Carbon-Price Future Clouded as Gillard Trails in Polls
Australia’s price for carbon emissions will survive whatever happens in elections due next year, the government says. Power markets aren’t so sure.
Australian electricity futures markets after 2014 indicate doubts that carbon prices will remain in force, according to Westpac Banking Corp. The nation started yesterday charging about 300 of its largest polluters a fixed rate of A$23 ($23.50) a metric ton for greenhouse gases under the law Prime Minister Julia Gillard pushed through Parliament last year. A market-based price is scheduled to begin in 2015.
With a poll showing Gillard trailing Tony Abbott, the opposition leader, by as much as 16 points, her plan to rein in the highest emissions per capita in the developed world may be in jeopardy, even as the law takes effect this week. Abbott is vowing to repeal the levy if he wins office, calling it a “wrecking ball” for the economy in Australia, the world’s largest exporter of thermal coal.
“Abbott’s stance is having a bearing on investment decisions,” Tim Jordan, a carbon analyst at Deutsche Bank AG in Sydney, said by phone. “The fact there are so many ways the election can play out does affect investor calculations.”
Gillard’s carbon price is the government’s main tool for reducing the country’s reliance on coal and meeting its target for a 5 percent cut in greenhouse-gases from 2000 levels by 2020. The levy will be fixed until 2015, when the nation will introduce a cap-and-trade system that lets companies buy and sell a fixed number of emissions permits.
“Those expecting prices to rise unimaginably or the coal industry to die will be getting a shock, because those wild predictions are wrong,” said Mark Dreyfus, Gillard’s parliamentary secretary for climate change. By the time of the election in late 2013, the carbon price will “have been in effect for over a year and the heat will have gone out of the debate,” he said.
Australia, which relies on coal for 80 percent of its energy, will join the European Union, South Korea, New Zealand, seven manufacturing regions in China and states such as California and Canada’s Quebec in adopting emissions trading systems.
The new law creates a new tradable commodity that carries the right to emit one metric ton of greenhouse gases in Australia. While a fixed price on carbon is different than a tax, which is used in some Scandinavian countries, Abbott still dubs it a “toxic tax” that will raise prices in Australia and eliminate jobs as mines are forced to close or relocate.
Gillard’s popularity slid after she backtracked on a pre-election pledge not to introduce carbon trading. When the 2010 ballot saw her Labor party lose its parliamentary majority, she proposed the legislation to secure the support of the Greens party to form a government.
Labor’s primary vote fell 1 percentage point to 30 percent, while support for Abbott’s Liberal-National coalition increased 2 points to 46 percent, according to a Newspoll published in the Australian newspaper on June 25.
“If we win the next election, rescinding the tax will be our first legislative act,” Greg Hunt, the opposition’s climate change spokesman, said in an interview June 28. “It can and will be done in six months. The election will be a mandate on the carbon tax, and we assume a defeated Labor party will recognize this and won’t stand in our way.”
The chances of the U.S., Canada, India and Japan pricing carbon in the next 20 years “are basically zero,” rendering Australia’s plan ineffective in lowering global emissions, Hunt said. The coalition is committed to curbing pollution and will do it through direct action, such as creating a fund to help carbon emitters upgrade equipment, he said.
The Treasury estimates the carbon tax will reduce gross domestic product and employment growth by less than a quarter percentage point in the fiscal year beginning July 1. It will have “no discernible impact” on the nation’s unemployment rate that has hovered just above 5 percent for the past year, Treasury estimates.
The Reserve Bank of Australia forecasts the tax will add a quarter-point to core inflation, currently near the lower end of the central bank’s 2 percent to 3 percent target range, in the 12 months through June 2013.
The Minerals Council of Australia, which represents companies such as BHP Billiton Ltd. (BHP) and Rio Tinto Group, has called the carbon price a “retrograde step” for the country. The mining industry faces carbon costs of at least A$25 billion by 2020, according to the group. It will also be hit by a 30 percent tax on iron ore and coal profits that started yesterday.
