The Gillard Government has hit Australia with a carbon tax of $23 a tonne. It predicts that when we switch to international carbon trading in 2015/16, the world price for carbon credits will be $29 a tonne.
That now seems highly unlikely, given the collapse of the two main carbon trading markets:
Last week, the price of an EU carbon allowance briefly tumbled to a record low of €2.81 a tonne [$3.64], heaping embarrassment on the EU’s flagship policy to combat global warming….
The price collapse is only the latest indignity the carbon market has suffered during its eight-year history – from value added tax frauds to cyber-thefts of allowances. Yet moribund prices may be the most worrying because they call into question the workings of a market designed to promote clean technology investment by putting a price on carbon and forcing companies to buy allowances to offset their pollution.
What the architects failed to anticipate was an economic crisis that has restrained industrial activity, and thus reduced the need for allowances…
Some wonder, therefore, if the EU carbon market will follow the path of its smaller cousin, the UN’s Clean Development Mechanism offset carbon market.
This scheme promised to enable companies, including those covered by the EU emissions trading system, to offset their carbon emissions with credits generated from clean energy projects in developing markets. But the weakness of the EU market – and limits on the amount and type of CDM credits allowed in it – has led to the collapse of CDM credit prices to less than €0.50, sinking much of the industry of project developers, analysts and assessors that grew up to support it.
This confronts the Gillard Government with a financial and political disaster.
It is giving many Australians compensation to match a carbon price of $23 – and rising as the carbon tax increases. That compensation is paid for by the carbon tax. But if the tax does not match the compensation, a great financial crater opens under the Government’s feet – unless it slashes the handouts:
But even if the carbon price falls to only $10, and then rises after that by 4 per cent in real terms annually, the commonwealth’s fiscal position during the period from 2015-16 to 2019-20 worsens by $25 billion. To leave budget outcomes unchanged, the government therefore needs an additional $25bn in revenues, spending cuts or both. Where are those savings, Mr Swan?
But the Treasurer isn’t the only minister swinging in the breeze. After all, Climate Change Minister Greg Combet repeatedly stressed that the entire purpose of the carbon scheme was to provide a “predictable, long-term price signal” whose steady rise investors in renewables and other low-emissions technologies could rely on.
Moreover, the floor price was essential to achieving that goal, as it ensures “stability and predictability” and avoids “the risk of sharp downward movements in the carbon price, which could undermine long-term investment in clean technologies”. Where is that predictability now, given the wild gyrations that characterise European carbon prices?
Andrew Bolt’s columns appear in Melbourne’s Herald Sun, Sydney’s Daily Telegraph and Adelaide’s Advertiser. He runs the most-read political blog in Australia and hosts Channel 10’s The Bolt Report each Sunday at 10am. He is also heard from Monday to Friday at 8am on the breakfast show of radio station MTR 1377, and his book Still Not Sorry remains very widely read.