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Initial Reactions to the Carbon Tax: A First Step, but Improvement Needed

10 July 2011

The carbon price package announced today is Australia’s first step in transitioning away from its current fossil fuel economy toward the renewable energy one we need to get to as soon as possible. There are significant improvements on Labor’s original Carbon Pollution Reduction Scheme (CPRS). But of course it’s far from perfect and it’s far from enough.

Pros

  • Finally Australia will have, from 1 July 2012, a price on carbon.
  • Emissions targets will not be set until 2014, when the independent Climate Change Authority will recommend a five-year emissions budget to come into effect in 2015 when we move to an emissions trading scheme. If the Parliament cannot agree on the target, a default cap will be set for one year only. The Climate Change Authority will review the target annually and make updated recommendations on 28 February. This arrangement provides the promised upward flexibility, in contrast to the legislated lock-in of the old CPRS.
  • In deciding on its recommended emissions reductions, the Climate Change Authority will have regard to global emissions budgets, climate science, existing targets, progress in cutting emissions, economics, social factors, and voluntary action. I’m happy about this because I assumed the authority would be working on Garnaut’s framework, which has a maximum target of 25%. As it is, the Greens say there will be no upper limit on emissions reductions.
  • At least 50% of emissions reductions must happen domestically, and there will be some level of accountability criteria for offsets. (CORRECTION 13 October 2012: The 50% limit does not refer to 50% of emissions reductions. Instead it means merely that companies are allowed to offset 50% of their emissions.)
  • The 2050 target has been raised from 60% to 80% unconditionally.
  • From 2015 to 2018 there will be a $15 price floor in the emissions trading scheme, ensuring some level of investment certainty.
  • An independent Australian Renewable Energy Agency (ARENA) will subsume every existing renewable program except the 20% Renewable Energy Target (RET), and will control a total of $3.2 billion funding. Meanwhile, the RET will be retained and will no longer include biomass.
  • $10 billion over five years will go to a Clean Energy Finance Corporation. $5 billion of that is guaranteed for renewable energy, and the corporation will not fund carbon capture and storage.
  • There’ll be a study on designing an electricity grid for 100% renewable energy by the Australian Energy Market Operator (AEMO). (Beyond Zero Emissions have already done this in their Zero Carbon Australia 2020 Stationary Energy Plan.)
  • The package includes a number of energy efficiency measures.
  • Measurable voluntary actions will automatically be subtracted from the cap. (CORRECTION 13 October 2012: Measurable voluntary actions will be subtracted from the cap five years hence.)
  • There is a strong household compensation package – 90% will be compensated, 70% fully compensated, and 40% overcompensated.
  • The mining fuel tax credit, a nonsensical fossil fuel subsidy, will be reduced. There will also be a Productivity Commission review of fuel excise policy, which may lead to removing many fossil fuel subsidies and covering petrol in the emissions trading scheme.
  • No new coal power plants will be built. (CORRECTION 13 October 2012: There is no explicit ban on new coal power plants, but Treasury modeling predicted the carbon price would be high enough to prevent them.) The Government will buy out 2 GW worth of coal power stations.
  • Coal will get $1.8 billion less compensation than in the CPRS, and in 5 years instead of 10. (CORRECTION 13 October 2012: This refers specifically to coal-fired electricity generators.)
  • Much of the coal mine compensation will be in the form of structural adjustment assistance, better than free permits. (CORRECTION 13 October 2012: This is incorrect. I’m not sure where I got this information from.)
  • Compensation to trade-exposed industries will be reviewed and move towards a principled approach, as recommended by Garnaut.
  • The Australian Chamber of Commerce and Industry, Australian Industry Group, Minerals Council of Australia, and Australian Coal Association oppose the policy, so there must be something to it.

Cons

  • If the policy fails to be improved later, Treasury modeling reportedly says, the coal industry will continue to grow exponentially. So its success depends on its upward flexibility.
  • Labor’s minimum 5% target is far too low.
  • Interestingly the Liberals make one of the same criticisms of the new emissions trading scheme that the Greens made of the CPRS: Australia’s domestic emissions will rise while half of the 160 Mt in Labor’s target will be offset overseas. There is a large potential for fraud in international offsets – a rare point on which I agree with Tony Abbott!
  • The 80% 2050 target is a long way off. The world needs to get to zero emissions by 2050 or sooner.
  • Carbon prices of $23 and $15 are far too low to drive a transition to renewables.
  • As well as a price floor there is a price ceiling: $20 over the international price. What if the international price crashes?
  • There have been media reports that the Clean Energy Finance Corporation will fund hybrid gas/solar power plants. Why build hybrid plants when you can build the real thing?
  • The carbon tax excludes petrol, a fossil fuel.
  • It sounds like the coal power plants which are bought out will be replaced with gas, when of course they should be replaced with renewables (I’d make the same criticism of Liberal policy). Also, we should shut more than 2 GW of coal before 2020. And I’m worried that buying them out now sets a precedent – that the Government will have buy them all out eventually.
  • The package retains unnecessary free permits for polluters, albeit temporarily, diluting the price signal and adding to the existing billions of dollars of fossil fuel subsidies. Notably the MPCCC did not agree to some of the compensation, but the Government will try to get it through Parliament.
  • Coal electricity generators will still receive free permits, albeit fewer.
  • Highly emissions intensive trade-exposed industries will receive 94.5% free permits, the same as in the CPRS. The compensation will include $1.3 billion to coal, $300 million to steel, and more. It will be locked in for five years, with an overlapping three-year notification period. This means there will only be a $1-2 price on trade-exposed industries until their compensation is reviewed in 2015.
  • There are $250 million of land sector offsets which I’m not sure whether to include as a pro or a con. While it’s important to manage the land sector side of things, I’m worried it will undermine the even more vital transition in the energy sector.

Summary

Though starting low at $23 per tonne with a minimum 5% target, it looks like the carbon price has unlimited upward flexibility. It still has unnecessary free permits for polluters which are effectively fossil fuel subsidies – but these can hopefully be phased out in a few years, and with luck some might not even get through the Parliament. While petrol is excluded, there will be a review of fuel subsidies hopefully leading to finally getting rid of them. There is a level of support for renewables here which is unprecedented in Australia, and looks like it will provide certainty for the renewable energy industry. It is unclear how well the emissions trading scheme is designed – there are at least some limits on international offsets, but that would still allow domestic emissions to rise.

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