What is the outlook for carbon pricing in Australia?

Clean Energy Future vs. Direct

Both political parties remain committed to achieving our national emissions reduction target set at 5% of 2000 emissions levels. Under the Gillard Government, the Clean Energy Future (CEF) package of measures will be maintained. Should the Coalition win in September, carbon reduction activities will be managed under “Direct Action”. 

The Treasurer’s Budget as handed down on Tuesday night laid out a number of points relating to the management of carbon emissions.

Firstly, the price on carbon is forecast to fall from $29 to around $12 per tonne in 2015-16, leaving a $6 billion revenue gap across four years. The fall in Government revenue led to funding cuts to a number of Clean Energy Future programs. 

However, of most relevance to Energetics’ clients, $160m in funding was brought forward for the popular Clean Technology Investment Program (CTIP) which has driven energy and emissions savings projects in manufacturing, and $370m in funding was deferred for the Australian Renewables Energy Agency (ARENA).

The revised carbon price forecasts reflect the collapse of the carbon price in Europe which is currently trading at around $5.50.  What this highlights for business is the need to forecast carbon at a lower price point, and the volatility of carbon markets which requires a risk management approach: whether your organisation is a liable entity under the CEF carbon scheme or concerned to manage supply chain impacts. 

In the Coalition’s Budget reply speech Mr Abbott stated “the carbon tax repeal bill, should we be elected, will be the first legislation that a new parliament considers”. The Coalition has committed to repealing the 18 pieces of legislation that make up the Clean Energy Future package of measures. It is, however, difficult to know the course this repeal will take and when the carbon price will be effectively removed.  You can read Energetics’ analysis of the possible timing in “The future of the carbon price.” 

What we do know is that a Coalition government will retain the current income tax thresholds and the current pension and benefit fortnightly rates, decoupled from carbon costs.

We also know that organisations which have already purchased carbon permits may dispute the Coalition’s assertion that no compensation is due to them for those purchases - because it was done voluntarily. The government however, argues that a refund could be necessary should the permits be considered a property right [1] . 

More details about Direct Action required:

There are also questions around the cost of Direct Action. More details should be provided either in the lead up to the election, or through a White Paper which is expected to be developed following the election, should the Coalition win office. 

Under the CEF, large emitters are compensated with free permits and some specific industries such as LNG, steel, coal and brown coal power generators have received financial compensation to mitigate the impacts of the carbon price on their business and to encourage the adoption of best practice measures to lower carbon emissions. 

By contrast, Direct Action recognises baseline emissions and so does not offer a separate compensation element. An extract from the Direct Action Plan follows describing the flow of funds, “The Emissions Reduction Fund will use the existing National Greenhouse and Energy Reporting Scheme (NGERS) to determine proposed emissions reductions beyond overall base levels already determined for individual firms.

Businesses that reduce their emissions below their individual baseline (‘historic average’) will be able to offer this CO2 abatement for sale to the government. This will provide businesses with a direct financial incentive to take direct action to reduce their CO2 emissions below their baseline levels.

… businesses will not be penalised for continuing to operate at ‘business as usual’ levels. Businesses that undertake activity with an emissions level above their ‘business as usual’ levels will incur a financial penalty. The value of penalties will be on a sliding scale at levels commensurate with the size of the business and the extent to which they exceed their ‘business as usual’ levels.  The value of the penalties will be set in consultation with industry.”

Direct Action is not a market-based scheme, but centrally planned and managed and as such incentives payable for emissions reduction activities should come from the government’s consolidated revenues. Although it’s worth noting that the Direct Action Plan suggests that funds derived from penalties will finance incentive payments – suggesting that Direct Action may ultimately closely resemble an emissions trading scheme. 

Energetics will keep you advised of details as they emerge. 

(1) Peter van Onselen, Contributing editor, The Australian:  “ALP figures on Libs ‘black hole’ don’t add up”, May 17, 2013

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