On Pricing Carbon – Labor Announced its Climate Change Action Plan

April 27, 2016,

Today, Labor announced its Climate Change Action Plan. Just some thoughts on Labor’s plan on pricing carbon.

Let me begin by outlining the general design of the proposed emission trading schemes (ETSs) – yes, there are two. Labor proposes two separate ETSs, one for electricity generators and a “broader” one. The broader ETS will apply to liable entities emitting more than 25,000t CO-e/p.a. of greenhouse gases (GHG)

Both of Labor’s ETSs will feature what Labor calls a cap. A cap refers to the maximum limit on GHG emissions from those liable entities covered by the ETS. The cap sets a limit on available free allowances (or permits or credits) or the threshold up to which a liability does not need to pay a price on carbon. This is what makes the primary feature of a well-designed ETS – scarcity that creates a market price for the allowances based on supply and demand.

The interesting part is that under both ETSs, Labor intends to allocate caps (or baselines) to liable entities.

Why is it interesting? Because it does seem familiar. Under the existing Emission Reduction Fund’s Safeguard Mechanism, must keep future net emissions at or below facility baseline emissions levels, or pay a penalty per t CO2-e above baseline (or cap), with baselines set by the Clean Energy Regulator using historical NGER data from FY09/10 – FY13/14 period at highest level during this period.

It would appear that both schemes are very similar in nature, with the exception being the threshold that determines liability, 25,000t CO2-e under Labor versus 100,000t CO2-e under the Coalition. So you see, the policies are very similar.

The question will be how Labor’s Climate Plan, and more specifically the ETSs, will be implemented. Rather than arguing about whether Australia gets an ETS, or a carbon tax, or baseline-and-credit scheme, more focus needs to be on the proper design of the scheme. And this will require a robust discussion around safety valves, such as price floors and ceiling, linking to other ETSs, eligibility of international credits, free allocation of credits and of course the overall cap.

There are certainly interesting times ahead in terms of carbon pricing. Let’s hope that political gamesmanship and strategic behaviour can be kept at a minimum.

A quick word on SMEs and those entities unlikely to be liable under an ETS… A carbon price will result in higher costs for fossil fuel energy use and other GHG-emitting activities, which should encourage greater energy efficiency and cleaner processes. The impact of a price on carbon will depend on an SME’s energy demand, sensitivity to energy costs, and of course the ability to pass on higher costs to the customer. So even for those businesses not covered, there may be merit in assessing and reducing their energy and carbon intensity.

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