Chapter 4
Amendments to the price floor and access to international permits
4.1
As noted in chapter one, to facilitate the link to the EU ETS, the
Australian Government has agreed that it would remove the price floor and
restrict the quantity of eligible Kyoto units that liable entities can use to
discharge their carbon liabilities.
4.2
For the most part, submissions were supportive of the removal of the
price floor and the surrender charge on international units. Several
submissions from clean energy and environmental groups expressed some
reservations about the removal of the price floor, while acknowledging that the
link to the EU ETS is a good alternative mechanism to provide certainty to the
CPM.
4.3
Submissions were sharply divided on the amendments limiting the use of
Kyoto units in the CPM and the introduction of the concept of ‘designated
limits.’ Whereas a number of business and industry groups argued that
sub-limits were inconsistent with the principle of least-cost abatement, other
submissions noted that such limits were necessary to protect the Australian
carbon price from falling too low to drive investment in clean energy.
Removal of the price floor
4.4
For the most part, submissions supported the removal of the price floor.
4.5
A number of submissions argued that the price floor would have
potentially distorted the market, created inefficiencies, and imposed an
administrative burden on liable entities. For example, IETA suggested its
preference was for market-based mechanisms, and the proposed link to the EU ETS
'was a lot more robust than what was previously proposed by the carbon price
floor mechanism.'[1]
4.6
Several submissions suggested that the removal of the price floor
created a measure of uncertainty regarding the Australian carbon price. The
Climate Institute argued that a gradually rising price floor has three
beneficial effects:
1. it
helps deter investment in highly emission-intensive technologies that would
become stranded under the stronger policies needed in the future;
2. it
reduces downside financial risk premiums associated with low carbon
investments, thereby reducing the costs of such investments; and
3. it encourages
investment in low emissions technologies through more predictable price
signals. This brings down their costs through 'learning by doing' and economies
of scale.[2]
4.7
While expressing a preference for an extended price floor, the Climate
Institute acknowledged that a link with the world's largest market (that is,
the EU ETS) was a good alternative, as long as it was combined with strong
complementary policies for domestic clean energy and energy efficiency.[3]
4.8
The Clean Energy Council made a similar argument in its submission.
While the removal of the price floor might reduce certainty for businesses
making investment decisions and ‘potentially lower the incentive for developing
low-carbon technologies,’ linking with the EU ETS is a ‘good alternative’ to
the price floor:
It safeguards the Australian carbon price framework from
future political pressure as repeal will now also mean severing connection to
the world’s largest carbon market. Furthermore, mutual recognition of carbon
units between the two cap and trade systems sends the message that Australia is
not acting alone.[4]
4.9
In its submission, WWF Australia noted that the possibility that there
will be a price significantly lower than the former proposed floor underscored
the importance of complementary clean energy policies, such as the Renewable
Energy Target.[5]
The limit on Kyoto units and 'designated limits'
4.10
Business and industry groups were generally critical of the 12.5 per
cent limit on the use of Kyoto units and the concept of a 'designated limit.' Such
limits, it was argued, are inconsistent with the principle of least-cost
abatement. Mr Dwyer, representing APPEA, underlined this apparent inconsistency
for the committee:
It is certainly the case that the introduction of a possible
range of sub-limits does seem to run against accessing permits as long as they
are credible wherever they may be available. It seems strange to us to
acknowledge that access to international markets is a positive development and
then seek to then arrange ways to constrain that access.[6]
4.11
Mr Morris of the Australian Coal Association made the case that
Australia, as a net buyer of permits, needs to access markets that need to sell
permits. Yet the EU is also a net buyer of permits. In effect, this means that
Australian entities will be restricted from freely purchasing permits from
markets with lower marginal costs of abatement, and this will have the effect
of making the EU carbon price the Australian price floor.[7]
4.12
In addition to the representations from APPEA and the Australian Coal
Association, the committee received submissions expressing opposition to the
limits on Kyoto units or the concept of designated limits from BCA, the Cement
Industry Federation and Qantas.
4.13
Some submissions also suggested there is a lack of scrutiny in the
amendments providing the Minister with the regulatory power to introduce new
designated limits or change existing limits. For instance, AGL Energy suggested
that providing the Minister with these regulatory powers would create
uncertainty, increase risk premiums and thereby adversely impact on investment
in low-carbon projects.[8]
4.14
On the same matter, the Cement Industry Federation suggested the
government enshrine in legislation its commitment to neither introduce a new
designated limit or change an existing limit without three years notice.
