In a pre-election manoeuvre designed most probably to diminish carbon pricing as an election issue, Prime Minster Rudd has announced details about the plan to move to floating price for carbon permits in Australia one year earlier than planned. See here, here and here for more details. As of 2014/15, instead of 2015/16, the price of CO2 emissions in Australia will be linked to international markets, the largest of these being the EU Emissions Trading Scheme (EU ETS).
The Greens oppose the move and the Coalition disagree with the very notion of pricing CO2 emissions.
But what does it mean to price CO2? In reality, there are three different ‘prices’ that are relevant here, and reporting of this issue as tended to confuse them. So here’s a quick summary.
1. The market price
First there is the market price for carbon permits. As the title suggests, the market price of carbon is simply what the market pays for permits created under emissions trading legislation. The price is largely determined by the supply of and demand for carbon permits. And being so dependent on legislation, demand and supply expectations are largely driven by political outcomes. The most significant of these are the caps on permits that determine the demand for offsets. Market prices are also determined by the availability of offset options. Cheaper offset options, e.g. retrofitting scrubbers to reduce emissions from existing power plants, will compete against more expensive offset options, e.g. building a solar thermal power station.
Recent prices in the EU ETS have been around 5 euros (7 AUD).
2. The social cost of carbon
The social cost of carbon should equal the ‘external’ cost of carbon emissions, the value of the damage done to the atmosphere from emitting a tonne of carbon. By having to pay this cost, it is hoped that market signals readjust to reflect the impacts of climate change caused from continued emissions of carbon. The market price arising from an emissions trading scheme may not result in a price equal to the social cost of carbon because emissions trading is based on the idea of setting a ‘cap’ on emissions, and allowing the market to set the price. This allows for innovation and what is known as least cost abatement.
But social cost of carbon is an important concept. In-fact, this cost was recently – and quietly – increased to $36 per ton in the US.
3. The carbon incentive price
The carbon incentive price (our own term) is the price at which you will see new projects and technologies come online to reduce emissions. In other words, the price at which the new behaviour and/or technology becomes financially viable. This is the price at which consumers may make meaningful changes to behaviour to reduce their energy consumption, renewable energy becomes more competitive with fossil-fuel energy and other sorts of abatement such as carbon capture and storage become viable.
A shift from a price in the $20-30 range down to less than $10 means the incentive price for many abatement approaches may not be viable in the near term. Anecdotal evidence of this can be seen in the announcement today that a geothermal energy company is diversifying into fossil fuel (gas).
So, when you hear about the carbon ‘price’, it’s worth remembering that there are a few different prices that matter for different reasons. Understanding these will help to understand the varied reactions to this announcement.
