Climate Change Alert: Carbon price of $40 per tonne needed according to Federal report - 20 May 2011

Federal Energy Minister Martin Ferguson has released a report this week which suggests a carbon price of $40 per tonne is necessary to move to the first stage of a low emissions energy economy.

Here, Partner Michele Muscillo and Solicitor Ben Ricketts discuss the findings of the report and how those findings sit with other papers released on the topic.

The report, which was prepared by Deloitte, states that $40 per tonne will allow gas fired electricity to compete with cheap black coal power generators at least on the east coast of Australia. A price of $70 per tonne has been suggested for Western Australia.

The second stage of renewable energy would be for gas fired electricity generation to be replaced by or compete with alternative energy sources such as photovoltaics, wind farms and tidal. However, no price has been suggested for that second stage to occur.

Key climate change adviser Professor Ross Garnaut has previously indicated that a carbon price of between $20 and $30 per tonne would be sufficient. The Greens has argued for a minimum of $25. The mechanism for pricing carbon is expected to be settled by July this year and implemented the year after in July 2012.

The key points:

  • Professor Garnaut has recommended a carbon price of between $20 and $30 per tonne, whilst The Greens (who will hold power in the Senate from 1 July this year) have maintained that a minimum of $25 a tonne is necessary
  • The report released this week indicates that in order for gas fired electricity producers to compete with black coal on the east coast of Australia, a minimum of $40 per tonne will be necessary. However Minster Ferguson has already indicated that $40 is not a starting price, just what is necessary for gas to compete
  • The Price Floor report from ANU (detailed below) states that certainty can be given to businesses and investors by providing a minimum floor price (without necessarily recommending what price) with a mechanism that allows for a tax to be added to the price of carbon permits under an emissions trading scheme

So what is a price floor?

Released by the Centre for Climate Economics and Policy at ANU, the Price Floor report recommends that whatever the carbon price, a floor must be provided to give assurance that the price of a carbon permit will not drop below a certain level. By doing so, certainty would be provided for investors and businesses. This will allow investment in alternative energy sources without the concern that the price of carbon permits will drop unnecessarily low.

The paper, released by Dr Frank Jotzo and prepared on behalf of the Multi Party Climate Change Committee, argues that a floor price will help to manage cost uncertainty, will reduce price volatility and will improve investment certainty for low emission technologies. The paper considers three possible mechanisms for such a floor price (the first two have not been considered acceptable):

  • a buy back by the government (when the price drops to the floor price);
  • a minimum reserve price for auction permits;
  • a further tax on a emissions trading scheme (regarded as the most desirable option).

In an emissions trading scheme, an emitter would have to buy permits and then surrender those permits in order to emit CO2.The mechanism proposed would see a further tax added for each tonne of carbon emitted. The carbon price then becomes the total of the price for the permit plus the extra tax.

For any advice in relation to climate change or carbon pricing please do not hesitate to contact HopgoodGanim Lawyers Climate Change Team.