Good oil on carbon trading needed now


NOW there is bipartisan support for the introduction of a market for carbon emissions trading (with both major parties proposing schemes with the same basic "cap and trade" structure), the differences in the detail, the looming election and the absence of any guidance on carbon pricing ought to concern.
While Labor, unlike the Government's taskforce, has nominated a target for reduction of emissions (60 per cent by 2050), neither side of politics has been prepared to nominate the likely price paths for carbon.
The taskforce has said broadly that there should be a long-term "aspirational" emissions abatement goal, an overall emissions reduction trajectory that starts moderately, progressively stabilises and results in deeper reductions over time, and is sufficiently flexible so it can be recalibrated in response to changing circumstances. It wants an emission trajectory that starts "moderately below" business-as-usual projections and establishes a low initial price for carbon before rising over time.
Under Labor's plan, trading would start in 2010. Under the taskforce proposal, the design features of the scheme would not be finalised until 2009, the first caps would not be established until 2010, and trading would not start until 2012.
Under the taskforce vision, current federal and state-based mandatory renewable energy target schemes would disappear. Under Labor's plan, the federal target would actually rise. None of the states appear keen to give up their schemes.
It would be easy to say that the gaps in knowledge of the detail of the schemes don't matter - indeed, that there is no rush to introduce carbon trading into this market at all. As a small but intensely resource-rich nation, carbon pricing has obvious and large-scale costs and risks for national competitiveness with no certain gains. It will have no discernible impact on global emissions and climate change.
Nevertheless, we are now committed to carbon trading and there are risks to be mitigated and opportunities that need to be exploited to offset the economic costs. Having made the commitment, we need to leverage any early mover advantages.
That will be difficult if industry isn't given more precise guidance about the initial caps and can come to some broad conclusions about the likely price paths as soon as is practicable.
If the uncertainty is prolonged - if it takes until 2010, for instance - behaviour and decision-making will be affected.

A carbon-intensive business, such as coal-fired power generation, would be reluctant to invest in more capacity, or invest in already available cleaner technologies, or devote capital to prospective technologies, without some idea of what the likely price path for carbon will be. The obvious response would be to stop investing and milk their existing plants for maximum profits before the carbon pricing regime kicks in.
Similarly, providers of capital to less carbon-intensive technologies, which need the certainty of a carbon price and/or confidence that the mandatory renewable energy target schemes will be maintained to evaluate their competitiveness, will be reluctant to invest unless they understand the likely price path.
It is possible, therefore, that a delay of three or four years in detailing the schemes could be destabilising to both the established carbon-intensive industries, and the existing and prospective industries a carbon price is intended to encourage.
Given the lead times for investment in power generation, for instance, delaying the setting of the initial caps for three or four years could push out the introduction of new, less carbon-intensive capacity into the second half of the next decade.
While it is necessary to conduct a robust audit of carbon emitters to ensure trading of emissions is properly based, it ought to be possible to fairly and quickly set up short- and medium-term targets for reductions in emissions that would establish an initial price for carbon high enough to have some impact without abruptly undermining the carbon-intensive sectors.
Once the obvious uncertainties are resolved, it would be possible to develop a futures market for carbon credits that would provide a price path and signal for investors and technologies.
In Europe, while the first phase of trading has been a disaster, with carbon being priced at minimal levels because of the over-allocations of credits, the next phase opens next year and the futures market is signalling a price of about $33 a tonne - enough to stimulate investment in some of the cleaner technologies. The third phase of the European market will open in 2013, where the market is pricing carbon at about $66 a tonne - which would create radical changes in the competitiveness of carbon-sensitive technologies.
Their market suggests there could be a massive risk that our carbon-intensive exports could eventually be priced out of major markets if they do nothing - and a potentially massive opportunity in areas such as clean coal, renewable energy technologies and in carbon trading itself if we are early adaptors to a carbon pricing environment. That requires early certainty.
bartho@smh.com.au
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