What will the starting carbon price be?

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.

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Comments

  1. I completely agree but I think you’re giving them way too much credit.

    The MRET target was set to 20% in 2020. The CPRS 5 target was a 5% reduction on 2000 levels by 2020. There was no science around this, the pollies just liked the soundbite.

    It’ll be $20.

  2. These targets were a joke for gullible.We are already above 2000 level and our population is growing by 2% pa.We would need to drop our current emission par capita by 40%.

    sad joke.

    Still cannot believe this useless carbon tax is likely to fly and be implemented.

      • regulation and the government guaranties to lower the cost of financing green energy production.We need to produce more energy, no less and at a cheaper price.

        Financing cost is the main cost of the green energy, lower it to the government cost of borrowing and they will succeed (over investments in coal)with long term incentives.

        could help to solve our dutch disease issue with high tech jobs/reseach, non offshorable (and more coal/gas available for export)

        this tax is useless, make energy much more expensive but every grams of coal we do not use is going to be burn oversea LOL no matter what.

      • Dam – we have a scheme to do that, the renewable target. It costs more to increase energy production whilst reducing carbon intensity under such a scheme because the scheme picks renewables as the ‘winners’ and ignores gas as a transition fuel.

        • Adam – the LERT is nothing like a low cost of financing/ gov guaranties over a long term – say 20-30 years to provide stability to investments in green projects.

          transition to gas – still a low tech/ low job energy – does very little to improve our dutch disease/productivity.

          We burn gas that would could export otherwise.bit moronic.

      • Impose a $100 per ton tax on every ton of coal mined in Australia.

        If the job needs to be done then do it properly.

    • Every one who voted green, around 10% of the population, we ban them access to terrestrial meat protein, electricity, petrol and any material item sourced more than walking distance from where they live.

      This should cut emmissions by roughly 10% instantly.

  3. I’d go even lower, perhaps in the mid-teens. The government has been completely spooked by the Abbott scare machine.

    Sadly, it will be 2013 by the time people realise this p*ss-weak over-compensated carbon tax will have negligible effect on their lives, by which time it will be too late for this government to recover.

    To be honest, I’m looking forward to an Abbott government. It will be a giggle if nothing else.

    • My take:
      .
      Before the elections, Gillard had no intention of implementing carbon tax or a carbon trading system for the next 3 years. She probably thought she could waffle around for 3 years with the people’s assembly and various committees.
      .
      But the post-election reality, where the Greens held the balance of power has forced her hand.
      .
      Abbott can scream all he wants – but there is very little he can do for the next 2 years, other than hope that the voters will still listen to him 2 years down the line.
      .
      I would say $20/t – a fair compromise between the Greens ($40/t) and Gillard government ($0/t).

      • So what your saying is it’s OK to lie outright before an election and that when the opposition points this out they are ‘bleating’?

        The Greens would never ever ever had supported the Coalition, no matter what the ALP did on carbon pricing.

        Nothing changed after the election, nothing at all that would jusfify her going back on her word. She said there would be no carbon tax under a government she leads, she leads the government, what you call ‘bleating’ I call defense of democracy.

        • Easy, Matt, you will get your chance to vote Julia out for lying, at the next election.
          .
          I have no problem with Abbott or anyone bleating – they are exercising their democratic right to bleat. I was just pointing out the futility of the exercise – it is not going to change anything viz carbon tax, given that Greens hold the balance of power.
          .
          BTW, if your voting criteria is based only on truthfullness, both Julia and Abbott would be disqualified from getting your vote and you will probably end up voting for the Greens!!

        • Wow, if we voted out every politician that lied we wouldn’t have any politicians left!

  4. I see carbon tax just as a increased tax that has nothing to do with global warming or pollution. In that sense we could argue whether we need new tax or not. I think that with the falling property sales and prices new tax will be needed anyway.

    • I see carbon tax just as a increased tax that has nothing to do with global warming or pollution

      Yeah, the government just thought it would be a great idea to self-destruct by imposing a new tax for no good reason.

    • And they did have a mandate (as did the coalition in Howard era) to “Do something about climate change”.

      People who vote in politicians who do things that they actually voted in politicians to do things.

      And sometimes what needs to be done is not the popular choice.

      I hope we get to a better tax regime and maybe this carbon pricing scheme will push us along in that direction, because its the ONLY competitive advantage we have (i.e a reform of our tax/welfare system with a comparatively low public debt level) after resource exploitation, against almost every other developed nation out there.

