Is Australia's carbon price too high?

It started as just one assertion among many in the most rancorous political debate of recent times. Then at some point it became an assumed wisdom. Stated as fact by host Tony Jones on the ABC's Q&A last week, it went something like this: Australia will soon have a "very high" carbon price that is "way out of kilter with the rest of the world". Will it? A snapshot survey of international and local carbon market experts suggests the picture is less clear. When the multiparty climate committee of Labor, Greens and independent MPs agreed on a starting price of $23 per tonne of carbon dioxide, it partly based its decision on the European price - then about $20. The European price later slumped and is now less than $10. The price of carbon credits generated in the Clean Development Mechanism - a United Nations scheme that allows the rich to pay for emissions reduction projects in developing countries - is less than $5. Most analysts and economists interviewed by The Age caution against using these low prices alone as a basis for lowering the Australian price. They say any discussion of the price should consider what the scheme is designed to achieve - something largely missing from a public debate focused on the cost. Several say it is a mistake to consider the European and Clean Development Mechanism prices a proxy for a global price. For now and the foreseeable future, there isn't one. Dr Christina Hood, a senior climate policy analyst with the Paris-based International Energy Agency, says calculating equivalent carbon prices in different countries is practically impossible - echoing a conclusion of the Productivity Commission last year. While a relatively small number of nations outside Europe have brought in direct carbon prices, she says many have fossil fuel taxes and regulations to restrict greenhouse gas emissions and promote renewable energy, making a straight comparison of permit prices alone misleading. There is a widespread expectation that the Australian price will fall back to its floor, or minimum, price of $15 once trading starts in 2015, because prices in overseas markets will be weak. But Hood says this should not be assumed given California, South Korea, Tokyo, New Zealand and several Chinese and Canadian provinces would have trading schemes, some of which may be linked. ''I would urge some caution in looking at what is happening today as a guide to what will be happening in 2015. We could be looking at a very different landscape,'' she says. ''But an important question in this is also: why is Australia doing this? If it is to position Australia's energy system for the future, then the precise details of what other countries are up to don't matter so much.'' Dr Helen Mountford, deputy environment director with the OECD, was one of several to cite Scandinavian countries as having introduced much higher carbon prices than Australia. Sweden has had a carbon tax since 1991, having slowly increased it over time in a planned way, giving businesses time to adjust. Today it is covered by the European carbon scheme and has taxes covering oil, coal, natural gas and petrol industries. A study backed by green think tank the Climate Institute and multinational GE calculated this added up to an implied carbon price of more than $130 a tonne. Mountford says the European price has fluctuated significantly in the past five years and is likely to rise again as the market for carbon credits tightens in coming years. "I think $23 is not a bad starting price. I think, predicting three years out from now, that it will go straight to the floor [$15 in 2015] is a bit premature - it may, but it may not," she says. Guy Turner, the London-based carbon markets director with analysts Bloomberg New Energy Finance, stands apart from other experts by arguing there is a reasonable case for cutting the starting price to $15. An analysis by his firm's Sydney office found the Australian price would fall to $15 in 2015 and hit $4 in 2020 once the floor price is removed. He says a short-term $23 price would lead to more operational emissions cuts - effectively, that it would give a greater incentive for businesses to improve their energy efficiency - but would mean little for decisions on long-term investments in electricity stations. "One of the acid tests of a carbon policy mechanism like a carbon market is: does it change investment decisions and does it change operating decisions?" he says. "What happens over the first three years is immaterial, frankly, to whether or not you are going to change your fleet mix in terms of the energy sector or make big long-term capital investments. ''You will get the benefit of a small amount of operational carbon saving in that time if the price is higher, but when everyone knows it is only for a fixed period, I don't think it is really going to make a big difference whether it is $23, $15 or $10 as to whether you are going to make an investment on a 20-year payback." Turner says this argument applies if the Australian government's goal is to hit an emissions reduction target [5 per cent below 2000 levels by 2020] regardless of whether this is achieved through international offsets or cuts on home soil. The rationale changes, however, if the goal is to de-carbonise Australia by switching from coal power to lower-emissions gas and renewable energy. That would require a higher carbon price than $23, and ignoring opportunities to buy offsets from overseas. But Turner says the Australian scheme is "pretty pragmatic", and that a high carbon price is likely to be fairly benign if export industries are compensated and revenue is used to lower other taxes. Australian-born environmental economist Dr Cameron Hepburn, who is based in London, is more blunt. A fellow at Oxford University and the London School of Economics, he says $23 is "nowhere near" the highest carbon price in the world. British companies, he says, are paying about £16 (A$25) once you count a "top up" tax charged in addition to the European permit scheme. Hepburn says the nature of a carbon market is that prices move up in boom times and down in a recession, and Europe and Australia are facing different economic scenarios. "The EU is in a prolonged recession, so it is hardly surprising that carbon prices have fallen to below $A10," he says. "Australia's