A month or so ago I suggested that there was “a deal to be done”. It sounds this week that it’s pretty close if not already done. A few people have asked me where I think the starting carbon price will be, so I thought I’d make a prediction. My money’s on a starting price of $20/t. Here’s why.
Firstly, there would have to be a compelling reason to depart the Garnaut recommendation of $20-30/t, which was calibrated to reduce Australia’s emissions to an extent compatible with a fair and proportionate effort in global mitigation. The MPCCC would presumably have taken the Garnaut recommendations seriously.
Pulling it down towards the low end of this range is BCA’s call for $10/t and other business pressures to minimise the impact. $10/t is consistent numerically with the starting price of the CPRS in its proposed first one year fixed price period of 2010/11. However, the carbon price mechanism will start two years later than when the CPRS price would have started. Escalation alone (at 4% real, say 7% nominal) would have us start 1 July 2012 with a $11.5/t price. But in losing two years of mitigation potential, we have made the job of reaching any given 2020 target that much more difficult, so a shift up in the carbon price curve is required to meet it. Business Community concerns could probably be addressed with compensation for emission intensive trade exposed industry, rather than the price itself.
At the higher side, there is a risk that a too high a price would lose the deal due to lack of political will and support on the Government’s side. The Greens had called for $40/t, which might be seen as an ambit claim but clearly they want to close a deal this time round. They see a high price as being what’s required to see the required structural shift in the economy. However, there are other aspects of the agreement perhaps equally as important to the Greens as the starting price, and compromising on this price may have been a quid pro quo for getting other elements of the deal agreed to, perhaps in areas such as compensation for coal and/or funding for clean energy.
Also in support of $20 is that:
- it’s the Australian dollar equivalent price, more or less, of the price of a carbon permit under the EU ETS, which has been around €15/t this year apart from a spike due to nuclear concerns in the wake of Fukushima and a dip due to Greek credit concerns. So on one calculation it’s commensurate with international effort.
- Both Minister Combet and Treasurer Swan have used $20/t as an illustrative figure over the last few weeks.
Interestingly, broker ICAP did a survey of the market yesterday for views on the starting price. The most popular bracket was $20-23/t, the second most popular was below $20/t and the least popular choice among traders was above $23/t. Interestingly, from a carbon market point of view, if this was the start of the traded market (floating price ETS) or an auction for permits, as opposed to a guess on the fixed price, then $20-23/t could arguably be seen as the opening spread for the two-way traded price. Obviously, you’d hope a more liquid market in permits would narrow this spread!
So I’m heading for $20/t. Maybe I just like round numbers, but I suspect that I’ll be surprised on the upside rather than the downside. The extent to which it’s higher than $20 shows the power of the Greens within the MPCCC and indeed in the Parliament.
As always, the only certainty in an economic forecast is that it will be wrong!
Let’s see where it ends up.