Moreover, any such changes should be subject to greater public scrutiny,
including analysis by the Productivity Commission.[9]
4.15
However, both AIGN and APPEA indicated they were satisfied with changes
made to the legislation since the exposure draft was released, which limited
the Minister's capacity to change designated limits with little notice
(although APPEA reiterated that it would prefer the concept of designated
limits to be removed altogether).[10]
4.16
By way of contrast, other submissions argued that it was important to
maintain carefully considered limits on the importation of international
offsets to prevent the Australian carbon price falling too low to drive clean
energy investment. As the Climate Institute told the committee:
If you have no limit on Kyoto units and you have no price
floor then the Australian price would have crashed, and it would have been a
mechanism which we had gone through a whole bunch of pain to implement, which
would not have driven the outcomes that we are already starting to see in the
electricity sector and across the broader economy—that is, reducing emissions.[11]
4.17
Similarly, the Clean Energy Council argued that the limit would ensure
that the Australian carbon price was not set in the Clean Development Mechanism
(CDM) market,[12]
and safeguard against Australia’s carbon price falling too low to encourage
clean energy investment.[13]
4.18
IETA told the committee that the 'fundamental fact' is that Australia
needs to have a 'level of domestic national ambition' for reducing emissions,
and the price of CERs does not align to that level of ambition. Therefore, it
'makes eminent sense' that this is the way we will become linked to EU ETS and
global markets.[14]
4.19
The committee also heard from DCCEE that while greater access to Kyoto
units might help Australia meet abatement targets at a lower cost in the short
term, this would not necessarily produce a least-cost outcome in the period
beyond 2020. That is, unrestricted access to Kyoto units might undermine
efforts to transition to clean energy and meet the longer term target of 80 per
cent emissions reductions by 2050. As DCCEE told the committee:
The objects of the Clean Energy Act include to achieve
Australia's international obligations and commitments—which, within those,
would include our target range for 2020, to contribute to achieving an 80 per
cent reduction in emissions by 2050 and also to encourage investment in clean
energy—and to do this in a flexible and cost-effective way. So if you narrowed
the target range down to 2020 only and you had no concern whatsoever about what
happened after 2020, then access to Kyoto units, which are trading at very low
levels at the moment—if those prices were to continue through that period, it
may have that effect at 2020, but it may not set Australia up very well for the
further emissions reductions that will be required to 2050 or for achieving the
80 per cent the reduction target.[15]
The credibility of Kyoto units and the 12.5 per cent limit
4.20
With regards to the CDM and the CERs it produces, the committee heard
from Professor Frijters that the low price and credibility issues in the CDM
market suggested 'a market in decline.'[16]
4.21
However, the Climate Institute told the committee that while there had
been problems with Kyoto units in the past, the rules have become more stringent
regarding the development of units. It further emphasised the importance of the
Kyoto mechanism in developing the global carbon market and investment in clean
energy.[17]
4.22
In its submission, COzero provided a strong endorsement of Kyoto units,
stating that it ‘believes in the integrity of credits generated through the
Kyoto flexibility mechanisms and the additional social/economic benefits that
many projects bring to developing countries.’[18]
4.23
In contrast to the views expressed by Professor Frijters, IETA argued
that Kyoto units were a 'victim of [their] own success.' The number of units
generated had proven far in excess of what anyone had expected, and with
essentially only one market for these units to be utilised in – that is, the
European Union – the price collapsed as a result of oversupply. The solution to
this problem will come from 'the expansion of other emissions trading schemes
that would be able to absorb those.'[19]
4.24
DCCEE assured the committee that Kyoto units 'are credible and reliable
sources of abatement,' and noted that they are backed up by sound validation
and verification processes. DCCEE further noted that 'the methodologies that
are used to create them go through the CDM executive board, which makes
decisions about the additionality of those methodologies.'[20]
4.25
DCCEE told the committee that the 12.5 per cent limit on Kyoto units is
not related to their reliability or credibility, but instead to the
Government's position that Australia's carbon price should match or be similar
to the carbon price that applies in most other developed countries that are
operating market-based carbon pricing mechanisms. DCCEE did, however, allow
that it was legitimate to raise questions about continued reliance on Kyoto
units 'when the continued existence of those units depends on the international
negotiations and also the extent to which the current price trajectories of
Kyoto units may actually be sustained in the future.'[21]
