Greg Combet. Energy prices go up, permit prices go down. Way down. (Photo credit: Wikipedia)
ANY business that buys cheap European emissions permits now may find them worthless by the end of the year. Linking emissions trading schemes isn't as easy as the Gillard government makes it out to be.
On Tuesday, Climate Change Minister Greg Combet announced that the government was scrapping the floor price for carbon permits in a post-2015 emissions trading scheme.
The rationale is that it will remove the need for extra complex regulation for Australia's ETS now that it will be linked to Europe's. If the price floor were kept in place it would create a regulatory nightmare for our government as it chased companies to pay the gap between the cost of European permits and the Australian floor price.
With the European Climate Commissioner for Climate Action, Connie Hedegaard, Combet also announced that Australian companies could buy EU permits "starting today". The same doesn't apply to European companies, which won't be able to buy Australian permits for some time.
Combet's clear objective is to get business to forward-purchase permits and make it harder for Tony Abbott to repeal the government's carbon pricing scheme if he is elected to government.
The economic impact of this deal is particularly confusing. The government's carbon price modelling was always flawed.
For example, the Treasury's Strong Growth, Low Pollution modelling assumes nearly two-thirds of Australia's emissions cuts will be achieved by international permits by 2020. Yet the cap will allow only 50 per cent of permits to be sourced offshore. A European linking deal that might halve Australia's carbon price from about $25 to about $12 overnight provides no respite from the great known-unknowns of an ETS's impact, especially for carbon-tax paying businesses.
Ignoring domestic political risks, business should still be very wary of the "benefits" of cheaper European emissions permits.
Europe is playing hardball in international negotiations, making forward-purchased permits potentially worthless.
The Kyoto Protocol specifically stipulates how international permits can be traded and how they can be counted against national emissions targets. But at the end of this year the first commitment period to cut emissions under Kyoto will expire.
Negotiations on if, and how, Kyoto will be extended into a second commitment period, and how international rules over carbon trading will operate beyond this year, are ongoing. Until mid-next week countries are meeting in Bangkok in an attempt to finalise a deal for the future of Kyoto.
December's UN Climate Change conference in Qatar is the definitive deadline to avoid a gap between a first and second commitment period under Kyoto.
Few think a comprehensive Kyoto agreement will be ratified.