Price floor and price ceiling
A far-reaching caution towards market mechanisms in emissions abatement can be observed even in the fully-operational phase of the Australian cap-and-trade, that is in the flexible charge years.
In the first three of these flexible charge years the scope of the Australian emission market will be delineated by a price ceiling and price floor.
According to the above-mentioned Commentary on Provisions of the ‘Exposure Draft of the Clean Energy Bill 2011’ the price floor will operate by a minimum reserve auction price for carbon units and a surrender charge for eligible international emissions units. The level of the price floor will start at $15 and rise in real terms by 4 per cent per year.
The price ceiling on the other hand will operate by the regulator issuing fixed charge carbon units that will be similar to the fixed charge carbon units for the fixed charge period. The level of the price ceiling will be set in regulations at $20 above the international price in 2015-16 and will rise in real terms by 5 per cent per year. The amount of the price ceiling issued in 2016-17 and 2017-18 will rise by 5 per cent in real terms per year, allowing for 2.5 per cent inflation per year, which is the midpoint of the Reserve Bank of Australia‘s target range (that is, the carbon price for the preceding year × 1.05 × 1.025, rounded to nearest 5 cents).
Although it is difficult now to precisely address the impact of these provisions on the international emission market, within the national Australian industry the price ceiling will undoubtedly have an important role of limiting risks flowing from new environmental policies. It is envisioned that to provide liable entities with certainty over the level of the price ceiling, the regulator will publish its exact value in advance of each compliance year. This will allow liable entities to determine the maximum cost of compliance – something that is really lacking in the EUETS.