http://afr.com/p/national/controversy_erupts_over_carbon_floor_sBTBG2uJAHa3rKmdszGIOL#

 

The federal government is struggling to find a way to implement a $15 minimum carbon price when emissions trading starts in 2015 and is negotiating with the Greens to re­design the complex scheme.

 

Despite widespread opposition to the $15 floor price from the energy industry and carbon traders, Climate Change Minister Greg Combet ­yesterday denied the government was preparing to dump the commitment to a floor price that was made to win the support of Greens senators.

The Australian Financial Review has been told by several sources there are considerable practical problems with the plan for a floor price through a "top-up" charge when the carbon scheme links to international markets in three years.

Senior government sources said it would be "very difficult politically" to walk away from the commitment to the minimum price and it could have implications for the budget.

As a result, the government is in intensive negotiations with the Greens to find an acceptable alternative. Bureaucrats have been asked to come up with other options, including possible legislative changes.

However, redundancies in the Department of Climate Change and the amount of work needed to be done to ensure the carbon tax was operational by July 1 has slowed resolution of the problem.

Companies that have been lobbying the government were recently told a discussion paper outlining a possible solution would soon be published.

"Both the Department of Climate Change and the Treasury are fully aware of the serious and irreconcilable flaws in the operation of the floor price," said one industry figure who has been lobbying on the issue.

Greens leader Christine Milne said yesterday there was a discussion about how "best to implement a floor price and give businesses the certainty they need to invest with confidence in the clean energy economy".

"We are working hard to make sure it can be completed as soon as possible," Senator Milne said. The Greens don't want the price to fall too far because it would reduce the incentive for business to cut greenhouse gas emissions and invest in renewable energy sources.

Some experts think the carbon price could fall from $23 a tonne now to $6 a tonne without government intervention.

A spokesman for Mr Combet said the government was consulting with parties over the details of the floor price. "The regulations are yet to be drafted and it's not appropriate to speculate about future parliamentary consideration of this matter," he said.

"The government remains committed to the MPCCC [multi-party climate change committee] agreement, which includes a floor price."

An options paper published this year indicates the government favoured a top-up fee for inter­national permits based not on what companies paid for the permits but their market value when they used them.

This would mean companies wouldn't know at the time of purchase what their carbon costs would be, and many would need to hedge their risk through financial markets. This could add up to $5 a tonne to the cost of each permit.

As a result, NSW independent Rob Oakeshott has threatened to ask Parliament to veto any regulations implementing a floor price.

Australian Financial Markets Association executive director David Lynch said a floor price didn't fulfil the objective to promote investment certainty.

"Our concern is that the floor price hinders the development of the forward market, and that is a consequence of less-efficient forward prices and that reduces certainty for investment," he said.

"Removing the floor price would just enable the domestic market to function better and give price signals which give investment confidence."

Mr Lynch said none of the options proposed by the government was workable, as it was difficult to determine the benchmark international permit price given the variety of ways they were traded.

Frank Jotzo of the Australian National University, who helped design the floor price, said the ­purpose of the policy was to promote investment in low-carbon tech­nology. "The argument in the end is not about the instrument but the objective and that is to drive some amount of change to a lower-carbon economy," Dr Jotzo said.

"For that you can't let the Australian domestic price crash down to those single-digit prices that you have in the market for international ­credits. How you do that, through a price floor or other way, is a separate question."