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Unpacking the Carbon Price Package
9 / 08 / 2012
Despite a relentless campaign by the Federal Opposition that the introduction of the Carbon Price Package would wipe regional towns off the map, and push up food prices so much that a simple Sunday roast would become a thing of the past, the sky hasn’t actually fallen in since the Package’s introduction last month.
ClimateWorks Australia has undertaken a comprehensive analysis of the Carbon Price Package. Their Executive Director Anna Skarbek provides this timely analysis outlining the impacts of the Package, and what more needs to be done in creating a cleaner, more energy-efficient Australia.
The Impact of the Carbon Price Package
By Anna Skarbek, Executive Director ClimateWorks Australia
The Federal Government’s carbon price package has been implemented from 1 July this year. Despite receiving considerable media attention, there is still a great deal of confusion as to how it works, its impact on businesses and households and whether it can deliver the required reduction in greenhouse gas emissions.
ClimateWorks Australia, an independent, not-for-profit research-based organisation, has undertaken a detailed analysis of the impact of the carbon price package. We analysed its impact on Australian businesses, its ability to reduce barriers preventing action on climate change, and the amount of emissions reductions that could be achieved will full implementation.
What we found was very heartening.
According to our analysis, the carbon price package could take Australia three-quarters of the way towards achieving its agreed minimum emissions reduction target of 5 per cent below 2000 levels by 2020, using existing technologies.
In fact, it has the potential to reduce Australia’s domestic greenhouse gas emissions by 124 million tonnes a year – more than double the Treasury’s modelling of domestic abatement achievable through the carbon price alone.
The Treasury modelling indicated that the carbon price would produce domestic abatement of 58 million tonnes by 2020. However, ClimateWorks Australia’s research shows that abatement within Australia can increase to 124 million tonnes when all measures in the package are considered. That’s because the Clean Energy Future package is more than just the carbon price – the carbon price underpins a range of other helpful measures.
How the carbon price mechanism works
To explain how the carbon price package impacts on businesses it is first necessary to understand how the pricing mechanism works.
Contrary to popular belief, the carbon price mechanism is not a tax. Rather, it is putting a price on carbon to create a financial incentive for large emitters to reduce carbon pollution. Instead of being a tax on transactions that must be passed to the Tax Office, it is a requirement on specified organisations whose emissions are large to buy a permit covering each of their emissions. In the first three years, the price of these permits are fixed, starting at $23 per tonne of carbon dioxide equivalent (CO2e) and rising by 2.5 per cent in 2013 and 2014. From 2015 onward, the market will set the price on carbon as we move to an emissions trading scheme in which the permits can be traded. Less than 500 of Australia’s largest companies are directly affected by the carbon price. These are primarily power stations, mines, heavy industries and landfills. Only these organisations are required to buy carbon permits; the rest don’t have any direct involvement in the scheme.
This means that the overwhelming majority of Australian businesses and all households are not directly affected by the carbon price. In addition, the carbon price does not apply to agriculture, and in most cases transport fuel is also exempt.
Under the pricing mechanism the biggest polluters are required to measure their emissions and report them to the Clean Energy Regulator. The Government then issues permits for these emissions. Businesses that emit more emissions will have to buy permits while other businesses that reduce their emissions can make money by selling their permits (during the fixed price period in the first three years, they can sell their permits to the Government for their original price, after that they can sell them to any buyer at a market price). The carbon price mechanism provides an incentive for large emitters to reduce carbon pollution.
Photo by Guillaume Blanchard
How it affects business and households
For other businesses and households, the impact of the carbon price is felt mostly through an increase in electricity prices. This provides an incentive to invest in energy efficiency and cleaner technologies.
Already over the last few years, electricity prices have begun to rise substantially. Large corporations have been seriously looking at ways to reduce their energy bills – there is a lot of scope to change and to improve. Some companies with implemented changes prior to the carbon price have recorded double digit per cent decreases in energy use. This is great for our productivity.
