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Australia to pay more than $500m per annum as a consequence of Copenhagen. Budget deficit implication.

October 19, 2009

The Prime Minister’s push for a domestic emissions trading commitment prior to the UNFCCC meeting at Copenhagen will have two implications:  first, in establishing a programme prior to the meeting, the Government may avoid the stickier issue of trying to secure a more difficult target in parliament (CPRS -25 rather than -5).  Second, the Australian Government will be able to feel good about themselves at the meeting (though it is folly to believe that Australia would have any substantial leverage as a consequence of the passage of the CPRS bill). 

In practical terms, Australia is a price-taker.  What other countries commit to at the negotiating table at Copenhagen has ramifications for the Australian scheme and costs.  It makes no sense to commit to specifics prior to the meeting.  This does not mean that Australia should ‘free ride’, but the fact remains that we are outside the circle of major economies that will dictate the shape of the agreement.

As it is, it is clear that it will be relatively expensive for Australia to reduce emissions.  We are coming from a higher relative benchmark.  This is set out clearly in the Treasury modelling for the CPRS .  I think it’s a useful time to remind ourselves of what the Government modelling says.

Australia’s emissions per unit of GDP is 0.80 Kg/USD$ (PPP) as opposed to a world average of 0.70 –more than twice the emissions intensity of the EU Economy.

Impacts on Australia’s income transfer and GNP are among the highest in the world.

These effects are obvious when we look at just want the international transfers emanate from:  the required intervention by Australia in the international emissions trading market, to the tune of between 60 to 103 Mt CO2e in 2020 (to be clear: i.e. short – as a buyer).

With the world carbon price modelled at USD $14-19/t CO2e in the G-Cubed model in 2019, and up to $47 in the first year of the scheme in the GTEM model, back-of-the-envelope maths shows that the implication is for an aggregate requirement for Australia to import upwards of USD$500m of permits in 2020.

How the onus of the allocation of this permit purchase is distributed in Australia is touched on in a previous post, but will not become clear until finalisation of the ETS.

I had mentioned that, should global prices outstrip the price caps envisaged within the CPRS, there will be little private sector participation in the international emissions market mechanisms such as the Clean Development Mechanism (CDM).  Instead, the backstop will be financed by the Australian public purse.

As also referenced in that post, Frank Jotzo’s analysis confirms the likelihood of budgetary impacts associated with international emissions trading, and the reasonable proposition of a budget deficit of over $1bn.

Curious, then, that the Climate Change Minister, Penny Wong, should be talking up the role of private sector participation through emissions trading markets in financing mitigation in developing countries.  Quoted from ‘The Australian’ last week:

She would not say exactly what form such financing would take, although she stressed that private investment via carbon markets would play a significant role.

“They are issues that would need to be considered after we get further through these multi-lateral negotiations,” Senator Wong said. “We do see a very big role for private finance, as in the carbon market.

“This means Australian firms having an incentive to invest in mitigation actions in developing countries. We need to expand those market mechanisms to get the flows of finance moving.”

On the contrary, clearly the Australian domestic climate policy framework – through the application of domestic emissions price-caps – would seem to support the preferred approach of developing countries for public government-to-government payments to be preponderant.

There is little public discussion of the wealth-transfer mechanisms, or the scale.  Will revenue from permit auctions be ring-fenced, and used, for example?  It looks unlikely, given the absence of such plans within the White Paper – meaning the it must come from general revenue.

Whether Australia’s contribution of USD$500m per annum is sufficient is another question.  The EU is talking about a required global payment of €100bn per annum from rich to poor countries – suggesting €15bn from the EU – for emissions mitigation.  Australia is within the G20.  Is this payment participation acceptable?  Australia has pushed to be part of the new framework governing the international finance system – the G20 – but with that comes responsibility.

The costs discussed above are purely for mitigation investment – not for additional investment in adaptation funds that the developing countries are seeking – which might cost an additional $100bn per year.

The implications of Australia’s participation in a post-Kyoto framework are drawing closer.

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