A deal to be done?

The finalisation of BCA and AiG’s submissions to the policy process could be a turning point in the carbon debate. A $10/t CO2e carbon price is a fundamentally different position than opposition to a carbon price at any price.  $10/tCO2e, as advocated by the business groups, was the price of the first (fixed price) period under the CPRS, which would currently have been in place if not for a single vote in the Liberals leadership vote in early December 2009. So in effect, if the $10/t CO2e price was to come in on 1 July 2012, it would be two years delay on the CPRS timetable.

We now have a negotiating range for the carbon price and the EITE assistance, and the positions are not too far apart. On price, the government is seemingly towards the lower end of the $20-30/tCO2e range, and the Greens somewhere around $40/tCO2e. On EITE assistance, the government has put forward the CPRS position (90% + 4.5% “global recession buffer” on Scope 1 and most Scope 2 emissions) and the BCA called for 100% assistance (against Scope 1, 2 and 3 emissions) for key industries. This is obviously a more generous position for business than achieved during the CPRS negotiations, but the negotiating dynamics are fundamentally different than 2009 given that the coalition have dealt themselves out of the game (rather than the main leverage point in 2009) and the main negotiating group is the MPCCC including the Greens and the two independents.

What would a $10/t carbon price do? In my view, the answer is not “nothing”. A price of zero (business as usual) sends emissions up to 24% over 2000 levels by 2020. And the price modelled to achieve a 5% reduction below 2000 levels is around the $25/t CO2e mark. So a $10/t CO2e price could be expected to have an impact in between these outcomes: it’s probably insufficient to drive significant abatement, but it is sufficient to move us off a business as usual trajectory. This includes things like not building new coal plant and undergoing low cost abatement like afforestation and methane destruction at gassy coal mines. What this means is that our emissions would stabilise (stay flat) or perhaps increase slightly, rather than track to business as usual. Also, what’s more important the the prevailing prices is the expectation of future prices.

We can’t know for sure what $10/t CO2e would do because we don’t know ex ante what the supply curve of abatement in the economy actually looks like. Although we can estimate it, what we do know for certain is that the forecast would be wrong. Typically, as the “Cheaper than Expected” Grattan Institute report shows, we’re likely to be wrong on the pessimistic side.

Along with last week’s Climate Commission’s report and this week’s Productivity Commission report on international action (to be released today), if the carbon price legislation ever makes it through both houses of Parliament, I think it will be this week that people will look back on as the turning point in the debate.

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  1. Isnt $10/t only for the first 3 years? Then the market will set the price, which I would assume would somewhere higher than this..

  2. What! No Gravy!

    “A price of zero (business as usual) sends emissions up to 24% over 2000 levels by 2020.”

    global emissions will have risen at a higher rate over the same period.

  3. If disposable income shrinks as it has then we will meet our emission reduction targets ahead of schedule.

  4. Alex Heyworth

    CEC, does your BAU scenario of a 24% increase take account of the 20% renewable requirement for electricity suppliers?

  5. Carbon E Coyote

    Yes, it factors in all existing policy like MRET (20% by 2020) and EEO etc.