Thanks Australia! Carbon tax failure will 'dim prospects for a new global climate treaty'

Carbon Trade Seen Losing Globally in Aussie Vote: Energy Markets

By James Paton - Sep 19, 2013  Bloomberg

Australia is at risk of breaching a global agreement to cut greenhouse gases as power markets signal Prime Minister Tony Abbott will exploit the widest election victory in nine years to repeal the nation’s carbon system.

Electricity futures prices show the implied costs of emitting a metric ton of carbon in Australia plunged 18 percent in the two days following the Sept. 7 election, bringing its monthly decline to 55 percent, according to data compiled by Bloomberg. At their lowest, prices indicated an 80 percent probability that Abbott will overturn the law that charges the nation’s polluters for their CO2 emissions, according to Bloomberg New Energy Finance.

The failure of Australia, the biggest emitter per capita among the world’s richest nations, to entrench its carbon price is emboldening opponents of fledgling emissions markets from South Africa to California and dimming prospects for a new global climate treaty. Negotiators from about 200 countries are set to meet in Warsaw this year to discuss how to ratify promises from the U.S. and China, the world’s largest economies, to reduce greenhouse gases linked to climate change.

“People who want a reason not to implement some form of emissions reduction would be able to point to Australia and say: they haven’t, why should we?” said Grant Anderson, a Melbourne-based partner specializing in carbon regulations for electricity, LNG and coal at Allens, a globallaw firm. “That’s the whole thing about international agreements. Once one party decides not to put forward a stronger commitment that was expected, it’s an excuse for others.”

Trading Alternatives

Abbott proposes spending A$2.9 billion ($2.75 billion) as an alternative to carbon trading. While he is “confident” it can achieve the 5 percent emissions cut Australia promised last year when it signed an extension of the Kyoto Protocol, RepuTex and the Climate Institute are among skeptics. They estimate he needs at least another A$4 billion to make the 2020 target.

While Australia’s Labor and Greens parties have vowed to fight Abbott in the upper house, he probably will be able to negotiate an agreement with independents and minor party lawmakers in the second half of 2014, according to Tony Wood, the energy program director at the Melbourne-based Grattan Institute. The prime minister told his staff yesterday to prepare a repeal bill for the first day of the new parliament.

Abbott’s victory has strengthened the case against a carbon tax set to start in 2015 in South Africa, Nazrien Kader, head of Deloitte LLP’s local taxation practice, said in an e-mail. The country delayed the plan in April after metals companies such as ArcelorMittal (MT) South Africa Ltd. and Gold Fields Ltd. objected.

‘No Support’

“We can only hope that it strongly influences the South African government’s stance,” Kader said. “A carbon tax has virtually no support from business.”

The American Energy Alliance, a Washington-based group that promotes fossil fuels, posted a note on Facebook on Sept. 11 saying “poor energy policies won’t get you re-elected” above a map of Australia. Senator David Vitter of Louisiana, the top Republican on the Environment and Public Works Committee, said in a Sept. 5 statement that U.S. lawmakers should learn from Australia’s “carbon tax failure.”

Since last year’s summit in Doha, carbon markets have started in California, the largest U.S. state, and the Chinese city of Shenzhen. Six other pilot programs are set to begin over the coming year in Shanghai, Beijing, Guangdong, and other manufacturing centers in China, the world’s biggest emitter.

EU Link

Abbott’s victory jeopardizes Australia’s agreement to link its carbon market starting in 2015 with the world’s largest emissions-trading system in the European Union. The EU continues to strive for a robust international carbon market, Isaac Valero-Ladron, spokesman for the EU Climate Action Commissioner, said when asked about prospects for the EU-Australia link.

The price of EU permits has recovered from a record low of 2.46 euros ($3.33) a metric ton on April 17 on speculation that Brussels will pass a proposal to reduce its surplus of allowances. EU permits settled yesterday at 5.53 euros on London’s ICE Futures Europe exchange.

The outlook for carbon in Australia remains unpredictable, with 2014 electricity futures vacillating, said Mike McKensey, head of carbon trading at Westpac Banking Corp. (WBC) in Sydney. The price, as high as $A10 in August, fell as low as A$4.50 in the days following the election from A$5.50 just before, he said. The figure has since risen to A$6, he said.

“Whilst the probability of repeal is now higher, uncertainty remains around both the timing for repeal of the carbon price mechanism and the detail around what Direct Action will look like,” he said.

New Senators

Abbott will be bolstered when new senators take their seats in July 2014, said Kobad Bhavnagri, the head of carbon analysis for New Energy Finance in Sydney. “The repeal of the scheme is not a foregone conclusion, as Abbott is likely to encounter resistance from the current Senate.”

When power futures indicated last month that 2014 carbon costs would be A$10 last month, New Energy Finance, Westpac and Deutsche Bank AG forecast some form of pricing was likely to survive Australia’s election. The price is computed by comparing contracts that include carbon costs with those that don’t in New South Wales, Victoria and Queensland.

Repeal of Australia’s carbon price would discourage cap-and-trade programs worldwide, Frank Jotzo, director at the Australian National University’s Center for Climate Economics and Policy in Canberra, said in an interview. The nation, the biggest emitter per person among developed countries, produces about 1.5 percent of the world’s greenhouse gases.

‘Negative Signal’

“Australia is much more important internationally in these matters than its share of global emissions might suggest,” Jotzo said. “For Australia to ditch all of this sends a very negative signal about market mechanisms. It could be a further impediment to efficient climate-change policy.’

Australia renewed its pledge last December to cut emissions under the Kyoto Protocol. Former Prime Minister and Labor Party leader Kevin Rudd ratified the Kyoto treaty in 2007.

“The fact that we ratified Kyoto and then went forward in implementing a carbon price had a positive impact at the international level,” Elisa de Wit, head of the Australian climate change practice at law firm Norton Rose Fulbright in Melbourne, said in an interview. “So a reversal of that policy will also have an impact.” The coalition’s alternative policy, known as Direct Action, will achieve the 5 percent goal, Greg Hunt, Abbott’s new environment minister, wrote in a Sept. 16 e-mail. Abbott plans “sensible, targeted incentives and not with a great, big tax.”

‘Obvious Conclusion’

The coalition has said it will commit A$1.55 billion over the first three years to an emissions-reduction fund. Abbott’s comment earlier this month that he won’t devote more money to the program prompted speculation that it will fall short.

If more money is needed to achieve the necessary emissions cuts, “the obvious conclusion is they don’t reach the 5 percent target,” de Wit said.

The coalition would need at least A$4 billion of additional funds to reach the 2020 target, the Climate Institute said last month. Abbott’s plan at best would achieve a 9 percent increase in emissions by the end of the decade, according to the Climate Institute, an independent research organization.

The Climate Change Authority, which advises Australia’s government, is due to release recommendations next month on the 2020 emissions target. The government has committed to cutting emissions by at least 5 percent and as much as 25 percent by the end of the decade, according to the department’s website.

The authority, one of the climate agencies that Abbott has promised to disband, looks forward to discussing its draft report with the coalition, it said in a a Sept. 16 e-mail.

Because Direct Action doesn’t set a cap on emissions, any reductions could be offset or exceeded by other polluters, said Anderson of the law firm Allens.

“Even if Direct Action were to make substantial inroads in terms of buying emissions reductions, in the absence of a cap on overall emissions, I can’t see Australia meeting its target,” said Anderson of the law firm Allens.