Will the carbon price deliver a low carbon economy?

03 Mar 2011Archived News Climate Change Matters

On 24 February 2011, a passionate Prime Minister Gillard released a proposed framework for a carbon price mechanism: essentially a resurrection of the Carbon Pollution Reduction Scheme (CPRS) and not a carbon tax.

The mechanism seeks to achieve a structural adjustment to the Australian economy, rather than bring about emissions reductions through direct action measures: "the initial fixed price could begin to drive economic transformation and investment in low emission technologies, and ensure greenhouse gas emissions reductions." (Multi- Party Climate Change Committee)

This provides business with greater certainty in carbon policy and is ultimately intended to drive behavioural change. With the commitment to the principle of budget neutrality, business and the community generally, can expect considerable support to ameliorate the impacts of the carbon price.

Businesses need to understand the range of issues associated with moving into the emerging lower carbon economy: the compliance requirements, the risks and the range of opportunities.

The key features are:

  • From as early as 1st July 2012 a fixed price is to be introduced and will operate for a period of 3-5 years, with the price rising each year at a pre-determined rate.
  • At the end of the fixed price period, the scheme will transition to a cap-and-trade emissions trading scheme.
  • Intitially, through the fixed price period, liable organisations may not be able to use international offsets.
  • Noteworthy features of the guiding MPCCC-agreed principles and in particular, new inclusions that differ from the CPRS:
    • Budget Neutrality - with the data gathered from the National Greenhouse Reporting Scheme (NGER), the Government should be able to determine the amount of revenue that will be generated. We can expect considerable debate as to how those funds will be spent.
    • Environmental effectiveness - may provide opportunities for the Greens to drive more aggressive targets.
  • In the finalising of the carbon price mechanism, negotiations will be informed by climate science and the internationally-agreed target to limit the increase in global temperature to less than 2 degrees.

Coverage

The mechanism is intended to cover the six greenhouse gases under the Kyoto Protocol. Included in the framework:

  • stationary energy
  • industrial processes
  • the transport sector
  • fugitive emissions (other than from decommissioned coal mines)
  • emissions from non-legacy waste sources.

Emissions generated from sources covered by the proposed Carbon Farming Initiative, such as those from agriculture, will be excluded.

Yet to be announced...

  • A carbon price. The government is awaiting a report from the Productivity Commission, expected in May, to inform that pricing decision.
  • The price escalation mechanism.
  • The compensation package that will be offered to large emitters.
  • Whether incentives will be provided to encourage the development and take-up of low emissions technologies.
  • How the carbon price mechanism will interact with energy efficiency initiatives and the recommendations outlined in the report of the Prime Minister's Task Group on Energy Efficiency, and the White Certificate Trading Scheme.

How will a carbon price impact overall energy prices?

As we await further details, energy users should continue to address the carbon pass through costs in their electricity and gas contracts.

  • It will be energy users who ultimately pay for the emissions related to the stationary energy sector.
  • The generators are likely to be compensated during the transition. This compensation is unlikely to be passed through to end users in the form of lower carbon costs.
  • Retailers are able to enter into electricity futures contracts via the Sydney Futures Exchange which are firm for carbon. Contracts for periods after 1 July 2012 jumped yesterday following the announcement, highlighting that traders are now starting to factor in a cost for carbon for this period. All retail contracts we have seen allow for a change in rates if there is a change in law.

Hurdles and opportunities

  • This initiative must pass through both Houses of Parliament, and will be reliant on the support of the Independents and the Greens.
  • Recent forecasts show Australia's carbon emissions are tracking above our business as usual levels. On this basis the case could be made for a higher carbon price. Modelling undertaken by Treasury for the original Garnaut review indicated a starting price of $23/t. Despite the fact that this price was developed at a time when emissions were lower, political pressure will probably ensure that under the new carbon price mechanism, the initial price will be no higher than $23/t.
  • Under the CPRS, coverage of the transport sector was to be phased in. However through its inclusion in the announced carbon price mechanism, we may see more switching to alternative fuels which also recently benefitted in the released Draft Legislation for the Taxation of Alternative Fuels. The draft legislation announced a 50% proposed tax discount compared to regular petrol on an energy equivalent basis.
  • Reference to coverage of the electricity sector through an intensity-based allocation scheme, while lacking detail, suggests that focus will be placed on reducing the energy intensity of Australia's electricity production. As a result we may see increased interest in exploiting Australia's vast natural gas reserves, expansion in coal seam methane production and coal gasification technologies.

What should your business do in response?

  • If not already considered, incorporate a price on carbon in the development of business cases for investments.
  • Ensure carbon mitigation projects are identified and costed. For example using a carbon abatement cost curve assessment methodology.
  • Consider offsets to reduce your carbon exposure.
  • Early actions will be rewarded - it takes time to implement behavioural and technological changes within your business.
  • Enhance your business' skills and knowledge in carbon management, ensuring the right people understand the impact of carbon on the business.
  • Understand the implications of flow on impacts through the economy, begining with suppliers hedging themselves against the carbon price.
  • Identify the business opportunities that the low carbon economy presents
  • Energy users must pressure suppliers to only pass through carbon costs which are fair, reasonable and cost reflective. Further benefits may be gained by negotiating carbon pass-through based on actual cost, so that electricity sourced from a generator with lower emissions will have a lower carbon pass-through cost than if the state based emissions coefficient had been used to calculate the obligation. Such consumer awareness and informed decision making will assist the transition to a low carbon economy in a meaningful way, however it will require a shift from retailers, many of which are yet to respond to end user pressure on this issue.

Written by:
Peter Holt
Principal Consultant

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