Tuesday, September 15, 2020

Climate Change: Carbon prices must rise

When Parliament introduced the Emissions Trading Scheme, it was worried that carbon prices might get too high. So it introduced a "fixed price option", allowing polluters to pay the government $25 in the place of surrendering credits. The result was predictable: after we were thrown out of international carbon markets and the supply of low-price Russian fraud was cut off, prices spiked to the cap, and then everyone started just paying it, creating a huge stockpile of credits which can be used in future. Meanwhile, the artificially low price meant that some abatement options which might otherwise have happened, didn't - so we polluted more than we needed to.

To "fix" this, last year the government raised the cap to $35 from 1 January. And you'll never guess what has happened: prices are once again at the cap (in just nine months), so polluters will be paying it and stockpiling credits for later, compromising all future carbon budgets.

What this tells us is that the government is consistently setting its price cap too low. Even the $50 cap which will supposedly apply next year (in the form of a trigger point for the government flooding the market with credits which it does not have and blowing the carbon budget) is probably too low. If we want the ETS to actually work, we need to remove the cap, and let the market set the price. This will mean some polluters will be unable to pay the new price, while dirty farmers will face more competition from trees. But that's the fucking point. Market mechanisms work by making some behaviour - polluting - less profitable than other behaviour - not polluting. It allows clean producers to outcompete dirty ones. By artificially capping the price, the government is preventing that process from working, and thus hamstringing our climate change response. And all to protect dirty, outdated producers who could not compete if they paid the true price of their activities.

Carbon prices need to rise. Until that happens, we're never going to get anywhere. It is that simple.