Svetlana German
Fellow
In February the Australian government announced a two-stage plan to put in place a domestic carbon price mechanism. The Gillard government intends to institute a fixed price on carbon for three to five years (essentially a tax equivalent) before transitioning to an emissions trading scheme in 2015. This hybrid scheme represents a novel approach to greenhouse gas regulation, phasing in carbon pricing by starting out as a permit system, and then requiring emitters to purchase permits sold by the government at a predetermined price. The system uses the architecture of a cap-and-trade scheme in order to smoothly transition to a trading scheme within a few years.
The Government proposed that a scheme establishing a carbon price commence on July 1, 2012, subject to the ability to negotiate agreement with a majority in both houses of Parliament and pass legislation this year. However, on April 15 the negotiations suffered a blow when key union representatives demanded an exemption for the steel industry. The Greens party, holding the balance of power in the senate, has stated that this request may be unacceptable to them. Carbon leakage and competitiveness concerns are once again major stumbling blocks to establishing a domestic price mechanism on carbon.
The steel sector, a large exporter, is already under pressure from the high Australian dollar and increased input costs caused by rising prices for ore and coking coal. In response to growing concerns for employment in the sector, The Australian Workers Union demanded that the steel industry be given a complete exemption from the carbon scheme and that there be generous compensation for the trade exposed aluminum, cement and glass sectors.
The compensation to be paid to trade-exposed industries, as well as the starting price for a tonne of carbon, is proving to be the main point of contention with the Greens party. Climate Change Minister Greg Combet challenged the industry, stating that a carbon price of $20 would add just $2.60 to the price of a tonne of steel and refused to exempt steel from the scheme, instead offering a significant level of assistance and compensation.
Countering concerns over competitiveness and carbon leakage will inevitably raise issues of border tax adjustment and free allocation of either allowances under a trading scheme or an initial tax exemption: measures that may be in violation of WTO law. Although the Gillard government initially rejected use of border tax adjustment measures, such a policy tool may now be needed to bring industry and union officials concerned about losing industry sectors and jobs back on board with climate regulations.
Australia has the highest per-capita emissions of all developed countries, at about 19 tonnes per person per year (higher than the United States per-capita emissions of 17.73 tonnes and Canada’s per-capita emissions of 16.19 tonnes, according to the U.S Energy Reform Information Administration). This compares to a world average of about 6 tonnes per person per year, and an average of about 14 tonnes per person per year in other developed countries. In part this is because Australia has avoided the worst effects of the Global Financial Crisis and built its recent prosperity with heavy reliance on coal and other energy-intensive industries. However, according the Garnaut 2008 review, Australia is also set to feel the some of the greatest effects of climate change among the developed nations.
In establishing appropriate mitigation strategy and considering policies aimed at protecting the competitiveness of certain sectors, it is worth noting that at present thirty-two countries and ten U.S. States already have emissions trading schemes. California, one of the largest economies in the world, is due to start emissions trading next year. Other countries, including China, Taiwan, Chile and South Korea, and a number of Canadian provinces, are either considering developing their own systems or already have trial emissions trading schemes in place. Carbon taxes are also in place in Britain, Denmark, Finland, Norway, Sweden, the Netherlands and Canada and under discussion elsewhere, including in the EU, Japan and South Africa. China has a tax on coal, oil and gas extraction in its largest gas-producing province and plans to extend this to all other western provinces. India has nationwide tax of 50 rupees per tonne levied on both imported coal and coal produced domestically, to be used for clean energy development. Even South Africa has released a discussion paper for public comment on a broad carbon tax.
Concern about the economic impact of reducing Australia’s emissions and the implications for industry competitiveness must be tempered by the fact that emission-intensive industries abroad are already operating under a variety of domestic price altering regimes aimed at reducing carbon emissions. Furthermore, analysis by the Grattan Institute shows that adjusting for a high Australian dollar, 95 per cent of thermal coalmines would barely be affected by a $35 per tonne carbon price, while 70 percent of metallurgical coalmines would face little impact from a carbon price. For those mines that might be affected by a carbon price, costs would be eclipsed by the soaring world price of coal – $130 per tonne for the next two years for thermal coal, and at least $220 a tonne until 2015 for metallurgical coal – resulting in higher margins and substantial profits for the mining industry.
At $25 per tonne, annual revenue from the scheme would amount to over $10 billion per year, approximately one percent of Australia’s GDP. The government has committed to the scheme being revenue neutral, returning the revenue to households, industry, and to climate change programs. However, the fiscal costs required to protect industry may also detract from investment in infrastructure, education and research and development. Using free allocation of permits or allowances may help existing producers keep older, dirtier domestic production processes in operation, while making it more difficult for new companies to bring cleaner production to the market.
Revenue from climate regulations, if spent properly, may actually do more to guard against a loss of competitiveness and employment in the long term. To some extent, although initially difficult, job losses may be an inevitable consequence of reduced demand for carbon-intensive goods, which is a key purpose of the price signal. A question arises whether it would be a better to auction all allowances and use the revenue to assist workers transition to ‘greener jobs’ that new investment incentives will create as opposed to aim to benefit shareholders. Auctioned revenue can then offset the distributional impacts of a carbon price through progressive tax policy, reduction in discretionary taxes and permit greater investment in environmental research and development.
These are politically difficult questions, as is the issue of determining the initial starting price for a tonne of carbon. Higher price levels may be needed for large-scale abatement and to generate alternatives to black coal for electricity generation. The Garnaut review recommends a price of $50 per tonne by 2020, in order to ensure a reduction in Australia’s emission levels from around 2015, while current proposals suggest a price of approximately $25 per tonne. How the Government responds to these challenges will be critical in securing the viability of the scheme and its environmental effectiveness.
If Australia succeeds in putting a price on carbon, it will demonstrate that a developed, growing economy, heavily dependent on fossil fuels can adjust to a carbon constrained future and ensure that it can continue on a path of sustainable and environmentally conscious growth.
Svetlana German is an Australian-trained lawyer with experience in relation to energy and climate change issues in both the Australian public and private sectors. She holds an LL.M. degree from Columbia University and is currently a Fellow at the Columbia Center for Climate Change Law.
