August 2013 is silly season here in Australia. We have a federal election in just a few weeks time and the inevitable merry-go-round of vacuous media grabs and absence of policy debate is upon us. It is actually rather depressing as the main parties jostle to hog the middle ground to spend money they don’t have whilst no one else can come up with anything better than “vote for me”.

It is also rather absurd. On the rare occasion when media do delve beyond the rhetoric, or for some unknown reason you dig yourself for evidence to help make a voting choice, what emerges are gems like this pre-election outlook from Treasury.  Somehow the economic boffins that work for the ministry have managed to predict that the carbon price that in Australia is currently fixed at $23 will first fall to $6.20 in 2014/15 [fair enough as the start of the flexible price period when the domestic scheme is pegged to the EU market has been brought forward a year] and then rise to $18.90 by 2016/17 reaching $38.0 by 2020.

Now we should remember that this is what is supposed to happen to a carbon price. The whole idea was that to ensure steady emission reduction the carbon market is capped so that supply is squeezed over time causing prices to rise. A rising price on carbon would encourage energy thrift and starts to make clean energy sources economically viable with the net effect of lower emissions. Except that the political will to set, stick to and steadily lower the cap has been conspicuously absent.

Alloporus borrowed a graph of the historical carbon price in the EU published by Point Carbon and appended the Treasury projections.

It looks like this:

As regular readers will know Alloporus is no economist, but whilst $20 seems possible, $40 by 2020 is hugely over-optimistic. It would require a significant step change around 2015 to reverse a market that has a t best been steady but mostly fallen. Such a change would need considerable and coordinated global political will to achieve. No single nation would stick their neck out that far [probably why the Australian government linked the domestic scheme to the international market so as to neatly sidestep the pressure to go it alone].

Then consider that by 2020 we will have seen price shocks in oil [and possibly coal too] that, even if temporary, will have the required effect on emission reduction without the need for a separate policy. In other words fluctuations in energy needs in response to inevitable pulses in the global economy will allow the modest emission reduction targets to be met most of the time.

Of course politically it is best if the carbon price is low, but for any cap-and-trade policy to be effective the price needs to rise steadily. Alloporus suspects that the carbon price forecast from Treasury sound like some middle ground plucked from the ether for political expedience.

The craziness here is that a lot of money has been spent and committed to deliver emission reductions — a ‘clean energy future’ as the policy was tagged. Except that the cap-and-trade approach chosen only works if the price of permits [the carbon price] rose steadily over time. And this required that the market was manipulated buy controlling permit and offset credit supply. Now that governments have shied away from that part of the plan, the whole policy falls over and monies spent on free permits for exposed sectors and, in the case of Australia tax threshold adjustments and cash payments to households, turn into welcome handouts that have no impact on emissions at all.

$38.0 by 2020 is what they would like it to be, except wishful thinking cannot make it so. You actually have to implement the policy.