Last month, Australia’s Prime Minister Julia Gillard announced her intention to establish a carbon price, likely starting in July 2012, with the possibility of transitioning to a cap and trade system. This climate change policy resulted from the work conducted by the Multi-Party Climate Change Committee (CCC), which Gillard chairs. The CCC was established in September 2010 following the outcome of the 2010 federal election in which Gillard was forced to form a coalition with independents and Green Party parliamentarians in order to form a government. The last time that Australia had a minority government was in 1940.
The Australian government should be congratulated for proposing a policy that puts a price on carbon. The fact is that putting a price on carbon is required if countries are going to reach the 2050 target to limit the increase in global average temperature to below 2 degrees Celsius above pre-industrial levels.
Following the U.N. climate change conference at Copenhagen in December 2009, Australia listed in the Copenhagen Accord its intention to unconditionally reduce its GHG emissions by 5 percent of 2000 levels by 2020, and by up to 25 percent in the event of an ambitious global deal capable of stabilizing GHG emissions at 450ppm. Presumably a carbon price would be a key policy means of achieving its mitigation targets.
The development of Australia’s climate change policy will need to take into account what happens in other countries, not least the U.S. Climate change is a global phenomena and a cap and trade system can reduce greenhouse gas emissions most efficiently. In fact, a cap and trade system is the least costly alternative particularly when there is a global carbon market that allows emitters to trade carbon permits and purchase international offsets from the least cost supplier. But there is uncertainty over the direction of U.S. climate change policy, including the future of cap and trade as a tool for reducing greenhouse gas emissions.
These uncertainties are reflected in the conditions the CCC lists for assessing whether to transition from a fixed carbon price to a cap and trade system. The CCC envisions a fixed carbon price starting on July 1, 2012, with a possible transition to a cap and trade system after 3-5 years, or in 2015-2017. One of the top issues to be considered in deciding whether to transition to a cap and trade system is the state of the international carbon market. Currently the EU is the only entity with carbon trading. This suggests that Australia will wait to adopt carbon trading until other countries follow course. The only other major country that might adopt a cap and trade system in this time period is the United States.
The prospect of the United States adopting a cap and trade system is effectively dead until at least after the 2012 presidential elections. Assuming that President Obama wins, there is a good chance that the Republicans will gain control of the Senate, and assuming they retain control of the House (which seems likely), this will give the Republicans control of Congress. It is always difficult to predict the trajectory of U.S. politics, but even if pricing carbon were to become a priority for Obama in 2013, it is difficult to imagine Republicans supporting such a policy. The visit by Gillard to the United States in March 2011 would have provided a timely opportunity to gauge how the United States plans to reach its 2020 target to reduce greenhouse gas emissions by 17 percent below 2005 levels. It does not appear that climate change policy was on Gillard and Obama’s agenda.
Pricing carbon before other major countries also has implications for the competitiveness of Australia’s trade-exposed, carbon-intensive industries. In fact, Australia is one of the most carbon-intensive economies in the world, and by some measures has the highest per capita emissions. Moreover, some of Australia’s main export markets are in countries such as China, which is not likely to price carbon in the near future.
It is well understood that adopting a carbon price in Australia might cause carbon-intensive industries to relocate to countries that do not, leading to no net reduction in global greenhouse gases while simultaneously harming Australia’s economy. This is the so-called problem of carbon leakage. Concerns about the impact of a carbon price on the competitiveness of Australian industry are reflected throughout the CCC proposal. For example, whether competitor economies have priced carbon and the impact of a carbon price on the competitiveness of Australian industry, are two factors the government will consider when deciding whether to adopt a cap and trade system.
Australia is also faced with the challenge of pricing carbon without the flexibilities for managing cost found in a cap and trade system, such as banking and borrowing, and access to international offsets. When Australia sought to pass legislation establishing a cap and trade system in 2008/09, access to unlimited international offsets was a key mechanism for reducing the costs of compliance. The absence of this cost containment mechanism under a fixed price scheme suggests that the government will set the initial carbon price lower than it would have been under a cap and trade system. This then begs the question whether the price will be high enough to drive greenhouse gas mitigation activity. Moreover, even if the expectation of higher prices is what ultimately counts, the uncertainties over whether Australia will transition to a cap and trade system are likely to blunt the impact that carbon price expectations could have.
The framework of climate change policy outlined by the CCC makes the best of a difficult situation. It will allow Australia to start pricing carbon, to learn about how the economy reacts, and importantly, it will hopefully acclimatize the Australian public to a price on carbon, which should shift the political debate from whether action is necessary to how much is needed. The proposal will also buy time for Australia to see what the United States does before committing to a full-blown cap and trade scheme.