      • *whoops – meant to say, People who vote in politicians who do things that they actually voted in politicians to do things then get upset when they (try) to deliver on that mandate.

        What was it – over 70% of the electorate wanted “something done” and we are now getting something done, but nobody wants to pay for it….

        • I think that 70% probably wanted a meaningful reduction in emissions, not a convoluted ineffectual tax. Julia didn’t want it.

        • Sure people want something done about climate change. They want free solar panels for their house, discounts on hybrid cars, windfarms built a long way from where they live, mass tree-planting, dolphins and daisies.

          What they don’t want is to pay more for electricity and petrol.

          BTW, no personal attacks today Fanboy? Why don’t you tell us all how anyone who accepts the consensus science on climate change is actually a selfish, unfeeling latte sipper who just wants to put coal mining families out of work to satisfy their personal prejudices?

          • “no personal attacks today Fanboy”

            Is it still all about you?

            With affection
            Fanboy.

          • I seem to recall your words were:

            “…The best possible scenario for MYSELF is a thumping recession in China…”

            And your then explained your motivation for your very particular and personal predilection for a China collapse. Your words, not mine (my emphasis).

            With growing affection
            Fanboy.

          • So?!

            At what point did I accuse YOU of personal motivation for pushing a particular view?

            Do I benefit from paying more for electricity or petrol? No.

            Right now I would benefit enormously from several interest rate rises because I have zero debt and considerable savings, but do you see me arguing for the RBA to hike? No.

            If the AUD was to go $1.50 I’d just retire and take a nice overseas trip with the family. I’d have to lay off the rest of my employees — which would be a shame — but I suppose I could buy them each a shovel as a parting gesture.

            I would be incredibly easy for me to say f*ck it and move on, but believe it or not I really do give a sh*t about this country and the planet … so before you start making assumptions about my situation and posting any more offensive remarks perhaps you should *think* before pressing the Submit Comment button.

            Yes, you really p*ssed me off.

          • Tr*th h*rts? You’re over-reacting. Learn from my example and take it in good h*mor.

            With affection and great calmness
            Fanboy

            ps I accept yo* have wider concerns, OK.

          • 57% gullible enough to want to pay more ( + more inflation & interest rate) to see the coal be burned in dirty Chinese coal plants instead of here.

            Interesting.

          • That poll is from Feb 2010.

            Numbers have dropped significantly since then, and the question is loaded anyway.

      • Resource ‘exploitation’. A slightly negative connotation there – when currently it is the most important sector we have. I suggest resource ‘munificence’.

        And no matter what, with the carbon tax, it remains true to that old adage “you can put lipstick on a pig, it’s still a pig”. The carbon tax will not signal the overhaul of the Australian Taxation system, it will simply become another tax. Won’t reduce emissions, will raise revenue via a complex scheme, a chunk of which is returned to ‘battlers’, the omissions and exemptions politically motivated. A travesty.

      • No I mean exploitation in the literal agnostic sense. i.e there’s some ore there, let’s get it.

        I’ve got no problem with resource exploitation (if done environmentally properly and funnily enough it usually is).

        And yes, it is the most important sector – sentimentally (not fundamentally) – as it drives the confidence that drives credit expansion, that drives up house prices and keeps the millions employed in services and construction industries.

        If the carbon tax gets us a little further down the road on tax/welfare transfer reform it will be a success, in my view. The GST, now a decade old (and with some serious flaws, but still good overall) now has the ability to step up and become a more important part of tax reform (even though Swan declared it “off the table”).

      • No they did NOT have a mandate, other than to NOT introduce this tax. Not in the slightest. The mere suggestion that they had one is utterly absurd.

        “There will be no carbon tax under a government I lead”.

        It doesn’t get much clearer than that.

        • Carbon E Coyote

          It’s not a carbon tax. It’s an ETS with an initial fixed price period, just as the CPRS was and as Howard’s proposal was.

          • Yep, and the GST isn’t a tax, it’s a ‘price on all goods and services’.

            If it looks like a tax, smells like a tax and acts like a tax…

            You can spin it all you want: “There will be no carbon tax under a government I lead.” Her words, not mine.

