What would rumored carbon tax changes mean?

It is rumored in the newspapers that the Australian Government is considering certain changes to its carbon price. I have been mulling over this for ten days because it’s difficult to assess the overall implications of an unconfirmed proposal lacking full details, and I have mixed feelings as some aspects of the rumored proposals are potential improvements and some are potentially regressive. However, my impression is the possible outcome has been leaked to gauge public reaction, so I figure I should express my thoughts, provisional though they may be.

Here’s the context: the carbon price policy as it currently stands was negotiated last year by the Multi-Party Climate Change Committee (MPCCC), consisting of Labor, Greens, and independent MPs; was legislated in November and came into effect last month. The policy is full of holes, but climate activists are failing to campaign for stronger action and industry lobbyists are campaigning to undermine it even further.

The first portent of the rumored changes was back in May when independent MP and MPCCC member Rob Oakeshott unexpectedly threatened to renege on part of the agreement. Oakeshott threatened to disallow regulations to establish a $15 floor price when the $23 carbon tax becomes an emissions trading scheme (ETS) in 2015. The floor price is in my opinion one of the best features of the Government’s policy, providing some price certainty so investors can confidently shift investment from high-carbon to zero-carbon or low-carbon assets. If there is no floor, the carbon price could collapse and limit emissions reductions instead of encouraging them – particularly given companies will be allowed to buy cheap international offsets (presently valued in the single digits).

I’m not sure what Oakeshott’s motivation is, but he says his position is based on “strong feedback from business”. Perhaps he has fallen for the business lobby’s ridiculous argument (which I debunk here) that Australia’s carbon price is somehow “too high”? Whatever the reason, it is disappointing that an ostensibly independent politician now seems to be doing the bidding of the business lobby.

In July, ABC Radio National’s Breakfast revealed the Government was undertaking secret negotiations to scrap the floor price, apparently unable to get it through the Parliament due to Oakeshott’s intransigence. Then ten days ago, the Australian Financial Review revealed Labor and the Greens had reached a potential deal: to ditch the floor price but restrict international offsets. The Government said it was “in extensive consultations with business” and “no decisions have been made”. If the limits on offsets are stringent enough, they would ensure action is actually taken domestically and keep Australia’s carbon price around its initial level of $23, which would be good news (relatively – a price reflecting the true cost of CO2 emissions would be far higher than $23).

But there’s a further complication. Six days ago, the Australian Financial Review elaborated that the plan is to limit offsets from the UN’s Clean Development Mechanism (CDM) but allow permits from the EU ETS. The former is good because the CDM is far from credible. (In one known rort, companies in China and India produce gratuitous pollution so they can be paid to stop – and this is currently the most common type of CDM “offset”!) The EU ETS is somewhat less problematic as it has a capped amount of permits, but on the other hand it is flooded with surplus permits (among other flaws) which have caused its prices to plummet; European politicians are debating whether and how to rectify the situation. So linking to the EU ETS would have unclear implications.

What a hodgepodge!

Here’s my opinion: Australia should not allow any international offsets from anywhere. Offset mechanisms prevent domestic action and are a breeding ground for creative accounting. Australia’s carbon price must drive domestic decarbonization, because we need decarbonization everywhere. Meanwhile, Oakeshott should back down and let the floor price go ahead. Better still, now we know $23 hasn’t caused the sky to fall in, the Government could raise it to $100, which would actually help emerging renewable energy technologies become competitive.

Of course, business lobby groups have already said no to any restrictions on offsets, and will continue to campaign for a lower carbon price. Therefore everyone who cares about climate change action, or wants Australia to move toward a renewable energy economy, should tell the Government, the Greens, and Oakeshott we support a higher carbon price and few or zero international offsets.

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