Carbon price a fertile ground for business scams

The Brumby’s Bakery chain has apologised after its managing director was caught out telling franchisees to jack up prices and “let the carbon tax take the blame”. Brumby’s parent company distanced itself from the scandal, telling the stock exchange it was just an “isolated incident”.

Yet no one should think Brumby’s is the only one. It takes no special foresight to work out that Australia’s big businesses will game the carbon price.

They exist to make profit. They have an obligation to shareholders to raise the company bank balance. If they can find a way to make money out of the carbon price by passing on more costs to consumers, they’ll do it.

But don’t expect too many more companies to make Brumby’s mistake and actually put their incriminating design to scam the system in writing. In other cases, the corporate scams will be more sophisticated and difficult to prove.

The companies to keep close watch on for carbon price gouging are not the bread shops, but the energy and finance companies. Because they play special roles in the economy, they have the power to shape the market to suit themselves.

For example, Western Australian energy company Synergy has decided to make its green power customers pay the carbon price, even though the carbon price does not affect renewable energy.

Similar problems have plagued Europe’s scheme. In its first phase, Europe’s big polluting companies made consumers pay the “costs” for carbon permits they received for free, gouging about €19 billion in windfall profits from customers.

Another big issue with Europe’s carbon price scheme has been the price itself, which has gone up and down like a yo-yo. Twice, the price of carbon permits have dropped to zero.

The price volatility is due to periodic droughts and gluts in the market. At times, the companies that control the most carbon credits — energy, industrial and finance companies — flood the market with extra permits and the price falls. Other times, permits dry up and the price goes up again.

Every time there is a big price shift, someone makes lots of money. But the yo-yo effect does not give economic certainty for zero or low emissions technologies. Some European energy companies have made fortunes selling carbon permits when they are high and buying them up again when they are low.

These carbon-trading problems have led to some perverse outcomes. Czech energy giant CEZ made so much money off a shrewd carbon trading deal that it built itself a new coal-fired power station.

In a 2009 paper, then-CSIRO economist Clive Spash said CEZ did it by being “allocated a third of the country’s allowances, selling them in 2005 when the price was high, being able to buy them back after the price collapsed and then using the trading profit to invest in coal energy production”.

The CSIRO refused to publish the paper, which was titled “The Brave New World of Carbon Trading”. Spash’s argument — “the focus on such markets is creating a distraction from the need for changing human behaviour, institutions and infrastructure” — made no impression on the mainstream debates about Australia’s carbon price.

Another carbon price swindle to watch out for are CO2 accounting tricks. The 500 Australian companies that pay the carbon price are allowed to measure and provide their own emissions statistics to the government. The government uses the company figures to add up the tax.

“Rentseeking” is a term for firms that manipulate the economy to extract value from others, rather than help add value to the economy itself. Carbon trading researcher Larry Lohmann has said: “Carbon-trading programmes such as the EU emissions trading scheme, in which pollution rights are given to private companies depending on how much they say they have been polluting in the past, are fertile grounds for rentseeking.”

That’s a warning to us. Australia’s new carbon price scheme awards pollution rights to companies based on how much they say they have polluted in the past.

Australia’s carbon price has included one partial safeguard — a floor price of $15. This limit means the price can fall only so far, stopping the worst of the yo-yo effect. But now Labor and the Greens are negotiating to lower or even do away with the floor price, which was due to last until 2018.

If that happens, it will be one more juicy invitation to powerful firms that are not at all bothered about how carbon pricing is supposed to work in theory.