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October 20, 2010

This is good for carbon pricing in Australia and elsewhere. Although I think the devil of this report will be in the detail:

China already has a substantial implicit price on carbon without a formal carbon trading scheme or tax in place, a UK study comparing six major economies has found. The study undermines one of the key arguments advanced in developed countries against carbon pricing.

Opponents of cap-and-trade and carbon tax initiatives in the US, Canada, Japan and Australia have long argued that a price on carbon should not yet be implemented in these countries because it would erode their trade competitiveness against the high-growth emerging economies of the developing world – particularly China and India – where no price is in place.  In Europe, where an emissions trading scheme is already in place, similar arguments are also put forward against the strengthening of the EU-ETS in its upcoming third phase from 2013.

But a study by the UK-based Vivid Economics and commissioned by Australia’s Climate Institute has produced a very different picture of the relative carbon price status of six major economies. It considered both the direct impact on the power generation sectors of carbon pricing schemes and the impact of indirect measures, such as clean energy incentives that act as de-facto prices on carbon.

The study looked at the range of measures in place to stimulate the switch to low-carbon power sources in each country and calculated an equivalent carbon price in US dollars. The calculations are adjusted according to purchasing power parity (PPP) for more meaningful price comparisons between the economies. The results were:

  • UK: $29.30
  • China: $14.20
  • North-East USA [home to RGGI carbon market]: $9.50
  • USA overall $5.10
  • Japan: $3.10
  • Australia: $1.70
  • South Korea: $0.70

The UK had the highest overall carbon price signal, courtesy of the EU Emissions Trading Scheme on heavy emitters and other regulatory measures in place such as the Carbon Reduction Commitment on high power users. China does not have an explicit carbon price via emissions trading or a carbon tax but has a substantial implicit price on carbon, nevertheless, due to other measures. These include renewable energy feed-in tariffs and other subsidies on a range of green energy sources, as well as energy efficiency standards.  

The report was commissioned to inform the debate over carbon pricing in Australia, now subject to deliberations of a climate change committee of politicians, experts, business representatives and NGOs. A major factor in the opposition to the Labor government’s failed cap and trade scheme proposal, the CPRS, was the trade competitiveness argument mounted by emissions-intensive, trade-exposed industries in the resource-rich economy. The report finds, however, that policies and regulations already in place in China create an equivalent price tag on carbon emissions in the electricity sector more than seven times that of Australia’s.

In New Zealand, which began an emissions trading scheme in July, the concern is that competitiveness will be undermined if major trading partners Australia and the US don’t put a price on carbon. The results of Vivid study will fuel those concerns.

The research also indicates that broadly speaking a market based mechanism, such as an emissions trading scheme, is the cheapest and most economically efficient way to reduce pollution, the Climate Institute says.


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