Consequences of joining the European ETS

The Australian government wants us to join the Europeans in a carbon Emissions Trading Scheme. To this end they have sent legislation to the Senate who are going through the usual rigmarole of invited submissions on this topic. Together with my PhD student Cameron Murray, I have written them an invited 9-page submission which you can find on the linked website.

Our conclusions:

  1. A large volume of accumulated unsold permits in the EU, currently about 950 million tonnes, ensures a continued oversupply. Deutsche Bank forecasts the price to be around 10 Euros per tonne in 2015, whilst Point Carbon thinks it could drop to 4 Euros per tonne.   A recent auction of 4 million permits in the UK fetched a price of 7.48 Euros per tonne.  Because of these reserve over-allowances, Australia could be sold EU permits without any change to the price or volume for any emitter in Europe, implying that we would buy ‘spare’ permits from the EU, without anything happening to overall carbon emissions for many years.
  2. We thus expect the revenue of the scheme to be much lower than projected: under the current Australian Treasury projections, the revenue would be $9.4 billion in 2015, based on a price of 29 dollars per tonne, applied to around 350 million tonnes of demand. We think it is more likely to be $10 per tonne and Australian revenue to be nearer $3 billion. At present arrangements, a sizeable fraction of Australian permits would be bought in the EU auction market, effectively leading to a transfer payment from Australia to the EU without any clear benefit to Australia.
  3. A best case revenue estimate in 2015, assuming no EU permits bought by Australian emitters and a price of $15 per tonne, would be $5.4 billion.  A worst case revenue forecast, with 50% permits bought from EU and other international Kyoto compliant offsets and a price of $8 per tonne, would be $1.4 billion, with payments from Australian firms to EU governments and other Kyoto offset suppliers of around $1.3 billion.
  4. We encourage a mechanism that would put more strict limits on the amount of permits Australian emitters would be able to buy from the EU system, and from Kyoto-compliant permits, particularly during the transition phase till 2018.  The EU experience shows that adequate monitoring of cross-border flows of permits are also essential to eliminate the scope for fraudulent trading behaviour.
  5. In order to prevent a massive outflow of funds from Australia to the EU from the threat or expectation of a change in policy, we advocate that the scheme includes an insurance component that guarantees the value of permits if there is major domestic policy change.
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