Well it would seem that somebody close to the policy makers might have noticed the elephant in the bathroom.
This week an article in the Financial Review talked of a carbon tax budget hole that could be $4 billion deep thanks to a carbon price that might not continue to rise after the fixed price period after all.
Blind Freddie can’t help but chuckle and the elephant’s stomach rumbles with contentment.
It seems that there has been some new modeling of the carbon price beyond the fixed price period on behalf of Australia’s Climate Change Authority. The numbers suggest a “fall from July 2015 to $10.72 a tonne”.
This should be no surprise given the current European market prices are hovering around $5 tCO2e — this difference from $23 per tCO2e and rising to the reality of current market price is the elephant standing quietly next to the bassinette.
Now if you are a government that has been struggling to get the balance sheet back in the black because it was one of the core things you promised to do, then $4 billion less revenue is a problem. Especially given that the carbon price policy was hugely unpopular in the first place and will continue to give you trouble in an election year.
If it was just a revenue shortfall [$10 instead of $23+ per tCO2e] that probably wouldn’t be too bad. Only the revenue is already either spent or committed, mainly to ease the pain for exposed industries and for consumers, making a market price dip in 2015 a double whammy.
Awkward for the Australian government but stayers among carbon traders in Europe are not too worried. The say it is just what markets do, they will show price volatility around long-term trends. And just now the price is low. Later it will rise again, not least because this is a regulated market designed specifically to manipulate credit supply to raise the price and reduce demand. Like all markets, success comes from the long play.
Then there is another thing that the elephant symbolizes.
Remember that the carbon price is for a permit to emit and fewer permits purchased mean fewer carbon emissions. This was the policy objective: to reduce emissions of greenhouse gases by making it more expensive to emit than the alternatives.
And as President Obama brings action on climate change to the State of the Union address, it will be hard to ditch the policy now. So here are a couple of options given we can see the elephant.
Ostrich option | Bury the report or, if the electorate cotton on, spin it like a fury.
After all 2015 is a long way off. There is plenty of time for anything to happen, perhaps even something positive. Remind yourself of the positivity of the ballsy carbon traders and wait. In the meantime, do whatever is possible to make the whole thing go away.
Be a honey badger | take hold of the policy, believe in it and shake it hard.
The idea of a carbon price was that it should deliver behavior change and make Australia less carbon intensive. So embrace that and with the tenacity of a honey badger stick with it. Allow an aggressive permit allocation limit, ease the coupling to the EU carbon market by changing the proportion of credits emitters can source from overseas and explain why to consumers. There is no reason that the domestic market cannot have a higher carbon price than elsewhere other than the fear of ceding competitive advantage.
In short, show leadership.
Now there is a thing.