  5. I have no ideological bent here, just free wheeling.

    Is the carbon tax much like any other consumption tax – GST, etc. Instead of the price of the good you are buying being the determining factor on how much you pay (10% on top of price) it is the inherent carbon within the good or service that determines the amount of ‘tax’.

    Isn’t this the beginning of a more sustainable future?

    -may have been one for DE’s mixed bag.

    • Isn’t this the beginning of a more sustainable future

      Well yeah … but don’t tell the denialists.

      IMO, this whole thing is a storm in a teacup. Most people will feel no impact after compensation, and the smart people will be ahead (there’s a lot of low hanging fruit in most Aussie households).

      What’s hurting non-mining Australia far more than the yet-to-be-implemented carbon tax is the strong currency and interest rates about 150bps above where they should be.

      Sadly, no politicians are telling the true story. Both Abbott and Gillard are completely beholden to the mining industry, which basically runs the country these days.

      • We are fortunate to have the mining industry – we don’t have much else of current global significance. I would say Gillard is beholden to Independents and the Greens and Abbott to opponents of Malcolm.

        Treasury and the RBA are rather fond of mining, as am I.

  6. A tax to stop a supposed rise in sea level? What a joke.

    A tax to decrease a gas which is benficial to plants and therefore oxygen production? What a tragedy.

    A tax to hoodwink the public into providing a ‘war chest’ for the next election? What a con job.

        • To burn carbon, Oxygen is required. ie. C + O2 -> CO2, fixing this via photosynthesis requires water, oxygen is emitted in the process. net O2 conservation.

          However, burning petroleum requires more O2, ie CH4 + 2 O2 -> CO2 + H2O net oxygen depletion.

          Note that more oxygen is a not so much a good thing, metals dont behave at all well in highly oxidising environments. Luckily its mostly fixed in the crust.

  7. “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”

    That must have had a trader like you salivating, Mr Coyote. Did you front run the tsunami, then short the “Greek credit concerns”?

    That’s productive enterprise for you.

    • Ah yes, trading the bad news, us nasty traders are always good scapegoats…

      Keep the comments clean JMD. That’s your first (and last) warning today.

      • You people are pretty touchy about criticism aren’t you?

        Usually people who are touchy about criticism have ulterior motives. Trading some carbon Mr Prince?

        • MB aren’t as sensitive as some!

          Although, come to think of it, I was once threatened with a ban for saying something I have seen paraphrased here since. Dare I say it now…

          I still like TBP policy:

          ‘Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.’

          Cheers

    • There’s criticism which is constructive and there’s personal and snide remarks.

      “salivating” and implying he and other traders (like me) get pleasure out of other’s pain (when its just our job to provide liquidity for markets to operate) is that sort of remark.

      And no, I am currently not trading carbon. But I did trade the market during Greece crisis 1.0 (last May), 2.0 (this and last month) and during the Japanese earthquake (down and up).

      Its my job.

      Would you prefer there were no traders or brokers? Because you would have no mechanism to invest your after tax savings – even in a bank (which needs traders to run its cash accounts).

  8. i’m guessing $20 or very close to it, with very generous compensation in earlier years tapering off after around 5 years (so 2 elections away, though the next election is the immediate consideration).

    This is political tax, so the motivations are also political. Gillard and co will design a tax and compensation package that will do as little damage as possible to the economy in the next few years to aid their chance of being re-elected.

    At the next election, Gillard wants to be able to attack Abbott on his “alarmism”, and to do so she needs to make sure no coal fired plants close and we dont see wholesale price rises. This is why you see 5 year loans being mooted for to-be-unprofitable coal-fired stations; a loan wont make a plant profitable, but it’ll delay closure for a few years.

    After that period the tax will start to ramp up.

    Whether or not targets are met by 2020 is irrelevant, thats not what the price will be designed to do.

  9. So the way I see, if I go to a Carbon Footprint calculator and enter my details for everything in my life, I end up with 72/t.

    72 x $20(?) = $1440 per year.

    But now I have to add an extra $300 increase in Body Corp fees, Increase rates because i’m sure Councils wont foot the bill for an extra 30% power.

    So at this stage, i’m looking at $2,000.
    Add another say 1% (Being conservative) OCR from RBA because inflation will explode. Thats an extra $3750 per year.

    So now up to $5750 after tax dollars.

    So I will need to earn an $7500 just to pay for the tax, because i’m sure I wont be getting any compensation.

