PM's concession on carbon

POSTED August 30, 2012

THE Gillard government has made a concession to big business and tweaked its carbon price, potentially creating a budget black hole and endangering incentives for the switch to cleaner energy.

After months of backroom talks with the Greens, Climate Change Minister Greg Combet announced yesterday he was scrapping the $15 per tonne minimum ''floor price'' the government had previously insisted was needed to give businesses certainty about the scheme.

Instead, Australia's scheme will be directly linked to Europe's, meaning the cost of carbon to Australian businesses - and therefore the prices that are passed on to consumers - will depend on the price in Europe.

Also, strict limits will be placed on how many permits big emitters can buy from cheap carbon-reduction projects in developing countries.

The changes were cautiously welcomed by both industry and environmentalists. But Opposition Leader Tony Abbott said the changes showed the government had got it ''fundamentally wrong'' and was ''mired in chaos and confusion'' just two months after the carbon price scheme began.

Mr Combet hit back, saying Australia would have the confidence and certainty of being linked to the biggest carbon market in the world - the 27 European Union member states plus three other countries.

''The real significance of this is that, contrary to all the crap that Abbott goes on with, we will have a carbon price that is coincident with that covering 30 other countries, 530 million people,'' he said. ''And we'll be looking towards the relationship with other countries in the [Asia Pacific] region.''

European carbon permits are trading at just below $10, down from more than $20 about 18 months ago. If the price stays at this level there is a danger that it will not be high enough to drive investment in clean energy in Australia, observers say.

But most analysts believe the European price will rise as governments there take action to bolster it.

The government would also face a considerable budget black hole. Mr Combet yesterday stood by Treasury's budget modelling that assumed an international carbon price of $29 in 2015, though few analysts believe the price will be that high.

The tax cuts and household compensation that offset