Tuesday, December 28, 2010

No bargain basement carbon will work

No cheap carbon

Michael Fraser, the managing director of AGL, has said his company will not start making investments in lower-carbon energy if the carbon price is below $30 per tonne… There is a minimum carbon price below which no real improvements in the carbon efficiency of the economy occurs, writes Michael Molitor, Visiting Professorial Fellow at the Climate Change Research Centre at UNSW, in the Climate Spectator.

"If our policy leads to a low carbon price, driven, in part, by high levels of compensation to big polluters, then the liable entities will make no real investments in de-carbonisation. They will pay the price of buying the few carbon instruments they will require to achieve compliance and make every attempt to pass on these costs to their customers. A low carbon price with high levels of compensation is, ironically, exactly what Tony Abbott called it, “a great big tax”. The result is our worst case scenario: Increased costs to consumers, and the economy in general, with no resulting carbon efficiency benefit.

"The other problem with a low carbon price is that the amount of capital required to de-carbonise our economy is tens of billions of dollars per year. The only way to move this much capital is to make it sufficiently attractive for the big financial players to enter the game. A low carbon price with a limited number of carbon instruments trading (due to the large allocation of free carbon permits as the principal form of compensation) fails to create the large liquid market conditions that attract the major financial players into the game…

"Finally, a higher carbon price will result in larger revenues to the federal Treasury. Instead of providing compensation to big polluters for the losses in the value of their high carbon-emitting assets, it would be economically preferable to use the carbon revenue to provide these companies with the capital to invest in lower-carbon emitting assets. In most cases these lower-carbon emitting assets are much more efficient and will actually save companies money."

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