In approximately 1000 -1200 words, describe the carbon policy for a jurisdiction of your choice. Including..
1) The coverage of the carbon policy. Discuss the sectors/fuels covered. Discuss, what sectors/ carbon equivalent emissions are exempted. How does the policy implement over time? Use the information about the policy’s coverage to inform an evaluation of the cost-effectiveness of the policy.
2) Discuss distributional effects of the policy. One of the primary concerns around a carbon policy is that by raising the price of energy it disproportionately impacts the poor. How do these policies address such distributional concerns?
GOAL: The Australian government has set a national target of 5% greenhouse gas (GHG) reduction from 2000 levels by the year 2020, and 80% reduction of GHG by the year 2050.
Policy Origin, Goals and How It Works
The Australian Senate formally approved to the government’s Clean Energy future plan, which is designed to reduce greenhouse gas emissions and transition Australia to a clean energy economy on November 8th, 2011. The plan consisted of four main components: renewable energy, energy efficiency, land management and most importantly, carbon pricing, which is also the core of the plan. The purpose of carbon pricing is to provide long term certainty and encourage business investment in clean energy activities.
The carbon pricing mechanism officially began on July 1st, 2012, and it covers approximately 60% of the emissions in Australia. The pricing mechanism is implemented as an Emission Trading Scheme (ETS) rather than a carbon tax, and a cap- and- trade model will be used to set the numbers of permits allowed for greenhouse gas emission. The mechanism is divided into two stages; a fixed price phase followed by a flexible carbon price phase.
Two Pricing Phases – Fixed and Flexible
The scheme starts out with a fixed carbon price for the first three years. In year one, emitted carbon is paid at a cost of $23.00 per tonne, increases by 5% to $24.15 in year two, and finally raises with inflation to $25.40 in year three. There will be no cap during the fixed price phrase, which means an unlimited amount of permits are issued by the government at those fixed prices. The use of temporarily fixed carbon price scheme allows a better management of introduction to carbon pricing to liable entities.
At the end of the fixed price phase, the carbon pricing mechanism will automatically move to the flexible price emission trading phase on July 1st, 2015. The price cap scheme will be used to set the supply of permits, while the market will determine demand and price. For the first three years of the flexible period, a price floor and ceiling will be implemented to avoid price fluctuations. The price floor is set at $15.00 in the first year (2015-2016), increases to $16.00 in the second year (2016 – 2017), and further raises to $17.05 in the third year (2017 – 2018). The price ceiling, which will be determined by May 31st, 2014, is going to be set at $20.00 above the expected international carbon price in year one, and raises in real terms by 5% each year for the last two years. The price floor is used to avoid hasty price falls, whereas the price ceiling is to eliminate rapid price spikes. In general, both price floor and ceiling are designed to ensure price stability during the first three years of the flexible price phase.
Although there is no binding global agreement, New Zealand, 10 U.S. states, and 31 European countries all have emission trading schemes implemented already. By July 2015, after Australia carbon price mechanism enters the flexible phase, it will be linked to the international carbon market. As a result, Australia’s carbon price will follow the global price more.
Permit
Carbon permits are considered as personal properties. Each emission permit allows the owner to emit one tonne of carbon. Since there is no cap on emission during the first period, unlimited number of permits will be issued by the government at the fixed price each year. Carbon units for the flexible period will be auctioned in advance during the fixed price period. Permits obtained during the fixed price period cannot be traded, sold or banked, but they are allowed during the flexible price phrase. A number of free carbon units will be given to the businesses engaged in emissions intensive trade exposed activities.
Coverage of the Carbon Pricing Scheme
There are six main greenhouse gases that influence atmospheric temperatures, and the carbon pricing scheme only applies to four of the six: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), and perfluorocarbons (PFC); the last two gases, sulphur hexafluoride (SF6) and hydroflurocarbons (HFC) are not covered. The carbon pricing scheme only includes direct emissions of the applied greenhouse gases.
The government identifies the sectors and businesses that are the biggest direct polluters to pay for their pollution under the carbon pricing mechanism. Sectors covered by the scheme are stationary energy, industrial process, waste, fugitive emission, emissions from non legacy waste, transport fuel, and heavy on road transport. Businesses within these sector that emit more than 25,000 tonnes of carbon will be included in the scheme, and an estimation of about 500 businesses meet the emission threshold to pay a price for their carbon emissions. Agriculture sectors, fisheries, and forestry lands are not covered by the mechanism. Emissions from sectors that are not covered by the mechanism are indirectly addressed through existing taxes and levies. Also, politically sensitive sectors are left out of the pricing mechanism.
Cost Effectiveness of the Policy
Implementation of the plan is expected to cost the Australian government AUS 4.3 billion over a four year period, and the cost is going to exceed the amount of revenue generated. Most businesses have to apply carbon lens across all activities, which means that they will have to thoroughly understand the new risks, volatilities and uncertainties that arise from carbon pricing, and approach them in a thoughtful manner. In addition, the carbon price the businesses have to pay will be passed onto the consumers. The Australian Treasury model has modeled an increase in household cost of $9.90 per week. As well, the carbon price mechanism will add 0.7% to the consumer price index in year one. It’s also predicted that with carbon pricing, annual gross domestic product growth will be 0.1% slower than without carbon pricing through to 2050. Hence, opposition politicians see the mechanism as complex, and costly. According to some, it will drive up prices, threaten jobs, and result in little environmental change.
Nonetheless, the treasury modeling still shows a strong growing economy with the carbon price in place. A household assistance package is set up by the government to lower the impact on households. In fact, over half of the revenue created from the carbon price will be returned to low income households through tax relief and better family benefits payments. Moreover, assistance will also be given to different sectors in order to assist them with the impact of carbon pricing, and to increase job opportunities in exposed sectors.
To conclude, I think it is prominent that the carbon pricing mechanism is worth its price, despite the high cost both the government and the liable entities have to pay, the benefit will eventually exceed the cost in the long run.
Reference
http://www.bakermckenzie.com/files/Uploads/Documents/qrg_australia_proposedcarbonpricing_sep11.pdf
http://www.c2es.org/docUploads/Australia_Pricing_Mechanism.pdf
http://www.growcom.com.au/_uploads/42952AH11019_Final_Report.pdf