Is $23 per tonne the right price for Australia?

Next week the carbon pricing mechanism gets going in Australia, starting at a fixed price of AU$23 per tonne of CO2 in the first year, but later on shifting to a full cap-and-trade (probably around 2015). Early on the system will behave more like a carbon tax, in that the government will make available as many allowances as are required at the fixed price, but the infrastructure for the market based system will begin to appear, i.e. allowances, registries, compliance by surrender of allowances etc. A full description of how the Australian Carbon Unit works (the allowance) can be found here.

Apart from the side issue (although not so for some) as to whether Australia should be acting to reduce emissions, the debate has now shifted to whether or not the selected price of $23 is the right one. Many argue that as the “prevailing global price” of carbon is much lower, then Australia is out of step and therefore undermining its own competitiveness. The call seems to be for a price closer to $10, rather than $23.

The problem with this argument is that there is no prevailing global carbon price. Rather there are pockets of carbon pricing in many different jurisdictions. The largest of course is the EU, where the price is currently €8, low by historical standards. But this is a market responsive mechanism and has traded as high as €30 back in 2008 to €6 very recently. In Australian dollar terms, the high coincided with an exchange rate of $2 per €, so the price briefly touched AU$60. The average cost of compliance for Phase II of the ETS (i.e. 2008-2012), assuming purchasing throughout, has been very close to €17. The average exchange rate over the same period has been about 1.5 $/€, so that cost in Australian dollar terms is $25.50. As little as a year ago the ETS price was €15 at an exchange rate of 1.35, or just over AU$20, but the move down started shortly after that. There is something of an upward trend underway at the moment, perhaps in response to moves by the European Commission to support the market through backloading or a set aside of allowances. A look at the forward prices for EU allowances shows a 2020 contract at about €11-12 per tonne of CO2.

Other jurisdictions show variability as well, but in a different way. Canada does not have a Federal carbon pricing scheme, but provinces are beginning to act. Resource heavy Alberta has had a baseline and credit system up and running for a few years now which imposes a carbon price of CAN$15 per tonne on industrial emitters. British Columbia has had a carbon tax in place for some time, which is currently at CAN$25 per tonne, but rising this year to $30. This is about the same in Australian dollars.

The USA currently has two carbon pricing systems, the cap-and-trade system due to start in California in 2013 and the existing RGGI system in the North East States. California allowances currently trade at around US$16-17 (so about the same in Australian Dollars), but the RGGI price has always been relatively low, trading between $2-$4 since 2008. What is not apparent in the USA is the underlying implied CO2 price that will result from the regulatory approach through the Clean Air Act.

A variety of other carbon prices also exist around the world. The UK is introducing a domestic carbon price floor in the electricity sector, initially at £15.70 per tonne of CO2, or about AU$23.55 (at an exchange rate of 1.5 AU$/£). Norway has had a carbon tax in operation since 1991, with the price varying by sector. The average price is about AU$22 per tonne of CO2. In Sweden it is even higher, with the price around $AU100 per tonne of CO2. Switzerland has had a carbon tax in operation from 2008. The current price is up to CHF 36 per tonne, or about AU$37 per tonne.

Finally, there is the one price that could be argued to be global, which is the price of CERs in the Kyoto Protocol’s Clean Development Mechanism. This is currently very low (€4) due to lack of demand from its one main market, the EU ETS.

The price being imposed in Australia is the decision of the government and has been reached on the basis of some objective that it wants to meet. Whether or not this is “right” in terms of emission reductions remains to be seen, but the argument that Australia is “out of line” with the rest of the world is questionable at best. The rest of the world is all over the place, with carbon prices ranging from just a few dollars to over one hundred Australian dollars. On that basis, the Australian price is probably about “right” in terms of starting the system, giving it some grit and getting everybody going. Full cap-and-trade isn’t far off with allowance auctions due to begin as early as 2014, after which a floating price will prevail.