Similarly, the average Australian household can do a lot to reduce their energy bills. There are a number of programs people can access to avoid the increase through more efficient appliances in their homes. Technology is moving rapidly and even the latest large-model fridges are already more efficient and use less energy than smaller ones available just five or ten years ago.
The scare campaign about food prices rising because of the carbon price is also misleading. In reality, the cost of the average basket of goods has risen by less than 1 per cent due to the carbon price because energy is just one factor associated with that basket of goods.
How it affects farmers/ land managers
Agriculture is not subject to the carbon price. However, farmers and other land holders have an opportunity of earning extra revenue by carrying out activities on their land that store carbon (eg planting trees) or reduce the emission of carbon through better farming practices (eg manure management, fertiliser changes). Under the Carbon Farming Initiative, farmers and land managers can sell carbon credits to emitters and earn extra income.
How it overcomes barriers to action on climate change
The carbon price package includes a number of complementary measures that work with the carbon price to overcome key barriers on reducing emissions.
Firstly, the introduction of a carbon price starting at $23 /t CO2e makes some opportunities to reduce emissions more economically attractive. For businesses that are included in the emissions trading scheme, every tonne emitted requires a permit. For these businesses, such as power generators, the carbon price actually reduces the relative cost of cutting emissions. For businesses that can provide offsets through the Carbon Farming Initiative, every tonne of offset earns a certificate, which can then be sold to emitters.
While not all actions are economically attractive at the starting price, there are many actions that are profitable, yet blocked by other barriers. For example, one barrier called a ‘split incentive’ means the landlord has to pay money to improve the energy efficiency of the building, but it is the tenant who reaps the benefit in terms of cheaper electricity bills. In the land sector, barriers to taking action range from market structure, supply issues or limited awareness.
The carbon price package addresses most of these barriers. Indeed, the complementary measures can more than double what the carbon price does alone – making their implementation critical to overall success of reducing Australia’s emissions.
These other measures include financial support such as grants, loans, equity investments or loan guarantees; the dissemination of information and skills; and adjustment to rules and regulations that encourage investment in more efficient technologies.
The complementary measures include $100 million in grants to support low income households to trial energy efficiency measures, about half a billion for farmers to directly test carbon methodologies, $40 million to provide information to small business and community groups and nearly $1 billion to enhance biodiversity.
The package also gives extra help to cleaner power technologies. Most of these are still not economical under the $23/t CO2e starting price, so there are special funds through the $10 billion Clean Energy Finance Corporation to help bring on some renewable and other low carbon energy technologies.
This means across the three important areas of energy efficiency, land and cleaner power, there is the underpinning economic signal of the carbon price, but there are also some targeted measures in a combined package that is now legislated to 2020 and beyond. It will be difficult under Australia’s Constitution and Parliamentary process to unwind this legislation.
With optimal implementation, Australia could make significant progress to reducing its greenhouse gas emissions by 2020.
What else needs to be done?
While the carbon price package potentially significantly reduces Australia’s greenhouse gas emissions; we believe there is more that could be done.
Our research shows that Australia could actually reduce its emissions by 25 per cent below 2000 levels by 2020, using existing technology. Thankfully, the legislation includes a mechanism for review and provides the Australian Parliament with an opportunity in 2014 to increase the 2020 target, based on independent advice from the new Climate Change Authority.
Australia’s first national carbon market is the push we need to kick-start the transition to a more efficient, low carbon economy. History shows that when other markets have been established to achieve environmental goals, markets always do better than governments predicted – the power of private sector innovation and profit motive leads companies to find new and cheaper ways of exceeding government and research expectations.
ClimateWorks is confident that evidence will show Australian companies outperforming expectations. This would see improvements in energy efficiency, carbon farming and cleaner power that help prove that Australia can and should meet the 2020 targets that scientists say we need and our future generations deserve.
- Executive Director of the independent, not-for-profit organisation ClimateWorks Australia – committed to reducing greenhouse gas emissions in Australia.
- Completed degrees in law and commerce and worked as an investment banker, solicitor, in government and carbon markets overseas.
- Former director of The Big Issue Australia and has served on the Board of Amnesty International Australia.