Qantas Airways Ltd. (QAN) and Virgin Australia Holdings Ltd., the nation’s biggest airlines, may struggle to pass on costs associated with the tax to customers through higher ticket prices, JPMorgan Chase & Co. said in a note dated June 18.
Not all Australian businesses oppose Gillard’s climate plan. General Electric Co. (GE), Fujitsu Ltd. (6702) and more than 300 other companies signed a statement today that said the carbon price “will assist Australia in remaining globally competitive, and will deliver new industries in clean energy, energy efficiency and low-carbon technology.” Parliament should be encouraged “to support stable, long-term policies” like a price on carbon, the Businesses for Clean Economy group said on its website.
Futures for baseload power in New South Wales, Australia’s most populous state, climbed 25 percent to A$74 a megawatt-hour for the third quarter of this year, according to Australia Stock Exchange data compiled by Bloomberg. Prices in Victoria surged 52 percent to A$87 a megawatt-hour, the data shows.
The government has faced criticism from the Australian Industry Group, which represents the interests of more than 60,000 businesses, for potentially setting its carbon price too high at A$23 a metric ton. European Union carbon allowances this week traded for less than 8 euros ($10) on London’s ICE Futures Europe exchange.
“The fact that the European price, partly as a result of the economic downturn in the area, has dropped doesn’t by any means mean there won’t be quite a substantial rise in coming years,” Dreyfus said in a June 27 interview in the capital, Canberra.
Wholesale electricity markets, although illiquid, indicate there is a 65 percent to 75 percent chance Australia’s carbon laws will be scrapped from July 2014 onwards, Connell Burke, Westpac Banking’s executive director of commodities, carbon and energy trading, said by e-mail.
Baseload power futures for 2014 have declined as the market factors in the probability of a “carbon tax being abolished,” Sandra McCullagh and Benjamin McVicar, Credit Suisse Group AG analysts based in Sydney, said in a May 23 report.
Market doubts about the tax’s long-term future are compounded by former Prime Minister Kevin Rudd’s failure to implement a prior carbon-trading plan, according to Kumar Padisetti, a Melbourne-based partner at Deloitte Access Economics.
Rudd was elected in November 2007 promising to introduce his Carbon Pollution Reduction Scheme. He shelved the plan following industry criticism and resistance in the Senate, and was ousted by Gillard in a June 2010 party coup amid a slump in his poll ratings.
“Once bitten, twice shy,” Padisetti said by telephone. In preparing for the Carbon Pollution Reduction Scheme, businesses “spent a lot of money setting up desks and recruiting people, and they then had to let them go. When they combine that with the opposition’s stance, they see the repeal scenario as a real threat, so they’re deciding to wait and see what happens.”
Support for Gillard’s carbon policy fell 4 percentage points to 33 percent, the lowest level since it was announced, the Sydney Morning Herald said today, citing a Nielsen poll of 1,400 voters taken June 28-30 with a margin of error of 2.8 percent.
“People will now have the opportunity to judge carbon pricing for themselves,” Gillard told Australian Broadcasting Corp. radio today. ‘There has been a hysterical fear campaign from the doomsday merchants. Those claims will be proved false.”
Upon winning government, Abbott would need the support of Parliament’s upper and lower houses to scrap the carbon price, which Treasury forecasts will reap A$24.7 billion in revenue within four years. Without an outright majority in the Senate, Abbott would be forced to dissolve both houses in a so-called double dissolution election to break the deadlock.
“Abbott’s put himself in a bind because he’s been talking so tough that if he doesn’t repeal the carbon tax, he’ll have broken voters’ trust,” said Zareh Ghazarian, a political analyst at Monash University in Melbourne. “If he does, he’ll be risking his government’s financial credibility because that would create a revenue shortfall. And to get there, he may have to hold a double dissolution, which aren’t popular.”
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