On Australia’s Green/Left policy train wreck:
“WHILE last week’s backflip by the government on the removal of the carbon pricing floor was broadly welcomed by those facing the prospect of paying the world’s highest carbon price, this most recent change in policy direction lays the foundations for more problems down the line.”
Greg Combet justified the move by saying that it was important to link the Australian carbon pricing scheme to the European scheme and other emerging trading mechanisms. But the fact is this kind of trading was already allowed under the existing arrangements.
So why remove the floor price? One sensible reason could be to reduce the costs of cutting emissions for Australian businesses and consumers. But the problem with admitting this is that it would imply lower government revenues and further undermine the government’s promised budget surplus.
The government’s spin on the backflip was to deny carbon prices would be lower despite knowing full well that informed stakeholders believe the opposite. When Combet was asked whether he thought the Treasury modelling showing a $29 a tonne carbon price in 2015 was overegged, he rejected the claim, stating that he had full confidence in Treasury’s predictions.
But if the carbon price really is going to be $29 a tonne, why do you need to remove the price floor? Indeed, leaving the floor price in place would give investors in low-emissions technologies greater confidence to make long-term investments — the very argument the government made for imposing the floor. None of the government’s position on this matter makes sense and reminds me of something that economist John Kenneth Galbraith once said: “It is a far, far better thing to have a firm anchor in nonsense than to put out on the troubled seas of thought.”
If the government had thought this through it would realise that its removal of the carbon floor price lays the foundations for further policy backflips.
Reductions of carbon emissions will come largely from investment in new technology, mainly from investment in new electricity generation technology.
This new, cleaner technology is more expensive than existing technology. The idea of the carbon tax is to swing the economics in favour of cleaner technology. If the tax is not sufficiently high to achieve this switch, investors will not make the investment necessary to reduce emissions.
The issue in Australia is that coal generation is much cheaper than gas generation. But gas generation is much cleaner. It takes a fairly big carbon price (more than the $23/tonne that prevails at the moment) to swing the economics in favour of gas generation. A carbon price lower than $23 a tonne will mean Australian coal generators will remain viable for many years and gas generation will remain out of the money, renewables even more so. This will mean little to no investment in clean technology will occur in Australia because of low European prices.
That would be OK for business if they could get all their permits from Europe. But the government’s scheme restricts the share of permits that could be acquired from overseas.