The unprecedented collapse in European carbon prices is shattering Australia’s budget assumptions just as corporate resistance to the market weakens in the developed world’s biggest per capita polluter.
The cost of permits on London’s ICE Futures Europe exchange, fast becoming the benchmark price for Australia as the nation prepares for market-based trading in 2015, fell to a record 2.75 euros ($3.60) a metric ton last month. That’s about 12 percent of the $A29 ($29.50) Prime Minister Julia Gillard’s government was counting on, meaning tax cuts will be deferred and the budget will have to be revised before it’s delivered on May 14, Climate Change Minister Greg Combet said today.
The drop in prices is strengthening the hand of Tony Abbott, a carbon-market opponent who is standing against Gillard in the Sept. 14 election, at a time when governments from California to China are pressing ahead with emissions-trading systems. It’s also making it less expensive for emitters to comply with caps imposed to reduce greenhouse gases linked to climate change.
“Abbott is going to jump all over anything that can be used against carbon trading,” said John Davis, a London-based trader at CF Partners LLP who sells EU permits to Australian emitters. “The plunge in EU prices and the implications for Australia will be very well exploited by Abbott and his team.”
Australia agreed in August 2012 to link its carbon market with the EU system, the world’s largest emissions-trading program. California, which has proposed using as much as $500 million a year in revenue from carbon auctions to build high-speed rail projects, announced plans last month to link with Quebec when its market starts next year.
Gillard, trailing Abbott by 5 points in the latest poll, isn’t giving up on charging more than 300 of the nation’s largest emitters for greenhouse gases linked to climate change. Her Labor government is proceeding with plans to auction permits in 2014 and set pollution caps through 2020.
Courting support from the Green party to discourage the mining and consumption of high-emitting coal, Gillard’s Clean Energy Act introduced a fixed price of A$23 for permits in July 2012. Australia is the world’s second-biggest exporter of thermal coal and discharges more greenhouse gases per person than any developed nation, Combet said, citing figures from the World Resources Institute and International Energy Agency.
The fixed price is set to rise 5 percent a year through 2015 and then shift to cap and trade linked to the EU market. Australia’s latest fiscal outlook assumed a market price of A$29 by 2015, translating to revenue of A$9.4 billion, including the value of permits given to certain businesses.
Budget revisions are inevitable, Combet warned for the first time on April 17, a day after the EU parliament voted in Strasbourg, France, to reject a measure to delay the sale of about 900 million permits to boost prices. The EU is facing a glut of allowances because the recession has cut emissions to levels below those forecast when the limits were locked in.
“The European system to which the government has tied Australia’s electricity prices is now deeply unstable.” Greg Hunt, climate leader for Abbott’s coalition, said in an April 18 speech. Australia has “spent the revenue before it came in the door,” he said in later e-mailed comments.
Allowances for December fell 35 percent on ICE, the most on record, to close at 2.75 euros a ton on the day of the EU vote, compared with 31 euros in 2006. Prices rebounded 22 percent on May 3 after German Chancellor Angela Merkel said intervention in the market shouldn’t be ruled out. They closed at 3.49 euros in London today.
Australia’s carbon permits are set to track the EU price and sell for about A$14 when trading starts in 2015, according to Bloomberg New Energy Finance. It forecasts the possibility of a “large discrepancy” between the government’s fixed rate, set to rise to A$24.15 next year, and the initial auction price.
“The design of the auction mechanism, in combination with the EU oversupply and Abbott’s threat of repeal, may cause the first forward auctions to clear at just $A2 to $A4 a ton,” said Hugh Bromley, a Sydney-based analyst at New Energy Finance.
Lower carbon prices are forecast to reduce Australia’s payouts as well as revenue, Combet said, declining to give specific revisions before the budget is presented. About half of the nation’s proceeds from selling carbon permits are earmarked to help offset higher residential electricity costs, while about 40 percent is intended to finance free permits for companies facing global competition. Nine out of 10 households in Australia claim such support, according to the government.
The government had promised additional tax cuts of A$1.59 a week starting in 2015 to those earning as much as A$80,000 a year to offset the costs of carbon pricing. While those tax cuts will be deferred until carbon prices exceed A$25.40, other household-assistance programs won’t be eliminated, Combet told reporters in Sydney today.
“All household assistance that has been delivered as part of the Clean Energy Future package is staying, even if there’s a lower carbon price,” he said.
While the lower prices are upending Gillard’s budget, they are also making it cheaper for Australia’s emitters to comply with pollution limits. The nation should scrap fixed prices and move immediately to a market-based system, the Australian Industry Group, which represents about 60,000 of the country’s businesses, said in a March 7 statement.
“Australian businesses could be taking advantage of these low international prices through emissions trading,” the group said in the statement.
Support for Trading
The Energy Supply Association of Australia, which represents electricity producers such as Delta Electricity, AGL Energy Ltd., GDF Suez Australian Energy and Origin Energy Ltd. backed carbon trading before global prices plunged.
“Our position has always been that we support lowest-cost emissions abatement, likely through a well-designed, market-based emissions-trading system,” Rebecca Harrison, the group’s Melbourne-based spokeswoman, said in an e-mail.
The prospect of a budget deficit is adding to evidence that Gillard should scrap the climate law, according to Abbott, who pledged a “blood oath” to dismantle what he calls a “toxic tax” on carbon and electricity. Abbott’s coalition plans to axe the Climate Change Authority, which announced last month it will re-examine Australia’s target of reducing 2020 emissions by 5 percent from 2000 levels.
The review will recommend emission caps from 2015 through 2020. A draft report is scheduled for October, regardless of the election results in September, said Anthea Harris, chief executive officer for the authority.
“We are definitely proceeding, regardless of the election,” she said in an interview from Melbourne. “We don’t have a choice.”
Abbott’s coalition supports Australia’s 5 percent reduction target by 2020. Its so-called Direct Action Plan would commit as much as A$750 million to subsidize companies’ spending to achieve that goal.
“It’s a market-based system to achieve the lowest cost to reach the target without subjecting Australia to the volatility of the European scheme,” Hunt said. “The key issue remains that it would leave Australia linked to a system which takes control of electricity prices out of the hands of Australia.”
Australia needs to scrap carbon trading before it does more damage to the budget, according to Abbott. The “conservative figure” for savings from abolishing the business subsidies associated with Gillard’s “carbon tax” is $20 billion over four years, Hunt said April 18.
The opposition’s economic case is losing traction, said Daniel Rossetto, managing director of Climate Mundial Ltd., an adviser to companies on carbon markets.
“Abbott’s arguments are weakened by what we are seeing today,” Rossetto said in an interview from London. “At a point where economies are most vulnerable, the carbon price is also at its lowest.”
Abbott would be “arguing against himself” if he maintains that low carbon prices show the market doesn’t work, Anthony Hobley, head of climate change at Norton Rose LLP in London and president of the Climate Markets & Investment Association, said in an interview last month.
“A plunge in the carbon price as Europe’s economy shrinks makes it more difficult to argue against the Australian carbon pricing mechanism on cost grounds alone,” Hobley said. “The lower price removes one of his key arguments to justify the effort to remove the whole thing.”
Abbott may be leaving himself “wiggle room” to eventually accept a cap-and-trade compromise, according to Davis.
“We agree on the science of climate change, we agree on the targets to reduce emissions and we agree on using markets as the best mechanism,” Hunt said. “But we disagree fundamentally on the carbon tax.”