This country does have a carbon price, which business is using. And it’s the key to success after the Glasgow climate summit.
Reducing carbon emissions – an even more urgent task according to the latest report of the Intergovernmental Panel on Climate Change – is proving good for business. While many governments talk a big game, the business community is setting the pace on emission reductions.
Economic theory tells us that where negative spillovers such as carbon emissions are evident, the optimal combination of government and private sector behaviour to reduce them is for governments to set a sound policy framework and the private sector to respond to the incentives or disincentives the framework creates.
And so it is with carbon markets. Article 6.2 of the Paris Agreement, which hopefully will be operationalised at the Glasgow meeting of the Conference of the Parties in November, provides for the establishment of bilateral and regional carbon markets.
The Australian government has established Australian Carbon Credit Units (ACCUs), certifying the storage or avoidance of one tonne of carbon by a project.
Issued by the Clean Energy Regulator, ACCUs are being bought by companies that have committed to zero net emissions by 2050 or earlier and are now moving to fulfil those commitments. ACCUs are also being bought by emitting businesses that exceed their allowable baseline emissions.
Yes, there is a clean little secret – the Coalition government has a carbon price set by the market. ACCUs are now trading at $22 each, sharply up from $16 early this year.
Carbon markets are great news for Australian farmers interested in diversifying their income sources. Farmers can earn ACCUs by storing carbon in their soil and revegetating parts of their properties. They might even install a few hectares of solar panels, allowing sheep to graze underneath them.
While this sounds weirdly futuristic and dystopian to those Coalition and One Nation MPs who still consider Australia’s future is coal fired, it is happening right now on farms in New England and many other places in rural Australia.
Imagine, though, what would happen to the price of ACCUs if they could be traded internationally. To illustrate, the current price of carbon in the EU is almost A$90 per tonne.
But far from contemplating buying our ACCU’s, the EU is planning to apply a carbon border adjustment mechanism (CBAM) to imports of selected products from countries with low emission-reduction ambition. Australia is considered to have low ambition, because it is refusing to commit to zero net emissions by 2050.
When the EU released the details of its proposed CBAM, commentators claimed the US was set to follow, so too Japan and Korea.
Missing from these predictions is a crucial fact: the EU already has a domestic price on carbon while the US and Japan do not. Without a domestic carbon price, a CBAM cannot be compliant with obligations under the World Trade Organization.
Unless the US wants to destroy the rules-based international trading system, it would need to implement an emissions trading system or a carbon tax in conjunction with a CBAM.
The Biden Administration is taking a much more conciliatory approach than the Trump Administration to multilateral organisations including the WTO and is therefore unlikely to impose a non-compliant CBAM.
Following the mid-term elections, the Democrats will almost certainly lose their majority in one or both houses of Congress, as has happened to every first-term administration in modern American history. What chance, then, of Republicans agreeing to impose a nationwide price on carbon?
The EU will proceed with its CBAM on selected goods in a manner that complies with WTO rules, with effect from 2026, and expanding in coverage over time.
The US will threaten a carbon tariff, will not introduce it but, supported by the EU, will apply maximum pressure on Australia to lift its ambition on emission reductions to give it leverage against China, Brazil, India and other emerging countries to lift theirs.
In our Asia-Pacific region, Australia could utilise Article 6.2, as operationalised at Glasgow, to negotiate bilateral agreements with APEC members. By trading in carbon storage and other ways of reducing emissions, the participating members could achieve their targets more quickly and with less disruption to their economies, while generating valuable new sources of income for farmers and other landholders.
While all the government manoeuvring takes place, increasingly private financiers are refusing to invest in new fossil-fuel projects. Businesses are imputing a high carbon price in their cash-flow analyses of investment proposals. And businesses, including farmers, are finding ways of making money out of carbon storage.
Rather than trying to replace markets, governments should state their policy ambitions clearly and harness the power of markets to reduce carbon emissions quickly and decisively.
Craig Emerson is a former Australian trade minister. He is a distinguished fellow at the ANU, director of the APEC Study Centre at RMIT and an adjunct professor at Victoria University’s College of Business.