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
10 replies on “Australia’s Carbon Pricing Mechanism”
Hi Vicky,
Great summary on our Carbon Price here in Australia. We’ve had the opposition label it as a carbon tax with media running with that title. My company Pangolin Associates has done quite a bit of modelling on the impact and in the services sector seen the impact to be relatively small whereas Australia is already starting to see a reduction in it’s emissions profile. Some of our quotes from last year can be seen here if interested to explore further.
http://pangolinassociates.com/useful-links/media/in-the-news/
Iain Smale, Joint MD, Pangolin Associates
Hi, Iain,
Thank you for reading my blog, and it’s great to hear that Australia is already starting to see the impact of the carbon pricing policy! 🙂
Hi Vicky,
This is very clean and effective writing. It’s easy to follow. I have got a good picture of the Australian cap and trade system after reading your post. It’s very informative. Thanks!
I actually assumed that Australia started carbon pricing long time ago. Maybe I consider it a big country who have well-established economy and industries and logically a significant amount of GHG emissions and thus, would abate or try to reduce the emissions. When I did my research I saw that Australia was the top polluter of CO2 per capita in the world. I was thinking what’s going on with Australia. Now your post has cleared up what I have puzzled at. It’s good to see that they are making a good progress.
The 2 phase pricing is interesting. I think it’s pretty much like imposing a carbon tax per integral tonne in phase 1 with unlimited permits being issued? They cannot bank the permits in phase 1, so they won’t be able to carry over the unused permits to phase 2 and trade…? I guess they would just get enough permits to pollute in phase 1 and probably undershoot which would create a dead weight loss? … It seems to me cap and trade always has something to make itself less efficient than it could be.. I don’t know. Good that we get to learn about the carbon pricing now.
Once again, like the above visitor said, great summary! Thanks!
Hey, Roson,
Thank you for the detailed feedback.
Since I didn’t read about any of the carbon policies in other countries prior to the one in Australia, I naturally assumed that everybody else started their carbon control policies recently. As I was reading our classmates’ blogs last night, however, I realized that Australia is actually really behind on carbon control. Most European countries have started their carbon tax policies over a decade ago.
Yes. Carbon pricing is very much like carbon tax, but the Australian government kept on emphasizing that it’s not a tax. They are similar, but carbon pricing is not the same thing as carbon tax.
Very nicely organized!!!
According to your blog,I belive that Australia is one of the country which imposed carbon policy successfully!! I had read the paper about combined carbon price mechanism and quantity mechanism policy and Australis did it too!!
Thanks for sharing good information!!
P.S. Thanks for your comment 🙂
Hey, Cindy! Thank you for reading.
I agree that Australia is off to a good start with their newly implemented carbon pricing mechanism, but I think it’s still too early to say that it’s successful. I mean it hasn’t even been a year since it officially started. 😛
Hi Vicky,
Your writing is very clear and organized. Australia does have a good carbon policy. In terms of distributional effects, do you think the Australian government has done enough to alleviate the tax burden for low income households? What are the policies implemented on those uncovered sectors? Thanks for sharing! i should start getting my blog more organized and concise like you!
Hi, Vicki,
To answer your questions..the Australian government has set up a household assistance package to lower the impact on households. As well, 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.
For the sectors that are not covered, their emissions are indirectly addressed through existing taxes and levies.
Hope this answers your questions. 🙂
Good article Vicky! I notice that Australia is just like BC, they both have a clear carbon policy. However, Ontario doesn’t have any carbon policy. Do you think it is because Ontario has more factories? They want to reduce production cost?
Hey Peter,
I don’t know if I’ve done enough research on Carbon tax in Canada (both BC and Ontario) to say this, but based on what I read from our classmates’ blogs, I think that while both policies appear to be effective, the mechanisms BC and Australia use are different. BC uses a carbon tax policy, whereas Australia has a pricing mechanism with the involvement of 2 different stages.