Briefing Note on Carbon Tax Investment Confidence Study

CENTRE OF INTERNATIONAL ECONOMICS: KEY FINDINGS

Purpose

  • The aim of the work was to examine the implications ? for prudent business planning ? of the hybrid architecture (3-5 year fixed price followed by emissions trading scheme) proposed for the carbon pricing scheme.
    • A particular feature of the work is to examine the implications of the proposed approach where Australia?s 2020 target is not decided until a year before the start of the emissions trading scheme (i.e. in either mid 2014 or mid 2016).

Methodology

  • The CIE team examined an ensemble of all major modelling work on carbon pricing and used the average cost of abatement. The work was undertaken by David Pearce, a leading applied economist who has been involved in greenhouse and related issues for the past 15 years. The CIE team assumed an initial fixed carbon price of $20 - rising by 4 per cent p a - for 4 years - followed by a floating cap and trade scheme.

Key findings

  • The analysis shows a major bounce in carbon prices once the fixed price phase of the scheme ends (in 2016-17).
  • Under a 5 per cent target the carbon price jumps to $49, under a 15 per cent target the carbon price increases to $71, while under a 25 per cent target (proposed by the Greens) the carbon price surges to $93.

Price bounce after end of fixed price phase

  • With the 5 per cent target, the price jumps by 118 per cent (from $22 to $49)
  • With the 15 per cent target, the price jumps by 217 per cent (from $22 to $71)
  • With the 25 per cent target, the price jumps by 315 per cent (from $22 to $93)
    • In other words, with no clarity on the 2020 target, Australian businesses could be facing carbon price volatility (after the fixed price phase) between 118 and 315 per cent.

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