Malcolm Turnbull's national energy guarantee plan masks a carbon price.

Source: Daily Climate

Peter Hannam

The Turnbull government’s new national energy guarantee could introduce a de facto carbon price, measuring the cost of emissions for the first time since the Abbott government scrapped the carbon tax in 2014.

The long-awaited energy plan, released by the government on Tuesday, requires electricity retailers to ensure improved reliability levels while also reducing carbon emissions in line with Australia’s Paris Agreement commitments.

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Buried in the detail of advice presented by the new Energy Security Board to state and federal governments is a mechanism to be added to the National Electricity Market in two stages in 2019 and 2020 that could produce a default carbon price.

“Some electricity retailers will not be able to meet the required emissions profile, while others will overachieve,” it reads. “Therefore a secondary exchange will occur between retailers to balance their portfolios.”

That “exchange’ will also be open to those underachieving retailers to buy a yet-to-be-determined portion of any “emissions guarantee” shortfall using Australian carbon credit units or international units, the briefing note says.

Hugh Grossman, Executive Director of advisory group RepuTex, said that mechanism creates a de facto carbon price, even if its level may be hard to pin down.

“It’s not a transparent price,” Mr Grossman said. “Certainly from a structural design point of factoring in that cost of carbon, [it’s] a very good step.”

Since Australian carbon credit units (ACCUs) already float and would be available for purchase by retailers, “the effective carbon price for the market would be the price of those ACCUs”, he said.

Energy challenges in focus: Energy Minister Josh Frydenberg and Prime Minister Malcolm Turnbull. Energy challenges in focus: Energy Minister Josh Frydenberg and Prime Minister Malcolm Turnbull. Photo: Alex Ellinghausen

Josh Frydenberg, the Environment and Energy minister, though, downplayed the prospect, telling Fairfax Media there would be no explicit carbon price.

“Under the new initiative, the commonwealth will legislate the target and retailers will be required to have an average emissions level across their portfolio,” he said. “They can use existing contracts to meet this obligation, potentially including international permits and domestic credits.”

Placing a price on carbon: One default outcome of a National Energy Guarantee. Placing a price on carbon: One default outcome of a National Energy Guarantee. Photo: Arsineh Houspian

At least one state government, though, interpreted the advice to mean Canberra was backing linkage to carbon markets.

Craig Kelly, chair of the Coalition’s backbench energy committee, took a similar view, saying: “there is a potential price but what that price will be is an unknown factor”.

Retailers overachieving on emissions will be able to trade them with those that don't meet the requirements. Retailers overachieving on emissions will be able to trade them with those that don’t meet the requirements. Photo: John Woudstra

“There will be a cost or price there if you are not meeting your obligations,” he said.

Mr Kelly said it is possible the price could be zero, depending on what trajectory for emissions is set by the Australian Energy Market Operator.

Prime Minister Malcolm Turnbull has in the past supported a price on carbon as the most efficient way of reducing greenhouse gas emissions, which are blamed for driving climate change.

However, carbon pricing as been kryptonite for the Coalition since Tony Abbott grabbed the leadership of the Liberal Party in 2009. Mr Abbott campaigned heavily to scrap the carbon tax introduced by Labor in 2011, a goal he achieved as prime minister in 2014, a little more than a year before he was toppled by Mr Turnbull. 

Mark Butler, Labor’s energy and climate spokesman, said that even without an “upfront market” setting a carbon price, the plan designed by the government will “inevitably [set] a secondary market that provides a pricing of the carbon arrangements”.

“Now that might not be what Josh Frydenberg and Malcolm Turnbull told the Coalition party room [on Tuesday], but I think it is the response of everyone in the industry,” Mr Butler said.

“At the end of the day companies will start contracting and trading with each other and a price will emerge on that which reflects the carbon obligation,” he said.

RepuTex’s Mr Grossman said access to international markets may also be one way to link whatever carbon market emerges in Australia to efforts in Europe, China or elsewhere to price carbon.

While international prices of carbon credits have been cheap in the past, those prices are likely to increase in the future, he said.

Given the large opportunities for carbon sequestration and other projects in Australia that could supply low-cost carbon credits, this country may even become an exporter of such market instruments to the benefit of land users and other ventures here, Mr Grossman said.