How Europe’s carbon woes will hit Australia

So much for Julia Gillard’s hope that the carbon tax debate would fade once the scheme was bedded down in the middle of last year. The issue has erupted again, hitting the government where it hurts at the worst possible time.

This week’s decision by the European parliament not to prop up Europe’s carbon price, which led to it falling 40% to a little over $3 a tonne, is a serious blow on two fronts.

It puts a multi-billion hole at the back end (years 2015-16 and 2016-17) of a May 14 budget that is already under major stress. The anticipated revenue would be significantly less, but the spending would still be high.

And it plays into Tony Abbott’s hands by highlighting that the Australian scheme is at present out of kilter internationally, which strengthens the voices in business complaining about competitive disadvantage.

The Australian carbon price, now $23 a tonne, is set to rise to $24.15 on July 1. It is not until 2015 that Australia would move to a floating price, when it would also be linked to the EU trading scheme.

The budget numbers are now being redone in light of the EU action. Beyond acknowledging that, Climate Minister Greg Combet has played down the European decision.

“This was just one proposal of a number that they are considering to support their emissions trading scheme, so it will now be considered further by the [EU] parliament’s environment committee in Europe”, Combet said on Wednesday, seeming to suggest it might be changed at some point.

The decision has set off a chorus from business with the Australian Industry Group calling for an immediate move to a floating price.

That’s the last thing the government would want to do from a budget point of view. The fiscal impact doesn’t come until 2015-16. If the market was brought forward so would the budget pain.

Ross Garnaut, who prepared the initial work on the carbon scheme for the Government, seeks to put this week’s events into perspective.

“There is a lot of water to go under the bridge before the European emissions price is determined for 2015 and later years. A tightening of targets or restoration of economic growth would change the price outlook.

“In the meantime, the low European price has no effect on the Australian budget or carbon scheme until 2015. Keeping the current arrangements in place will see the Australian price rise with increased international effort after 2015.

“There would be trivial competitiveness gains once free permits to emitters are taken into account, and large budget losses, from moving earlier to link with Europe.”

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