Carbon Errors Make Australia Wiser as Gillard Sets Price Record

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Australia is setting the world’s highest price on carbon emissions as it seeks to avoid mistakes made when Europe started the biggest cap-and-trade system seven years ago.

The country of 22.5 million people, with the most emissions per capita among developed nations, will charge almost 300 of Australia’s largest polluters a fixed price of A$23 ($23.15) a metric ton for their greenhouse gases for the year starting July

1. European Union carbon allowances traded as low as 7.87 euros ($9.80) a ton today on London’s ICE Futures Europe exchange.

Prime Minister Julia Gillard is counting on payouts and credits worth about A$30 billion over the next four years to appease Australian business and households facing higher power bills. The climate law she pushed through Parliament last year also allows Australia to reduce its supply of permits to support prices. The cost of European Union carbon allowances plunged to a record low this year after it gave away too many, failing to foresee falling demand because of the recession and debt crisis.

“Europe pioneered this, and the whole point of being a leader is that you are learning by doing, and sometimes making a lot of mistakes,” said Anthony Hobley, the global head of climate change at the law firm Norton Rose LLP who consulted with the EU on the design of its emissions registry and worked on the first emissions-trading contracts in Europe. “Australia has the advantage of being able to learn from those.”

‘Toxic Tax’

Carbon pricing is Australia’s main tool for meeting its target of a 5 percent cut in greenhouse-gas emissions by 2020. The levy will be fixed until 2015, when the country plans to introduce a market-based system. By opting for cap and trade, which lets emitters buy and sell a fixed number of pollution permits, Gillard is endorsing a system that has been rejected at the national level in the U.S. and dubbed “a toxic tax” by Australia’s opposition party.

That criticism isn’t stopping governments around the world from adopting carbon pricing. California, the largest state in the U.S., is scheduled to start a cap-and-trade system next year and link it with the Canadian province of Quebec. Seven manufacturing regions in China are set for pilot trading programs in 2013, and South Korean lawmakers voted to begin emissions trading by 2015.

“The cheapest and most efficient way of reducing carbon pollution is to harness the power of the market, to put a price tag on greenhouse gas emissions that creates an incentive to cut them,” Australian Climate Minister Greg Combet said on June 20.

Price Floor

Australia has built price ceilings and floors into the market-based system for the three years to 2018 to protect against spikes or plunges. These boundaries have drawn criticism from independent lawmaker Rob Oakeshott, a supporter of Gillard who helped her form a minority government in 2010.

The price of Australian allowances may be higher than international credits when the market-based system starts in 2015, posing a risk to investment in the country, Oakeshott said last month, according to the Australian Broadcasting Corp.

Opposition leader Tony Abbott, whose Liberal-National coalition is ahead of Gillard’s Labor government in opinion polls, has said the carbon levy will “act as a wrecking ball across the economy.”

Abbott has vowed to repeal the legislation if he wins a leadership role in next year’s election. He couldn’t rescind the policy before the end of 2014, JPMorgan Chase & Co. said in a note dated June 18.

Europe’s Surplus

Australia will set the annual supply of permits five years in advance. That offers more leeway for adjusting supply than in Europe, which locked in its cap through 2020 more than a decade beforehand and needs member states to agree before any revisions can be made.

This has led to a surplus of allowances that dragged the price to a record low of 5.99 euros ($7.50) in April. While the falling price eases the burden on the more than 12,000 emitters covered in the European program, it works against the goal of discouraging use of coal, oil and other fossil fuels, and provides little incentive to invest in cleaner technologies.

The European Commission, the EU’s regulatory arm, is considering options to improve the carbon market and address the oversupply, while members of the 27-nation bloc remain divided on whether to amend its climate policies. There will be a surplus for the next 12 years unless policy makers intervene, according to a study published June 11 by the Oko Institut for Greenpeace and WWF.

Falling Prices

“Europe can’t easily tighten its emissions cap, and it’s now got a carbon price that is so low that it’s not delivering what it was set up to do,” Seb Henbest, a Sydney-based analyst at Bloomberg New Energy Finance, said in a telephone interview. “That is to provide a price that is high enough to diversify Europe’s energy mix into renewables and other low-carbon technologies from fossil fuels.”

EU carbon permits have declined 41 percent from a year ago on the ICE Futures Europe exchange in London. They settled at

7.97 euros a ton yesterday, compared with a high of 18.27 euros in May last year.

The Australian price of A$23 a ton will increase by 2.5 percent each year, plus inflation, before shifting to cap and trade in 2015. The Climate Change Authority will set the emissions limit for each of the five years through 2019 by May 31, 2014, according to the published plan. The 2020 cap will be set by June 30, 2016, and supply will continue to be set annually from then, five years ahead.

Rising Emissions

“The scheme has about seven years of European experience to draw on, and I think the Australian model picked up key lessons from Europe,” said Tim Jordan, a Sydney-based analyst at Deutsche Bank AG. “The rolling caps on permit supply that have been adopted are a direct learning experience from the European model. It’s a really clever bit of architecture.”

Australia’s greenhouse gas emissions rose 0.6 percent to 546 million tons in 2011, data from the Department of Climate Change and Energy Efficiency showed in April

Australia expects to raise A$24.7 billion over four years after the tax starts in July, the government said in budget documents last month. Electricity prices will climb by as much as 10 percent, or an average of A$3.30 a week per household, according to Combet, who cited treasury modeling.

The government will provide A$9.2 billion over three years in the form of free permits to assist businesses such as aluminum smelting, steelmaking and pulp manufacturing. Power generators will get A$5.5 billion, while consumers will receive A$14.9 billion through tax changes and benefits.

Steel manufacturers, aluminum smelters and other industries facing global competition will pay an average of A$1.30 a ton of carbon when the tax starts in July, Combet said in May. Some companies in this group will get as much as 95 percent of their permits for free, he said.

“Our plan will reduce emissions while supporting economic growth,” Combet said. “Our plan assists households and supports jobs and competitiveness.”