The Greens’ renewable energy fantasies go up in smoke
Greg Combet announced on Tuesday that the Labor Government would abandon a floor price of $15 for the Emissions Trading Scheme scheduled to begin on 1 July 2015.
That is the day earmarked for the Australian ETS to replace the carbon pricing mechanism, commonly known as the carbon tax, which started on 1 July this year.
The success of the switch to the ETS was always dependent on there being an international market for emission permits. If there isn’t one, then the carbon tax will continue.
The only really major current trading scheme is the EU ETS. So what the Gillard government has done is negotiate entry into that scheme from 1 July 2015.
The EU scheme doesn’t have a floor price so Australia could not join without abolishing its floor price, especially if, as is likely, that price will be well above the market price in the EU ETS.
The EU ETS is hardly a success. In the first years after its introduction CO2 emissions rose.
Emissions began to fall when the GFC hit. The EU ETS didn’t cause this; the lack of demand and production did.
The carbon price in Australia under the carbon tax is currently $23 per tonne of CO2 emissions and will be about $25 by 2015 under the automatic indexing in place. Treasury predicts the international price will be about $29 then.
Moving to an ETS in 2015 without the proposed floor price of $15 means the price will be set by the global market.
Since the only market we will be in is the EU ETS, the price of permits will be the European price, influenced by Australia’s market contribution (tiny) to the price.
As Climate Change Minister Greg Combet put it: “From 1 July, 2015, Australia’s carbon price will effectively be the same as that that operates in our second largest trading bloc.”
That current EU ETS price is $9.80.
The carbon price here in Australia at the end of the 3 years of the carbon tax will be about $25 under the current escalating price mechanism in place under the tax.
If EU prices don’t recover then it means Australian companies can pay around $10 per tonne of CO2 emissions to pollute under the EU ETS scheme we will be part of rather than the $25 they will in 2015 before the transition to the ETS.
Even the current carbon tax prices in the twenties are too low to drive a large scale move to renewables.
That would need, according to the Greens in their more honest days about this, a price of over $70 to move to wind and over $100 to make it competitive to move to solar.
At $10 per tonne of CO2 emissions nothing will change.
So a rational polluter might bet that European and hence Australian pollution permit prices will be around $10 per tonne in 2015 and thus not begin any expensive program to move to renewable energy because that price doesn’t make renewable energy cost effective and second they can bear the short term higher carbon tax price by passing the extra costs onto consumers.
Indeed if the permit price drops in 2015 from the mandated $25 or so here to an EU market price of say $10, then the bosses will reap a benefit because you can bet your bottom dollar the big polluters won’t drop their prices because of the fall in the price of permits.
But hang on says the Government, and the Greens, the price in Europe will be higher in 2015.
This presupposes the European economy improves over time rather than deteriorates.
The word domino when linked to Greece, Portugal, Spain, Italy, France and Germany might cause some concern abut whether that will happen. Add in a slowing Chinese economy and the prospects for a high carbon permit price in Europe in 2015 appear low.
Other factors at play here are an oversupply of permits by national authorities, market manipulation and price volatility. The EU ETS price collapsed by 50% in 2006 and to zero over the next 12 months.
Thomson predicts that the price of the permits in 2015-2016 will be four euros as a consequence of oversupply. That is about $5.
The Bloomberg New Energy Forecast forecast is that the EU ETS will be $12. If the Eu takes drastic action to reduce oversupply, the price may rise to $20. It is a big if, and even if it happens $20 a tonne is hardly an earthshaking price to produce a shift to renewable energy. It locks in fossil fuels.
Certainly the Gillard government abolishing the floor price of $15 indicates they thought that that figure of $15 would be too high in 2015 to allow entry in the EU ETS because the actual EU ETS price would be lower than that.
Australian polluters can begin to buy international permits now. They will be limited to only being able to use international permits to offset half their liability. There are UN permits available from developing countries and their price is currently $4 a tonne. Australian companies will be able to use them to offset up to 12.5% of their liability, which means they can use EU ETS permits at say $10 per tonne in 2015 to offset 37.5% of their liability.
Given the Australian ETS permit price will be set by the EU ETS permit price the other 50% will be Australian permits purchased at the EU ETS price, in this example $10, making the effective price about $9 per tonne of CO2 emissions.
It gets worse. UBS estimated that the EU ETS to 2011 had cost $287 billion and had no discernible effect on reducing emissions.
It concluded the money would have been better spent on targeting polluting industries specifically. Or who knows, investing in renewable energy to save the planet? Gee, what a novel idea.
The Australian government’s decision to abandon a floor price is the cost of it entering the EU ETS.
The abandonment of a floor price is a political, not an environmental, decision. It means the Gillard government can say we are on track to be part of a global market in permits, although that market will do little or nothing to reduce greenhouse gas emissions if the price remains low.
At $10 per tonne there will be no move to gas, let alone renewable energy, now or when the Australian market joins the EU ETS.
At a possible worst case scenario of $5 per tonne the effect will be negligible. It will be (polluting) business as usual.
On top of that the loss in government revenue based as they are on predictions of a price around $29 per tonne in 2015 will be huge. The increased Budget deficit will be paid for by cuts to public services.
I may be wrong. Phase III of the EU ETS might fix up all the problems and produce a price close to $30 per tonne. Pigs might fly too.
The neoliberal Greens have sold us yet another market dud.