Pitfalls of Australia joining the EU ETS

Back in August the government announced its intentions to join Australia’s new emissions trading scheme (ETS) with the EU ETS in 2015. Houses and Holes commented at the time that the decisions could be interpreted as a political cop-out.

While the long run goal is surely an integrated international scheme, the Clean Energy Amendment Bill as it stands will make Australia a subservient partner to the EU scheme for the 2015-2018 transition period. This has important implications not only to for the effectiveness of the scheme in reducing emissions and encouraging the uptake of cleaner technologies, it removes Australia’s position as a global example of effective carbon pricing. To me, the decision to adopt an effective carbon pricing scheme was part of a broader political effort to demonstrate workable policy to the world, whether high emitting countries would take notice or not.

At at local level, the integration of Australia’s scheme into the EU ETS has more direct implications. In a joint submission to the Senate Inquiry, with Professor Paul Frijters, we made the following conclusions about the impact of the regulation as it stands.

1. A large volume of accumulated unsold permits in the EU, currently about 950 million tonnes, ensures a continued oversupply. Deutsche Bank forecasts the price to be around 10 Euros per tonne in 2015, whilst Point Carbon thinks it could drop to 4 Euros per tonne. A recent auction of 4 million permits in the UK fetched a price of 7.48 Euros per tonne. Because of these reserve over-allowances, Australia could be sold EU permits without any change to the price or volume for any emitter in Europe, implying that we would buy ‘spare’ permits from the EU, without anything happening to overall carbon emissions for many years.

2. We thus expect the revenue of the scheme to be much lower than projected: under the current Australian Treasury projections, the revenue would be $9.4 billion in 2015, based on a price of 29 dollars per tonne, applied to around 350 million tonnes of demand. We think it is more likely to be $10 per tonne and Australian revenue to be nearer $3 billion. At present arrangements, a sizeable fraction of Australian permits would be bought in the EU auction market, effectively leading to a transfer payment from Australia to the EU without any clear benefit to Australia.

3. A best case revenue estimate in 2015, assuming no EU permits bought by Australian emitters and a price of $15 per tonne, would be $5.4 billion. A worst case revenue forecast, with 50% permits bought from EU and other international Kyoto compliant offsets and a price of $8 per tonne, would be $1.4 billion, with payments from Australian firms to EU governments and other Kyoto offset suppliers of around $1.3 billion.

4. We encourage a mechanism that would put more strict limits on the amount of permits Australian emitters would be able to buy from the EU system, and from Kyoto-compliant permits, particularly during the transition phase till 2018. The EU experience shows that adequate monitoring of cross-border flows of permits are also essential to eliminate the scope for fraudulent trading behaviour.

5. In order to prevent a massive outflow of funds from Australia to the EU from the threat or expectation of a change in policy, we advocate that the scheme includes an insurance component that guarantees the value of permits if there is major domestic policy change.

The full document, along with other industry submissions, is available from the Senate Standing Committee on Economics website.

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  1. I’m not fully across the EU ETS but isn’t it still in stage 2 out of 3 of the introduction phase with availability of the number of permits set to decrease? I believe the EU is looking to bring this forward due to the issues highlighted above.

  2. So glad we are copying Europe, what could possibly go wrong? They seem to be doing everything right these days…

  3. There’s a bigger problem that this, although the budget shortfall & increased CAD are big issues in the short/medium term.

    The bigger problem is that the relative economics between coal and gas fired power stations are very different in the EU compared to Oz. Both coal and gas are expensive over there. A carbon price that is sufficient to lead to gas generators replacing coal in the EU is most likely insufficient to cause the same outcome here.

    There is every likelihood that our EU-linked ETS will now never lead to a substantial move away from coal and towards gas in our domestic electricity sector. It will simple raise costs, allow the Gov to inefficiently churn the money and create dead-weight losses.

  4. Rumples
    Do I have this straight?

    So we are going to borrow foreign currency to buy an EU invented fantasy non-product that will not decrease C emissions one iota in either Europe or Australia?

    If so the mind boggles! Who thinks this stuff up?

    • thomickersMEMBER

      i bet you some synthetic product will be invented by investment banks and funded with people’s superannuation balances…

  5. In the meantime I believe Bluescope has sold the rights of a photovoltaic steel coating to the chinese or it will be manufactured in China I am not 100 per cent sure.

    We will soon be importing colorbond fencing that will produce electricity.

    there is some really interesting technolgy developements going in Australia but the funding and ownership is sourced from China.
    Dysol is another one that is a part australian/european and chinese partnership.

  6. Jack
    Have you got any reference for the steel coating? We have some interests in and contacts with thin film photovoltaic technology. Our information, admittedly now some 6 months old, was that the steel coating technology was not going too well. Again also as we understood the research was being done with a British company.
    Perhaps there is more than we know about?