Solar panels (Image source: Michael Mazengarb)

After an extremely bumpy ride, 2012 will finally see Australia implement a carbon price. The Clean Energy Future legislation, which passed in October 2011, will put a price of $23 AUD per tonne on emissions from July 1 and will apply to approximately 500 companies. It is hoped the initiative will cut emissions by 159 MtCO2e – the equivalent of a 5% reduction by 2020.

A very bumpy ride

Australia’s carbon price has had a difficult journey. Former Labor Leader Kevin Rudd’s attempt at a Carbon Pollution Reduction Scheme was defeated in 2009, having lost the support of both the Greens and the Opposition. After the defeat of the bill, Rudd postponed the implementation of a carbon price until 2012.

In 2010, Rudd was toppled by his deputy Julia Gillard. Initially, Gillard endorsed Rudd’s postponement of the scheme, however the 2010 election result led to Parliament being controlled by four independents and the Greens, who made their support for the Government contingent on the adoption of a carbon price. The scheme’s development was highly controversial, with 53% of Australians saying they still oppose the scheme in recent polling.

Making the scheme work

For the first three years, Australia’s carbon price will operate as a fixed price Emissions Trading Scheme. This means Government will set the price of a fixed number of permits, which will be tradeable between emitters. The price will start at $23 AUD (€18.70), and be increased in the following two years. In 2015 the scheme will convert into a standard ETS, with permits being auctioned to allow a market price to develop. This will be complicated by the low price currently being received for EU carbon credits, as the Australian price is currently significantly higher than the current EU price.

The Australian Government has announced that up to 50% of emission reductions must be achieved domestically. While the Australian Treasury has suggested that emission offsets should be sought where they are cheapest (which may well be international offsets) a broader transformation of the Australian energy mix requires that much of the reduction be achieved within Australia. This tension will become increasingly important as emission reductions become more ambitious, as the current Government policy does not suggest what an appropriate mix of international permits will be after 2020.

The carbon price will also provide a significant increase in funding for complimentary measures, as a carbon price alone is unlikely to provide the incentives to get costly renewable energy projects off the ground.  The Clean Energy Finance Corporation will be provided with $10 billion to identify and support renewable energy projects through loans and direct investments, while $3.2 billion will be managed by the Australian Renewable Energy Agency to fund research, development and commercialisation of renewable energy at early stages of development. These funds were not included in the original Rudd-era scheme, and are a clear indication that the new Australian scheme aims to invest directly in renewable energy, rather than simply allow the market to shape energy policy.

Managing household impacts

Modelling by the Australian think-tank the Climate Institute suggests that the carbon price will increase the cost of living by 0.6% in 2012, which will increase an average Australian household’s expenses by $9.10 a week. This will be offset by $15 billion in household assistance and tax cuts in the first four years of the scheme. Low and middle-income earners will receive this support through a three-fold increase in the tax-free threshold while aged pensioners, families and unemployed people will receive support through increases in the family tax payments and a 1.7% increase in the pension.

Not out of difficult waters yet

The passing of Labor’s carbon price has not ensured the schemes future. The Opposition continues to actively oppose the mechanism, with opposition leader Tony Abbot swearing a ‘blood oath’ to repeal the scheme if he is elected. However, it seems difficult to see how he will remove the tax once it is in place.

While July 1 marks a complete reversal in Australia’s climate policy – from its refusal to sign Kyoto to implementing a significant carbon price – the modesty of the 2020 target reminds how much there is to do in the medium to long term if Australia is to meet its 80% emission target by 2050. While the carbon price is an important first step, the monumental effort this has taken underscores just what an unimaginable challenge Australia, and indeed the rest of the world, faces in meeting our long-term goals.

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