What carbon price is right to bite into, not bark at, climate change?

The carbon price represents the value that, we as a society, place on averting the worst climate damages. A $21 price [per tonne of carbon dioxide] says that we are not too concerned about it; the problem seems fairly small and most of its costs will be borne by future generations…

A $200 or higher carbon price sends a very different message and would result in a very different outcome… If applied world-wide in every economic sector, a $200-$500 per tonne carbon price would provide enough incentive to bring emissions down to levels consistent with a 50/50 chance of keeping long-term temperatures under 2⁰ C…

Dr Elizabeth Stanton, 2011

The carbon price has been introduced as a central element of the Federal's Government's plan to move Australia to a clean energy future. A focus for action for climate change is a new carbon-trading system that uses a two-stage pathway for pricing carbon.

The carbon-trading system was introduced against a background of continuing polarisation of public opinion against the need for any action for climate change. Also, there had been little public debate on alternative actions for climate change, other than the Federal Coalition's "Direct Action Plan" policy.

The first stage of the pathway for the carbon-trading system will be the three-year period, commencing 1 July 2012, when the price of carbon will be fixed like a "carbon tax". The carbon tax will be applied to 500 companies that account for around 60% of Australia's carbon dioxide emissions.

From 1 July 2012, the price of carbon will be $23 for each tonne of carbon dioxide. The price of carbon will then rise by 2.5 per cent each year; at the end of the three-year period the price of carbon will be around $25 per tonne.

A carbon price of $23 per tonne of carbon dioxide is higher than the prices paid in the EU over the past few years: the average price for each tonne of carbon dioxide in recent EU-ETS auctions (September-November 2011) was €11.20 ($AU14 approx.).

For the second stage of the pathway, the carbon tax pricing mechanism will transition to an emissions trading scheme where the carbon price will be determined by the market.

Emission targets, for reducing carbon dioxide emissions over time, have also been set by the Federal government.

By 2020, the goal of the Federal Government's clean energy plan is to reduce carbon dioxide emissions by at least 5 per cent compared with 2000 levels.

The Federal Government also has a new long-term target: to reduce carbon dioxide emissions by 80 per cent below 2000 levels by 2050. However, no details for the projected carbon price for each tonne of carbon dioxide for achieving this target have been given.

This gap in information is significant as it creates uncertainty whether Australia's carbon-trading system will effectively tackle climate change when considered against the social cost of carbon.

The following conclusions were derived by Dr Stanton based on the sensitivity in climate-economics-models on choices made in the mathematical model for discount rate (the discount rate is used to determine the equivalent present day value of future economic impacts), the degree of climate temperature-change sensitivity and the assumed relationship between temperature increases and economic damage:

· That "a $21 social cost of carbon is a bark, certainly, but it lacks teeth"; and

· That a $200 or higher carbon price is the kind of bite required for a serious emissions reduction policy that shouts to the world that government takes climate change seriously.

On this analysis, the government's carbon tax of around $23-$25 is merely barking at the problem for climate change. Also, the Federal Coalition's Direct Action Plan" has a modest target that may "lack teeth" for tackling climate change. Its goal is to reduce carbon dioxide emissions by 5 per cent by 2020 - but based on 1990 levels - not the 2000 levels adopted by the government.

The challenge for government for taking real action for climate change will be the period 2020-2050. The transition will require government to bite into the problem of climate change. Far more substantial carbon dioxide emission reduction targets will be needed. Continued reliance on carbon-trading systems may mean that the carbon price could soar to $200-$500.

In this situation, will the emissions trading scheme continue to be the most cost-efficient and environmentally-effective means for moving to a clean energy future – whilst ensuring Australia continues to have a strong, growing and diversified economy that is globally competitive?

It is possible that no single action may be clearly superior for tackling climate change when all the dimensions for resolving this environmental problem are assessed; that it may be appropriate to develop a hybrid action for climate change based on a number of alternatives.

Surprisingly, an alternative action to reduce carbon dioxide emissions that was consistent with the environmental concept of sustainable development has not yet been considered.

There is a major difference between action for climate change based on sustainable development and a carbon tax/ETS.

For any action taken for climate change to be consistent withsustainable development, the multiple and competing objectives for sustainability – ecological, economic, social and cultural – must all be considered equally. In contrast, carbon-market mechanisms, like the carbon tax/ETS, have an inordinate focus on economics.

The Kyoto Protocol contains two relevant obligations for reducing carbon dioxide emissions within the framework of sustainable development:

• to "achieve emission limitation and reduction commitments" using a mix of Kyoto Protocol"national measures" that "promote sustainable development"; the carbon tax and ETS are not Kyoto Protocolnational measures(Article 2); and
• to implement policies and measures in such a way as "to minimize adverse effects, including the adverse effects of climate change, effects on international trade, and social, environmental and economic impacts…" (Article 3).

Support for obligations contained in the Kyoto Protocol can be found in the Clean Energy Act 2011 that was passed in the Federal Parliament on 18 November 2011. The first object of this statute [at section 3(a)] is "to give effect to Australia's obligations under … the Kyoto Protocol".

A prudent course for government to now take would be to ensure that medium- and long-term decision-making on action for climate change facilitates public trust and confidence in government. People should have an opportunity to effectively participate in the decision-making process, secure in the knowledge that their needs and concerns will be properly taken into account.

All possible alternative actions for reducing carbon dioxide emissions must now be identified and then subject to an independent evaluation using the Kyoto Protocol obligations as the dimensions for the comparison.

This is a priority issue for tackling climate change today as, in all likelihood, future generations will be faced with most of the costs; the needs for inter-generational equity make today's decisions on the action taken to reduce carbon dioxide emissions, and the emissions targets that are set over time, crucial.