<a href="http://www.greenlifestylemag.com.au/blogs/leon#">The Business of Green</a>

The Business of Green

Money matters in the green world, by Leon Gettler.

Why a low carbon price is bad economics

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In recent weeks, we’ve no end of complaining from business leaders about the $23 a tonne starting price on carbon. It’s too high they say.

The Australian Industry Group that $23 a tonne is way higher than what’s offered in other markets, like in Europe, and it should be $10. Basically, it’s saying that business can’t afford it.

We’ve also seen the Business Council of Australia (BCA) has called for the $23 a tonne price to be scrapped, and the price set at $10. "It is clear there is a substantial gap between the international permit price and the starting price in our fixed-price period, and this is a concern for the competitiveness of Australia's industries and the impact this might have on our economy," BCA chief executive Jennifer Westacott said.

This was echoed by economist Warwick McKibbin who wrote a piece in the Australian Financial Review saying that anything over $10 doesn’t make sense when the price varies around $6 to $9 per tonne overseas. He says that would see Australia introducing a carbon price between three and four times the world price.

Of course, Opposition leader Tony Abbott has told Radio 6PR that $23 a tonne is just unrealistic.

All of this is dumb economics. It won’t help address climate change by encouraging investment in renewable energy. The carbon price has to be at $23 for a very good reason.

As Giles Parkinson points out, the price in Europe is low and it’s collapsed. But because it’s so low, it’s discouraged investment in low carbon technologies. The low price locks investment into high emitting sectors, simply because the higher emissions provide a better return.

“The hounds are at it again,’’ Parkinson says. “The country’s biggest business groups, vested interests, the Opposition and mainstream business commentators are all calling for complementary green schemes to be dumped. Rescind the renewable energy target, can the Clean Energy Finance Corp, and – while you’re at it – dump the carbon price too, or at least cut it to $10 where it’s small enough to be inoffensive. As usual, these arguments are only ever justified if you either don’t believe in climate change, or, like Bill Gates, you believe that the only way to solve the problem will be through some sort of geoengineering – like sticking giant vacuum cleaners in the sky or deploying massive sun shields above the Earth. The push for a low carbon price is counter-productive – and short-termism at its worst. It will almost certainly lead to greater costs in coming years. As numerous economists – from Stern to Garnaut and the IEA’s Fatih Birol, and now the RBA’s Jillian Broadbent point out – the greater the effort now, the cheaper the task of abatement will be in the long term. But that message is a hard sell in the world of the political sound-bites and tabloid headlines. Europe, the world’s carbon pricing guinea pig, is now finding this out at its own cost.”

Furthermore, the Australian price is likely to be reflected overseas with Climate Change Minister Greg Combet negotiating a regional ETS which will take in China and South Korea. More will join.

Why $23 a tonne? It’s pure economics. The best driver of investment in low emission technologies comes from a solid price.