    And what do I get for my sacrifice of spending more time away from my family, just to pay this tax. (Or decreasing my standard of living)

    Absolutely nothing, except the warm fuzzy feeling of the dole bludgers next door will be getting more money from the govt than what they have to spend, (And a nice 20% buffer) and they have sacrificed absolutely nothing for it.

    • Wow – you must have one hell of a lifestyle, when I calculate mine ( using the WWF site ) if i exclude petrol i get 6.8t

    • Carbon E Coyote

      It’s not being conservative to say inflation will “explode”; it’s being alarmist. The CPI impact has been modelled as a 1.1% once off increase, and the RBA will look through this, as they did the GST impact.

      This from the AFR quarterly survey of economists: http://prpaustralia.com.au/news.cfm?ID=820

      Also, don’t know how you got 72 tonnes. Do you live in three McMansions?

    • Yeh, I know 72t, but the calculator I used here,
      http://www.carbonfootprint.com/calculator.aspx

      takes into account everything, inc air travel, (With 10 interstate and 4 international flights boosted it up, I recon), Just my power is 16t, anyway…

      CEC, just wait see about inflation, I don’t trust the modelling. In fact I’d put $50 bucks that on the 1st July 2013, ABS/RBA will tell us their inflation modeling on the effects of the Carbon Tax was wrong.

      • Carbon E Coyote

        I came up with 8 tonnes. But I buy 100% Green Power, have 3kW of solar panels, offset my flights and mainly use public transport.

        There’s a problem with that calculator in relation to car travel, it assumes that there’s only one person in the car. You need to divide car km by average number of passengers + driver.

        • I used the WWF one and came up with less than 4 tonnes per year.

          Mind you, I work from home and use a motorbike to travel (and when in car am with my wife). Never use A/C or heating (wear less or more clothes).

          Although I was “penalised” because I eat meat (for shame – even though not eating meat is paradoxically bad for the planet).

          Still needed 3.1 planets to “feed my lifestyle” though…

          • Because it encourages population growth at lower standards of living (less area required to feed a larger populous)

            Grain and sugar based diets (for almost all cultures) lead to lower standard of living and high levels of disease, particularly heart disease and diabetes.

            We are optimally designed to eat meat and fat, with some vegetables and the occasional fruit and raw nuts.

            Grains and sugar should be at the apex of your food pyramid, not the bottom or middle (which is where meat and fat resides).

          • Designed?

            Vegetarian diets leading to heart disease and diabetes is a new one for me. There I was thinking it was Western lard-arse lifestyles and high fat, high sugar diets were the cause.

            Sure overdosing on carbs — especially highly processed carbs — isn’t a good idea, but most of the 3rd world doesn’t get that opportunity.

            FWIW, I’ve never met a fat vegetarian. Have you?

            Disclaimer: I am a carnivore.

          • ouch tried carbonfootprint.com calc … came up at 30.12t …

            something to do with km I drive (heaps even though I drive a diesel at 5.3l/100km …), flights, and lifestyle …

            but most is the wife’s use of aircond for heating and cooling

          • Alex Heyworth

            The highest incidence of diabetes in the world is in southern India, nearly all the people there are vegetarians.

      • Rob, I used the same calculator at carbonfootprint.com and it told me 9.2 tons, and I could lop 1.5 tons off that because I’m on 100% Green Power.

        Yes, I’m a hippy too.

        • Don’t think I’ll bother, because honestly we do nothing in our household (apart from put the wine bottles in the recycling bin). Nothing. Lamps everywhere. Outdoor lighting effects. Pool waterfall thingy. Big screen tvs. Nothing. But happily pay the electricity bill. And life seems pretty good.

          Any feelings of guilt. Again, honestly, no. No guilt.

          Funnily enough, we’re vegetarian, well really pescatorian (is that a word – eat fish) – the influence of Peter Singer! The Greenest of Greens!

  10. It could be $1, the starting price is irrelevant for these reasons:

    1. It’s designed to go up.
    2. She stated categorically we would not have a carbon tax in order to scrape over the line.
    3. Next election it’s gone because the Coalition will have a REAL mandate to remove it.

    What we need is an election on this issue. The Australian people have a right to decide. This could have been Gillards GST, instead it will be her workchoices.

  11. “There will be no carbon tax under a majority government I lead”.
    .
    With the benefit of hindsight, fixed it for Joolia 🙂
    .
    Why do you think Rudd is still in cabinet? Not because Joolia wants to keep her pre-election promise to Rudd. This is a minority government that survives on outside support + Rudd.

