Cameron Hepburn

17 May 2012

Sydney Morning Herald – The price is right?

Cameron Hepburn

Is Australia’s carbon price too high compared with other major countries, or will it be all right in the end?

IT STARTED as just one assertion among many in the most rancorous political debate of recent times. Then at some point it became an assumed wisdom. Stated as fact by host Tony Jones on the ABC’s Q&A last week, it went something like this: Australia will soon have a “very high” carbon price that is “way out of kilter with the rest of the world”.

Will it? A snapshot survey of international and local carbon market experts suggests the picture is less clear. When the multiparty climate committee of Labor, Greens and independent MPs agreed on a starting price of $23 per tonne of carbon dioxide, it partly based its decision on the European price – then about $20.

The European price later slumped and is now less than $10. The price of carbon credits generated in the Clean Development Mechanism – a United Nations scheme that allows the rich to pay for emissions reduction projects in developing countries – is less than $5.

Australian-born environmental economist Dr Cameron Hepburn, who is based in London, is more blunt. A fellow at Oxford University and the London School of Economics, he says $23 is “nowhere near” the highest carbon price in the world. British companies, he says, are paying about £16 (A$25) once you count a “top up” tax charged in addition to the European permit scheme.

Hepburn says the nature of a carbon market is that prices move up in boom times and down in a recession, and Europe and Australia are facing different economic scenarios.

“The EU is in a prolonged recession, so it is hardly surprising that carbon prices have fallen to below $A10,” he says. “Australia’s economy may have two speeds, but overall it is growing reasonably quickly by comparison to the EU, so its carbon price would be expected to be higher. So $23 is not an inappropriate carbon price.”

Like most Australian-based experts, Hepburn says he expects the Australian price to be close to the $15 floor by 2015-16. In part, this would be because evidence in other emissions schemes has shown it is usually significantly cheaper to cut pollution than companies expect. In a 1990s US program to reduce the sulphur dioxide and nitrous oxides causing acid rain and in the NSW Greenhouse Gas Abatement Scheme, which forced electricity retailers to meet an emissions target, cuts came more cheaply than expected.