economy may have two speeds, but overall it is growing reasonably quickly by comparison to the EU, so its carbon price would be expected to be higher. So $23 is not an inappropriate carbon price." Like most Australian-based experts, Hepburn says he expects the Australian price to be close to the $15 floor by 2015-16. In part, this would be because evidence in other emissions schemes has shown it is usually significantly cheaper to cut pollution than companies expect. In a 1990s US program to reduce the sulphur dioxide and nitrous oxides causing acid rain and in the NSW Greenhouse Gas Abatement Scheme, which forced electricity retailers to meet an emissions target, cuts came more cheaply than expected. In Australia, respected economist Dr Frank Jotzo says it may be time for a rethink on how quickly the nation links its scheme to overseas markets. The director of the Centre for Climate Economics and Policy at the ANU Crawford School of Public Policy, Jotzo says the most logical approach would be to keep a fixed price until international markets are less fragmented and volatile, rather than linking arbitrarily in three years. If that were not to happen, given the goal is for a long-term downward trend in Australia's emissions, he says there is a good argument for making the starting fixed price and the floor price the same to ensure consistency. Whether that price should be $15 or $23 is ''open to debate'', but it should not be determined by the European or Clean Development Mechanism prices. He says emissions cuts in Europe were driven by both the carbon price and complementary climate policies, such as standards for cars and feed-in-tariff schemes guaranteeing a high price for renewable energy. In Australia, the carbon price would do much more of the heavy lifting. "If there was an internationally integrated carbon price where many countries with solid carbon price schemes linked up together, and there was a solid expectation that they would remain into the future, then it would be reasonable to take that as a guide to what the Australian price should be," Jotzo says. "We are just not in this situation. What we really need to consider is where we want our carbon price to be in the next 10 or 20 years." The case for a long-term strategy for revamping economic practice was picked up last week in a report by the World Bank. Titled Inclusive Green Growth: The pathway to sustainable development, it warns that current growth patterns around the globe are unsustainable and inefficient and says changes need to come in the next decade to avoid longer term problems. While green growth strategies would vary across countries, it says all have a chance to become more environmentally sound without slowing their economies. In Australia, the public reaction to the carbon pricing has become inseparable from questions over the Gillard government's honesty, and the debate - dominated by Tony Abbott's extraordinarily successful campaign against it - is focused on what the cost will be on July 1, not the shape of the economy in decades to come. Understandably, the consideration of what other countries are doing focuses on China and the US. The Obama administration shelved its plans for an emissions trading scheme in 2010 when faced with an antagonistic Congress. In its place are regulations preventing new coal plants and significant tax breaks for clean energy. California is the biggest of a handful of states to introduce emissions trading. Its price for 2013 on forward markets is about $15. IN CHINA, seven regional pilot emissions trading schemes are being developed, though, in trademark Beijing style, the details remain opaque and there have been mixed messages over whether they will cover energy generation. A national scheme has been mooted by mid-decade. China is capping energy consumption and spent $51 billion on renewable energy in 2010. David Pearce, executive director of the Centre for International Economics in Canberra, says it could be true that the 400 or so businesses charged the carbon price would bear a greater cost here than elsewhere, but that the cost across the Australian economy is unlikely to exceed what many other countries are doing. In countries that paid subsidies to limit emissions by, say, boosting renewable energy, the public foots the bill via taxes. The federal Coalition's proposal to pay businesses and farmers to cut emissions follows this model. Under the carbon scheme, a greater proportion of the initial cost is worn directly by large emitting industries, with compensation for export businesses competing in markets without a direct carbon price. Pearce says he also expects the price to fall to something like $15 in 2015 and says there is a good argument for a floor price to be maintained beyond 2018 to give investors some certainty. ''The price you start with probably won't make a difference across the life of the scheme. My view is it is not so much the price at any point in time that matters. It is the price profile over time that sends a signal to people who are making these 20-30 year investments,'' he says. ''The only rational policy is just to start and to do some pretty rigorous assessment of what is happening.'' Pearce says one of the biggest problems facing the Australian scheme is an ambivalence to the logic behind it - experiencing some pain now through increased costs to avoid what scientists and economists warn may be much greater pain decades down the track. The ambivalence is coming from the government down, and has allowed misunderstanding about the complicated scheme to grow. The word ''carbon'' appeared just once in Treasurer Wayne Swan's budget speech last week, and the government has been widely mocked for launching an advertising campaign to promote household compensation payments without including the words ''carbon'' or ''climate change''. Pearce says it is puzzling that compensation payments started this week, months before the price impact of the scheme is likely to be felt. ''A clear statement of the policy case for what we're doing was lost a long time ago,'' he says. ''Nobody wants to admit there is going to be a price increase, and the Australian Competition and Consumer Commission seems to be saying people are going to be ripped off. ''I believe the extreme ambivalence of the Australian community will work against the policy.'