mines. That takes us beyond tokenism into real action.

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  2. Gerard Dean

    Managing Director

    Absolute Lunacy!

    Australia putting it's faith in the European ETS is a joke. Their ETS has been so rorted by scammers and manipulated by EC members to obtain favourable outcomes that low trading levels mean it is virtually defunct.

    Why should Australia tie itself to a system that is manipulated by faceless, un-elected, highly paid EC bureaucrats in Brussels. Who knows what they will do?

    If Eurocrats do nothing and the price stays low, we can build new coal fired power stations and buy a…

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  3. Gerard Dean

    Managing Director

    Who said: "And they didn’t know until earlier this year what the carbon price would be. For them it’s really a matter of having a greater amount of certainty – there will actually be a price on carbon for the forseeable future and that will have a gradual effect in terms of current operational decisions and future investment decisions."

    Answer: Dr Frank Jotzo in his article "The Carbon bill passes - now what for business?"

    Where is the certainty now?

    I also take issue with your comment, "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."

    Given your original opinion that certainty and floor prices were critical to the success of the carbon tax, and in the light that these factors no longer exist, why are you so keen for the tax to 'survive'?

    Gerard Dean

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  4. Dr Graham Lovell

    logged in via Twitter

    Carbon trading makes sense in Europe, where they have 27 member countries, a wide geographic spread, and a diverse range of economic and climatic situations. Carbon trading in Europe means that one European region can benefit from the "carbon advantage" of another European region, even if all the carbon abatement measures are undertaken in Europe as a whole.

    The Australian international carbon trading situation is quite different from that in Europe. We do not need this kind of sharing of burdens…

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