Carbon Price on the Table, Alongside Food

Australia’s Prime Minister says (finally) that dealing with a price on carbon was not only necessary to cut carbon emissions pollution but to provide business with “the certainty they seek” and to stay in step with the rest of the world. But a member of Julia Gillard’s high level climate change committee, Independent MP Tony Windsor expressed concern about the impact a carbon price would have on the cost of food. Others want Government to consider a “hybrid” carbon scheme.

Sid Maher in The Australian (28 September 2010):

KEY independent Tony Windsor has expressed concern about the impact of a carbon price on the cost of food.

Mr Windsor has joined Julia Gillard’s top-level climate change committee.

As the Prime Minister announced she would chair the committee herself with “all options on the table” to find a consensus – including a carbon tax, an emissions trading scheme or a hybrid of both – Mr Windsor said the impact of a carbon price on food prices was at the top of his concerns.

“We have to make sure that we don’t start to change land use away from food production,” Mr Windsor said.

He said a carbon price could make the creation of carbon sinks or the growing of biofuels more profitable than food production and this would have to be factored in to any carbon pricing regime. With the government holding a one-seat majority, Mr Windsor’s ultimate position will prove pivotal to the government’s success.

Ms Gillard yesterday unveiled the long-awaited climate change committee, naming Climate Change Minister Greg Combet and the Greens’ Christine Milne as co-deputy chairs. Mr Windsor and Greens leader Bob Brown were also named as members.

But the committee, which will meet monthly until the end of next year, is unlikely to debate the government’s emission-reductions targets of a 5 per cent cut from 2000 levels by 2020 despite the Greens pushing for higher cuts, and will focus instead on the carbon pricing mechanism.

Ms Gillard said the committee would start from the position “that a carbon price is an economic reform that is required to reduce carbon pollution”.

Under its terms of reference, the committee’s deliberations would be “broadly limited to the issue of a carbon price” and its deliberations and papers would remain confidential.

Ms Gillard said the committee would be advised by a four-person panel: the author of the climate change report to the Rudd government, Ross Garnaut; executive director of the Australian National University’s Climate Change Institute Will Steffen; director of consultants Port Jackson Partners and adviser to the Business Council of Australia on climate change Rod Sims; and KMPG partner and social inclusion expert Patricia Faulkner.

Professor Garnaut would be invited to update his climate change review, and the panel would consider the findings of an expert body that is calculating the carbon price equivalent measures undertaken by other countries.

Government sources said last night that some papers were likely to be released.

There will also be two round tables to discuss a price on carbon: one for the business community and the other for environment and non-government organisations.

Ms Gillard said dealing with a price on carbon was not only necessary to cut carbon emissions pollution but to provide business with “the certainty they seek”.

“Dealing with the question of pricing carbon is also necessary so that we stay in step with the rest of the world,” Ms Gillard said.

“The global economy has already begun to shift to a low-carbon economy and if we fail to act on a price on carbon pollution, we run the risk of falling behind.”

Her comments came as nuclear energy advocate and former Telstra boss Ziggy Switkowski said he wanted Ms Gillard to introduce a carbon tax to force up electricity costs. Mr Switkowski said in Adelaide a carbon tax would spark debate about increased energy costs, and raise awareness about the benefits of cleaner nuclear power.

The climate change committee will hold a public forum of experts in Parliament House and consider whether to proceed with the Citizens’ Assembly on Climate Change, promised by Ms Gillard during the election campaign but heavily criticised.

Ms Gillard said the Coalition would be invited to provide two members to the committee.

But last night, opposition climate change spokesman Greg Hunt attacked the committee’s secrecy, saying the Coalition would not participate in it.

He said the Prime Minister had used a hung parliament to break “a bedrock pre-election promise”.

“Ms Gillard today also confirmed a prerequisite for membership of this committee is a belief-test in some form of carbon tax. The Coalition rejects this,” he said.

Climate Institute chief executive John Connor said the committee was “well-rounded”.

Source: www.theaustralian.com.au

Commentary in The Age by John Daley, who is chief executive, and Tristan Edis, a research fellow at the Grattan Institute. (24 September 2010):

A mix of ”cap and trade” and emissions taxes is needed to do the job.

Imagine you could only sell your house by auction, but weren’t allowed a reserve price. Doubtless auctions would be more exciting, with buyers hoping for a bargain. But it is also likely that house prices would fall. Many people would fear to invest in housing in case they sold on a bad day.

Energy investors face the same issues with carbon pollution prices, even if the price tags are bigger. Investors in less polluting energy – such as gas, wind and solar power – worry that the carbon price may turn out to be too low. If it is, they won’t make enough to justify investing.

That is why the debate about carbon pricing has turned to “carbon taxes”. Taxes provide more certainty of making a profit on energy investments. However, unlike the “cap and trade” policy proposed last year in the Labor government’s carbon pollution reduction scheme, carbon taxes provide less certainty of big enough cuts in emissions.

A hybrid scheme – a trading scheme with a floor price, a bit like a house auction – would be the best of both worlds. It would reduce uncertainty and, ultimately, the costs of cutting carbon pollution.

Carbon pricing is a key issue when building new power stations. Major private sector energy companies in Australia are not seriously considering building coal-fired power stations in eastern Australia, and banks aren’t likely to be keen to lend money for such projects, either. Instead, they are planning lower-carbon, baseload power stations using gas.

This is exactly the point of carbon pollution prices. We need these new power stations to keep up with rising energy demand and ultimately replace high-pollution power stations such as Hazelwood. But it only makes sense to invest if gas-fired generators cost less to operate than coal-fired generators (including paying for carbon pollution).

A “cap and trade” scheme caps the maximum amount of carbon dioxide that can be emitted each year. Polluters need to buy a permit for each tonne they emit. If there are fewer polluters than permits, then permit prices can crash.

This has already occurred with environmental permit trading schemes in Europe and the US, and with Australia’s three existing trading schemes. Unlike normal markets, the supply of permits is fixed by the government, and does not reduce with lower prices.

A simple levy on carbon pollution gives investors more confidence. It becomes cheaper to finance new power stations, and ultimately consumers pay lower electricity prices. Companies that emit carbon pollution directly, such as chemicals manufacturers, think the same way – with more certainty, they will be quicker to invest in their plant to reduce emissions.

The problem with a levy is that it does not guarantee how much carbon we emit. Trading schemes also cushion the economy during recessions: when the economy slows, emissions fall and carbon prices fall.

The best solution may be a “hybrid” scheme, where for each tonne of carbon dioxide emitted, polluters must both pay a levy and purchase a permit.

In effect, this sets a floor-price for carbon emissions, something like the reserve price in a house auction. It creates more certainty for the builders of power plants, and businesses investing to reduce their direct emissions.

A hybrid scheme would fit with policy around the globe. The European and British schemes appear to be moving towards hybrid designs. The legislation proposed in the US Congress also looks like this.

Established coal-fired generators have the most to lose from a hybrid scheme. Without a floor price, new power generators are slow to invest, electricity prices rise, and existing coal-fired power stations make higher profits. The whole community pays the cost.

At best, a hybrid scheme will reduce emissions like a cap and trade scheme, but at lower cost. Efficient investments will be made earlier. At “worst”, a hybrid scheme might result in Australia cutting carbon emissions by more than we intended. By definition, we would only be paying a cost that we were prepared to pay.

Given that Australia has the highest per capita emissions in the OECD, we can probably afford to overshoot. A hybrid scheme would be the best of both worlds. Just like it is for house auctions.

Source: www.theage.com.au