Last week, Australia’s energy ministers made a commitment to reform the National Electricity Objectives (NEO) and commence work on a National Energy Transformation Partnership. Many have applauded this historic decision, which will see the Australian Energy Market Commission (AEMC) prioritising cutting emissions as part of its objectives for the first time since its creation a quarter of a century ago.
The AEMC makes the rules for the electricity and gas market. It must refer to the NEO to guide the formation of these rules. Currently, the goals are based around price, quality, safety and reliability, and security of supply. Now, the AEMC will have to prioritise emissions reduction as well.
Some experts believe this is a step towards a carbon price. It's been a decade since a carbon tax was on the national agenda, so could it really be back? At the moment, Australian farmers and businesses who are generating carbon credits are in a voluntary domestic carbon market. That is, Australian companies are not legally obliged to offset emissions.
We take a look at what a carbon price is, how it works and whether we might see it make a comeback in Australia.
So, what is a carbon price?
Carbon pricing is an instrument that captures the costs of greenhouse gas (GHG) emissions, such as damage to crops, health care costs from heat waves and droughts, and loss of property from flooding and sea level rise, and ties them to their sources through a price, usually in the form of a price on the carbon dioxide (CO2) emitted.
Instead of dictating who should reduce emissions where and how, a carbon price provides an economic signal to emitters, and allows them to decide to either transform their activities and lower their emissions, or continue emitting and paying for their emissions.
In 2012, Australia introduced a carbon tax with a plan to transition to a cap-and-trade emissions trading scheme three years later. Emissions dropped almost immediately after the tax was introduced as businesses moved to technologies that emitted less. Just two years later, the tax was repealed and carbon emissions began to rise again almost immediately.
According to the World Bank, about 46 countries are pricing emissions but while most use emissions trading schemes (ETS), carbon taxes are relatively rare.
What’s the difference between a carbon tax and an emissions trading system?
An emissions trading system (ETS) is a system where emitters can trade emission units to meet their emission targets. To comply with their emission targets, regulated entities can either implement internal abatement measures or acquire emission units in the carbon market, depending on the relative costs of these options. By creating supply and demand for emissions units, an ETS establishes a market price for greenhouse gas (GHG) emissions.
A carbon tax directly sets a price on carbon by defining an explicit tax rate on GHG emissions. It is different from an ETS in that the emission reduction outcome of a carbon tax is not predefined but the carbon price is.
So, will Australia bring back the carbon tax?
Australia certainly could see a return to carbon pricing, with a view to introducing an ETS like many other countries have done. Although this does not guarantee a reduction in emissions, it can serve as an incentive by placing the onus on individual organisations to find ways to reduce their emissions. Whether a carbon tax is on the horizon in Australia remains to be seen, watch this space.