Yallourn "W"

Yallourn "W" Power Station in Victoria, Australia (Source: Dallas Ewing)

Australia’s transition from a fixed-price carbon scheme to a full emissions trading scheme in 2015 will also mark the introduction of international carbon permits into the Australian market. This will allow Australian companies to use certified emission reductions such as the Clean Development Mechanism (CDM) to meet their carbon liabilities.

In an attempt to balance reducing Australia’s emissions with demands for lowest cost abatement, the government decided to cap international permits at 50% and to levy a surrender charge – a fee to top-up the difference between an international permit and the Australian price floor.

Collecting the surrender charges

In a recent round of consultation about this policy, the Government has proposed four potential mechanisms for collecting the surrender charges in cases where the international permits are cheaper than the price floor:

  1. Companies will be required to pay the difference between the actual price paid for a unit and the price floor on the day the unit is surrendered.
  2. Surrender charges will be based on the difference between a class of international units at the time the units were purchased and the price floor.
  3. Surrender charges will be based on the market price at the time the unit is surrendered, regardless of the price paid for the international offset.
  4. Surrender charges will be based on market price at time of surrender; however a future price agreement can be struck an emitter and the government.

Business consultation has provided little consensus about a preferred option. Some companies suggest that option one is the fairest way to directly levy the lowest price; however others have suggested that verifying each individual transaction would be administratively onerous. Supporters of option two argue that the certainty of knowing the value of an international permit at the time of purchase will outweigh the relative loss of flexibility.

Option three is preferred by the LSE’s Grantham Institute, who argues that charges must be calculated at the date of surrender to avoid gaming or perverse incentives. However, critics suggest that this approach makes it too difficult for investors to achieve certainty. Finally, supporters of option four suggest that this approach would provide the most flexibility while giving companies certainty.

Beyond the disagreement about the particular models, many businesses used the consultation to attack the cap on international permits. Businesses such as Santos have argued “that a surrender charge is neither environmentally effective (as the extra money paid for the surrender charge does not directly assist in reducing global greenhouse emissions), nor is it economically efficient (as the surrender charge in essence is a further transaction cost)”. BP takes their criticism even further, saying that the Australian approach threatens the very legitimacy of international units, bombastically labeling the cap a “trade protectionist mechanism” that will impede lowest cost abatement.

International offsets bring international problems to Australia

This reliance on international permits – even capped at 50% – raises several important unresolved questions that Australia will have to face if it is to make significant carbon reductions.

Firstly, a number of questions remain about the veracity of CDM reductions. CDM evaluator LambertSchneider suggests that many CDM projects are not actually additional to what would have happened without CDM funding. While Durban went some way to addressing these issues, there is still a long way to go before CDM issues are resolved.

Secondly, the level of reliance on international permits suggests that the carbon price will make a limited contribution to the government’s aim of driving clean energy investment in Australia. Climate Change Minister Greg Combet said that the floor price “will give businesses certainty to plan ahead and start the investment to transition our economy to a low-carbon future.” However, the reliance on international permits will mute the impact of the carbon price on clean energy investment.

This is compounded by the government’s silence on the level of international permits that will be allowed after 2020. If Australia is serious about meeting its ambitious long-term 80% reduction targets then industry will need a far more secure basis to make long term investments in renewable energy.

Finally, the low global carbon price continues to present the government with a significant political challenge. While international carbon prices are significantly lower than the Australian price floor, business will continue to argue they are being asked to pay too much for international carbon permits. Without a robust international agreement with strong carbon markets across the world, Australia prices will continue to look onerously high.

The devil was always to be in the detail

The conflation of policy goals in an insecure global environment makes it profoundly difficult to establish a scheme with sufficient certainty and ambition whilst achieving lowest cost abatement. Australia’s long term carbon reduction goals will require a profound change in energy mix, and this can only happen through changes in Australia.

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