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Public fiscal liability and climate change

November 9, 2009

In the MYEFO last week Treasury provided an updated view on the revenue and expenditure impact changes associated with the CPRS.

The main conclusion was that the CPRS would now generate a AUD$1.2bn net fiscal cost – AUD$2.5 billion out to 2019/20. 

This is due to improved terms of trade and the strengthening of the $AUD which would suppress the carbon price (and therefore revenue from permit sales).  A further significant influence is increased emissions in uncovered sectors, which Treasury suggest would lead to lower permit issuance availability to covered sectors.

The report also points out that expenditure for some components (e.g. Climate Change Action Fund) of the assistance programme are in no way indexed to the carbon price – and that therefore ‘discrete policy action’ needs to be taken for the scheme to be calibrated to the price.  The inference is that unindexed assistance represents a fiscal risk.

The report states (Part 3, P10) the difficulty in generating forward estimates with:

components of the package significantly affected by the state of international climate change negotiations and scheme linkages, as well as changes in world carbon prices and the outcomes of scheme review processes

These last few points highlight a point that I’ve made in a previous post regarding budgetary liabilities and the design of the emissions trading scheme. 

This point is that the Government, through scheme design of the CPRS, and in nearly every statement made, indicates an implicit guarantee to assume carbon price risk.

In a short space of time, Treasury has adjusted their view as to an Australian carbon price by about 10% – from AUD$29 to AUD$26. 

Treasury notes, in the quote above, that effectively the carbon price might do anything in the future.  For example, if Parties to the negotiations at Copenhagen move closer to a reasonable cut, and leave out substantial inclusion of some major supply-side prospects of the market, then one might reasonably expect a 2012-2020 global carbon price to increase relative to current assumptions.

This scenario might increase public revenue through permit sales but, through a preliminary fixed carbon price and carbon price cap thereafter within the CPRS, it may increase public fiscal liability. 

Government would need to intervene more substantially in covering a national inventory shortfall through purchasing international carbon credits.

This situation might actually be exacerbated by the increase in emissions from uncovered sectors.  The Treasury analysis suggests that the impact of the increase in these emissions would be fewer permits made available to covered sectors, thus reducing revenue.

The effect may not be so much on the revenue side of the balance sheet, however, but on expenditure.

Given that the Government is clearly pliable to the demands of exposed sectors in the CPRS, a more plausible scenario might be for permits to be auctioned to the same extent as before to the covered sectors.  Granted, this trajectory of hand-outs under the CPRS is now under pressure.

Should the Government cover shortfall either through buying AAU permits from other Governments or CERs from CDM projects, neither covered nor uncovered sectors would have to assume the burden of a carbon budget deficit. 

The Government (a.k.a.: taxpayer) would effectively assume the national carbon budget risk – rather than pass that liability (through a domestic permit shortage) to the private sector.

In addition, the recent communiqué from the G20 meeting in St Andrews emphasises

the need to increase significantly and urgently the scale and predictability of finance

This would come from significant private investment, leveraged by public finance, with an implied role for emissions trading.

Australia is signed up to this.  Australia will need to pony up for a substantial increase in investment in international permits – the choice is on the spread of the origin of this additional investment – whether from the private sector or public purse, or both.

Given that at least some Government intervention in international carbon markets is a plausible option, then a sensible question to ask is what liability (expenditure) provisions might be made within budget forecasts for additional Government intervention in international carbon markets.  

A broader implied question is whether a the CPRS – with substantial assistance programmes and a low target – is a viable design.

Are the Australian public budget and CPRS participants, prepared for the signficant increase in North-South financial flows to which Australia seems bound to contribute, which is at the core of a global deal on climate change at the UNFCCC?


PS:  In an interesting piece, Alan Kohler at the Business Spectator has also noted the conundrum for the G20 (and Australia) as to how emissions abatement is paid for.


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