Australia Launches Carbon Pricing Mechanism

Six years after former Australian Prime Minister John Howard announced that he believed an emissions trading scheme would be the most efficient way to curb carbon emissions, the country has implemented the highest fixed carbon price to date in the world. On July 1, the Australian system imposed a price of $23 Australian dollars (A$), the equivalent of $23.72 U.S. dollars, per metric ton of emitted carbon on almost 300 companies. According to Australian Climate Minister Greg Combet, households should expect to pay about 10 percent more for electricity, or an average of A$3.30 per week. In order to reduce the economic burden of the carbon price, consumers will receive A$14.9 billion in tax cuts and assistance payments while power generators will get A$5.5 billion in free permits.

Australian leaders hope the carbon price will help the country, which has the highest carbon emissions per capita in the developing world, meet its target of a 5 percent reduction in greenhouse gas emissions by 2020. “The cheapest and most efficient way of reducing carbon pollution is to harness the power of the market, to put a price tag on greenhouse gas emissions that creates an incentive to cut them,” said Combet. According to Prime Minister Julia Gillard, the tax will reduce carbon emissions by 160 million tons by 2020, the equivalent of 45 million cars.

Australia will phase in a market-based system in order to avoid pitfalls found in the European Union's cap and trade scheme. Australia's carbon price will increase 2.5 percent, adjusted for inflation, each year until 2015 at which point market forces will decide the price. The carbon price, however, will have built-in price ceilings and floors until 2018 at which point a full market system will take over. The country will also determine the annual supply of permits five years in advance in order to have greater control over market strategies.

“The scheme has about seven years of European experience to draw on, and I think the Australian model picked up key lessons from Europe,” said Tim Jordan, a Sydney-based analyst at Deutsche Bank AG. The European Union's cap and trade program set carbon permit supply through 2020 which caused prices to plummet as demand for permits fell during the recession.

There is no guarantee, however, that the tax will last long enough to phase into a market system. The opposition leader Tony Abbott has vowed to repeal the tax if his party gains the majority. Abbott has criticized the carbon tax system, saying it will "act as a wrecking ball across the economy." His Liberal-National coalition currently leads Prime Minister Gillard's Labor government in the polls.

Photo : Photo by Takver .

Note: 1 Australian dollar = 1.03113 U.S. dollar (July 17, 2012).

Sources:
Bloomberg News
Sydney Morning Herald
The Australian