CPA—May 2012

Why is a carbon price needed?
The Australian Government has committed to cutting the nation’s pollution levels by 5 per cent, based on 2000 levels, by 2020. The mechanism chosen to achieve this goal is the Clean Energy Legislative Package, a suite of legislation passed by the Senate on 8 November last year. The Government suggests economists around the world recognise that putting a price on carbon is the cheapest and most environmentally effective way to cut pollution.

How does the carbon price reduce pollution?
Based on the “rational person” approach, it is assumed Australian businesses, in order to avoid paying the carbon price, will try to reduce their carbon emissions. Some will achieve it through finding more efficient ways of operating; others will invest in clean technology.

How will it be implemented?
The legislation containing specific details of the carbon price is the Carbon Price Mechanism (CPM). It has two phases:-

A three-year fixed-price phase (Phase 1):

• Starts 1 July at A$23 per tonne (rising 2.5 per cent per year in real terms).

A fully flexible market price phase (Phase 2):

• Starts 1 July 2015 as a cap-and-trade emissions trading scheme (ETS) with the price determined by the market.
• The number of permits issued by the Government each year will be capped.During the first three years a price will be A$20 above the expected international price (with a 5 per cent rise in real terms per year). The floor price will be A$15 (with a 4 per cent rise in real terms per year).
• Liable entries will need to surrender permits equivalent to their annual emissions
• Units may be obtained from a variety of sources, including free allocations, Government auction, open trade and eligible international units.

What will be the effect?
Prices will increase, we are just all unsure which prices and by how much. For those of you operating business, be sure to take into account these price increases when determining the value of the products and services you sell or provide.