The price of pollution

Opposition Leader Tony Abbott with Coalition climate spokesperson Greg Hunt. AAP PHOTO

The Liberal-National Opposition believes that carbon pricing is on the way out, but signals from China and elsewhere suggest otherwise. [14 May 2013 | Peter Boyer]

The outlook for emissions trading in Australia is bleak, if you believe what’s we’re hearing from Opposition leader Tony Abbott and his environment spokesman Greg Hunt.

As they see it, we have “outsourced” our tax system, including our trading scheme, by tying our carbon price to that in Europe, currently the world’s biggest carbon market.

The outsourcing thesis is pretty shaky, but their intent is clear: to raise concerns about price volatility ahead of their election in September (if that happens) and their planned scrapping of carbon trading along with most other measures making up the Clean Energy Future package.

The Abbott-Hunt comments were sparked by the European Parliament’s recent decision not to support the carbon price there, which has left its price hovering around $4 a tonne.

Playing on voters’ craving for stability, the Coalition says the carbon market is out of control and the scheme has to go. But it will have to secure Parliament’s agreement to this before July 2015, when Australia’s present fixed-price setup is due to become a full cap-and-trade scheme.

Under the scheme a cap on total emissions is to be set and a specified number of permits traded between polluters. There’s to be a decreasing number of permits available in succeeding years as the national emissions cap is reduced, in theory forcing up the price of the permits.

Treasury had projected that Australian permits would sell at $29 a tonne when trading starts, but because of the depressed European market the price, to be revealed in tonight’s Budget, looks like being only $15.

Part of the problem in Europe is that too many permits were issued when the scheme was being planned 10 years ago, a result of governments over-estimating national emissions. A glut of permits means a lower price.

The other reason is the continuing recession in the Eurozone. Climate measures have been forced to take a back seat to employment and national bail-out programs, which resulted in the recent rejection of a proposal by the UK, France and others to temporarily cut the supply of permits.

The falling European price triggered last week’s deferral of compensatory tax cuts by Climate Change Minister Greg Combet. This is no big deal in itself — just $1.59 a week for people earning up to $80,000 a year — but it will do nothing for the government’s electoral prospects.

Regardless of how effective emissions trading is in reducing emissions, the implications of a failure of the carbon market anywhere are significant. It’s an issue of public confidence, not just in emissions trading but in the capacity of governments to deliver, and that’s in very short supply.

But messages from abroad are mixed. While Europe is in the doldrums, the Chinese economy looks likely to remain strong for some time yet. Australia has focused on Europe because it’s the carbon market leader, but it makes good sense to keep a weather eye on Beijing.

China, the world’s biggest carbon emitter, is embarking on a serious of pilot emission trading schemes in at least seven major industrial hubs, each scheme different from the others. The success of these will guide planning for a national scheme planned to start around 2018.

The pilot schemes are a steep learning curve for China and prices are likely to be volatile, but the Chinese are nothing if not businesslike. Their carbon markets will be big by any standards; the total population covered by the pilot schemes is 10 times that of Australia.

The point is, we’re all on a learning curve. Europe’s scheme is faltering because of mistakes made a decade ago. We know a good deal more now because for some years various countries have been running different schemes, but there’s much still to discover.

One thing we have to wrestle with is how the schemes work together, across international borders. Though not the first cross-border arrangement, the Australian linkage with Europe was a significant step towards a global carbon market.

Whether this is the way to go is still being debated by economists — including free-marketeers who seem suddenly coy about globalised trading. If it’s all right for commodities, why can’t the same be said for carbon permits?

There are undoubtedly problems about international trading, but it’s unlikely that any national scheme will want to cut itself off from cheaper abatement opportunities in other countries. That is, unless, after September’s election we take the Coalition path.

The Liberal-National “direct action” policy is to abolish the climate change apparatus set up under Labor, including carbon pricing and, crucially, the national emissions cap to operate from 2015. The Coalition would replace emissions trading with an “Emission Reduction Fund” — a buy-back scheme in which the government would seek lowest-cost quotes for emissions reduction and accordingly pay companies for cutting their emissions after the event.

Greg Hunt claims the process is more efficient than carbon trading because it’s selective — “no money goes out unless there is an emissions reduction, and we only do that on the basis of the lowest cost” — whereas a carbon price mechanism imposes a cost on the whole economy.

But in trying to counter the frequent criticism that direct government action to mitigate emissions is more costly, and seeking at all costs to avoid compulsion, the Opposition’s selective measures run the risk of missing emissions that a whole-of-economy scheme like carbon trading will capture.

I hear what Tony Abbott says about carbon pricing. I know he intends, as the protesters’ placards said, to “axe the tax”. But when push comes to shove, I don’t think he’ll be able to.

• Hobart will join the global screening of “Do the Math”, the new movie by US climate activist Bill McKibben, at 5.30 pm on Thursday in the Menzies Centre’s Lecture Theatre 105 in Campbell Street, Hobart (diagonally opposite the Royal Hobart Hospital).

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