Impact on revenue
4.26
The committee heard that the Treasury has not amended its projection of
a $29 per tonne carbon price in Australia in 2015-16. Treasury explained that:
...the fundamental assumptions in the modelling...have not
changed in the sense that [the modelling] always envisaged Australia linking to
credible international markets and was essentially a proxy for an international
cost of abatement. I think we would regard the European scheme as the largest,
deepest, most liquid market currently trading, as consistent with those
modelling assumptions that were outlined.[22]
4.27
Treasury further pointed out that because of the volatility in spot
prices for carbon and even futures market expectations, Treasury tends to rely
'on longer term estimates rather than intermittent peaks and troughs that might
come through with the spot market.[23]
4.28
Treasury also pointed out that the:
...fundamental environmental targets and commitments that were
embodied in the Treasury modelling have not changed. The modelling was based on
commitments of 89 countries through the [United Nations Framework Convention on
Climate Change] process to emission reductions by 2020. It assumed a long-term
environmental target of stabilisation of atmospheric greenhouse gases of 550
parts per million. Those assumptions remain valid.[24]
4.29
Professor Frijters expressed scepticism regarding Treasury's revenue
projections. Drawing on projections produced by Deutsche Bank and Point Carbon,
and taking into account the over-allocation of permits in the EU ETS and
reduced economic growth in Europe, he suggested that 'revenue is going to be
something like a third of what has been forecasted.'[25]
4.30
Treasury acknowledged that economic growth in Europe is now projected to
be somewhat slower than predicted at the time of the modelling. However, it was
Treasury's view that what matters for carbon price projections from a modelling
point of view 'is a very long-term outlook for world GDP growth,' and
assumptions about long-term world GDP growth remain valid.[26]
Treasury did, however, acknowledge that these are projections that refer to
'three years into the future with an internationally traded commodity where
there are a lot of variables, so in that sense it is less certain than over the
shorter term when the price is fixed.'[27]
4.31
The Climate Institute pointed out that there is a broad spread of views
on where the carbon price will be in coming years. The Climate Institute's own
view is that the chance of the carbon price being under $10 per tonne by 2020 has
diminished, and it is more likely prices will be in the $15 to $20 by that
time. IETA further suggested that, while the carbon price over the short-term
might not be sufficient to drive sufficient investment in clean energy, a
linked Australian CPM will serve as a mechanism to reduce emissions over the
long term.[28]
The role of the cap in determining Australia's aggregate emissions
4.32
Professor Frijters suggested that the likely low price of carbon under
the arrangement made carbon abatement less likely:
[T]he internal incentives in Australia to reduce carbon
emissions depend directly on the price and, since that will be fairly low, the
local impacts on innovation will be fairly minor as well and there will be
certainly almost no knock-on effect within the European Union because it is
expected that they are just going to sell us reserve permits if we buy any of
them at all and the reserve permits are so enormous they already have three
times more than our total annual usage in reserve permits that there is no
pressure on their internal system from the meagre demand that we might actually
put on their system.[29]
4.33
In response, Treasury made the point to the committee that ultimately it
is not the price of carbon that determines Australian's aggregate emissions so
much as the cap, at least from 2015-16 onwards:
Aggregate emissions are fundamental to the scheme and are
determined by the cap, and to the extent that the cap binds, and we would all
expect it to bind, that determines Australia's aggregate emissions. It is the
reduction in the cap that achieves Australia's emissions reduction target.[30]
Committee view
4.34
The committee considers that the removal of the price floor will help
facilitate the linkage of the Australian CPM to the EU ETS.
4.35
The committee acknowledges concerns expressed by some submitters
regarding the 12.5 per cent limit on Kyoto units and the concept of 'designated
limits'. However, the committee believes that some limit on Kyoto units is
necessary to drive the transition in Australia to a low-carbon economy,
consistent with the objectives of the CE Act.
4.36
The committee further notes that unlimited access to Kyoto units might
create a higher long-term cost to the Australian economy in the transition to a
clean energy future.
4.37
The committee acknowledges the need to establish provisions for the
future introduction or setting of designated limits to, as the Explanatory
Memorandum put it, provide 'flexibility in both setting and changing limits
over time, reflecting maturation of Australia's emissions trading arrangements,
the enhancement of existing links with overseas emissions trading schemes and
the development of new links and international emissions trading systems.'[31]
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