  12. Looks like it will be $23/tonne.

    Abbott won’t be able to repeal as Greens will have control of Senate for at least 6 years. The odds of Abbott getting control before then would probably require a combined Greens/ALP vote of well below 30 TPP (I haven’t done the maths though).

    So good luck any party who wants to try and repeal it in 6 years when all business/investment decisions have locked it in.

    Agree with Prince that hopefully a carbon price will offer some serious reform of the tax/welfare system, in particular, the rather inefficient fuel tax subsidies for (big) businesses.

      • Bad luck Fanboy — environmentalism is a long term trend. Support for the Greens is strongest amongst the young and weakest amongst the over 55s, so its not going away anytime soon.

        While its entirely possible the Greens may screw things up politically, the Green vote will simply move to another like-minded party or like-minded independents. Think Andrew Wilkie.

        Essentially this is what happened to the Democrats. The latte sipper vote simply moved from the Dems to the Greens.

        BTW, its not this Senate that’s unusual, it was the previous one, which was a product of the 2004 Latham implosion. Its very unlikely that either major party will control the Senate for decades to come.

        • Have to agree, environmental propaganda, I mean ‘education’ is rife in schools. My son recently was handed back an assignment on The Pilbara, received an excellent mark apart from neglecting to mention under ‘Environmental Issues’, and I quote, “What about the great big holes the miners dig” slashed across the page in red. Reference to mining was made but of greater concern is the loss of vegetation habitat as a result of widespread cattle grazing and introduced species. But all the teacher (and this is a very good school) could focus on was “great big holes” – somehow reminded me of Abbott.

          And unfortunately that is what we have, the half educated propagandizing to the young. Now if this is extended to an understanding of the role of heavy metals in the environment, hazardous man-made chemical pollutants almost everywhere, chemical pathways through the body (all the stuff CeC is no doubt aware of), preservation of water sources – fine. But simplistic references to the ‘horrors’ of mining or global warming without corresponding reference the the benefits we enjoy in modern life is nothing more than brainwashing. Perhaps a Lord Monckton video is in order!

          As for the Greens, the vote they received demonstrates the possibly irreversible decline in educational standards in this country. Even at the best of schools.

          There is something inherently wrong in transferring our adult world anxieties and doomsday myths to the young. It is their time to revel and rejoice in the beauty of the world, both natural and manmade, and to come to an understanding of our place on this planet cognisant of the evolution of scientific knowledge. What are we doing – all this nihilistic thought – has resulted in kids of today pretty sure the world will end in their lifetime. We are in the process of denying them the sentiment of hope. And to my mind, that is a terrible legacy. It is their time for unbridled joy.

          What we are doing to our children is far worse than the any supposed destruction of the planet.

          • “And unfortunately that is what we have, the half educated propagandizing to the young.”

            Are you suggesting that the scientists studying the climate are also half-educated propagandists? Or only the ones who think climate change is real?

            Which science do you think should be taught to your children? Only the science that agrees with your limited experience of the world?

    • Alex Heyworth

      In a double dissolution election the senate quotas are halved, ie for state senate seats the quota is 7.69%. Six quotas is therefore 46.15% and seven quotas 53.85%. On current polling, the coalition would be guaranteed a minimum of six seats in each state, one in each territory and would be almost certain to get a seventh seat in at least one state, probably at least two states. This would given them an absolute majority of the senate.

      The AlP would be wiped out in a double dissolution on current polling. The Greens would get two seats in several states (maybe three states) and one in each of the others, leaving them about where they are now.

      So my betting would be that if the coalition were elected in a landslide (as they would be on current polling) the ALP would be very willing to pass pretty much anything in the senate to avoid a double dissolution, at least until the honeymoon period was over and the coalition polling numbers came down from the stratosphere.

      • Good grief. There needs to be a very strategically engineered campaign to ensure that the minimum number of Greens are ever elected in the future.

        A ‘Green’ future in this sense is frightening. The power out of all balance to electoral voting intentions.

        I can recall, after the last election, speaking to pretty cluey (clueless I now acknowledge) people who were proud they had voted Green. Like they’d just saved a koala or something.

        Interestingly, not one, NOT ONE, of these individuals will vote Green again. Obviously a highly scientific sample – but hope it’s representative.