Floating CO2 price could cut bill for coal miners a year early
The Australian government plans to move from a fixed to a floating carbon price one year earlier than expected, said a minister over the weekend.
This should cut the emissions bills for coal producers in the country, as they could then start importing cheaper emissions allowances from the EU emissions trading system (ETS) by next summer.
It would also bring Australia's emissions price more in line with the lower prices in Europe, at a time when the Australian economy is struggling as falling commodity prices hit the country's thermal coal export sector.
No other major coal-producing countries tax or price carbon emissions from mining.
If an emissions trading system (ETS) replaced the current fixed-price system - often referred to as a tax - on 1 July 2014 rather than 1 July 2015 as scheduled, it could be linked to the EU ETS earlier than planned after regulation is passed.
The benchmark European 2013 contract closed at €4/tonne of CO2 equivalent (tCO2e) on Monday, according to ICIS data. The current fixed Australian carbon price paid by producers such as Xstrata and BHP Billiton stands at Australian dollar (A$) 24.15/tCO2e (€16.71/tCO2e).
On Tuesday, the government estimated that an early link would push down the price in 2014-2015 to $6/tCO2e. It did not specify what would happen if the EU is not ready to link by next summer.
The Australian scheme is due to establish an interim link with the European programme as soon as it launches in 2015. A full link is scheduled for no later than 1 July 2018. The European Commission will seek a mandate from the EU states to negotiate a treaty by mid-2015 to implement the full link.
Motivation to change
Comments made by Australian treasurer Chris Bowen in a series of interviews over the weekend indicate that the move to speed up the ETS is motivated by the aim of lowering the CO2 price because of the challenges facing the Australian economy.
The ETS was designed by the previous government, led by Julia Gillard, who was ousted in a Labour leadership contest. Kevin Rudd is prime minister until an election due later this year.
"New prime minister, new climate change minister, new treasurer, new cabinet, fresh set of eyes.... Look at the development in the world economy since then, look at the way we need to spur investment in the non-mining sector as well, look at cost of living, and say, well, we think it's sensible to bring it [the ETS] forward," Bowen said in an interview posted on the treasury's website.
He added that because the carbon price is lower in Europe, "it makes sense to match our price to theirs earlier".
"I don't think Australia would move to a floating price if they can't link with the EU ETS at the same time, because if their purpose is to lower the carbon price, then no one knows what it would be in case they implement their ETS without linking to Europe," said Philipp Ruf, senior analyst of EU carbon markets at consultancy Tschach Solutions - recently acquired by ICIS.
Australia still must pass regulation allowing the link to be fully operational.
Australian independent research organisation the Climate Institute said any decision to bring forward the ETS by a year should come with a statement of increased ambition and strengthened domestic policy.
"In determining the new limit, the government should respect the legislated role for the independent Climate Change Authority, which is due to bring draft recommendations on future caps and targets in October with a final recommendation in February," said CEO John Connor in a statement, adding that the process can work with a decision to bring forward the ETS.
An industry body, the Queensland Resources Council, said it cannot pass judgement on the new Rudd-led government's plans until more details emerge. The organisation posted questions such as: Will EU politicians be left in charge of setting a floor price? Does the government intend to lock Australian firms into buying 50% of carbon permits locally? And will the carbon pricing scheme continue to apply to fugitive emissions from coal mines?
"If the federal government's answers to each of these questions is no, then clearly the intent is no more than a political fix in the shadow of an election," said Michael Roche, CEO of Queensland Resources Council, on Sunday.
More details are set to emerge in the coming days. The opposition Liberal Party has said it will scrap the whole plan if it wins the election, which must take place before 30 November this year. Silvia Molteni and Fionn O'Raghallaigh
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