Labor should introduce ‘shadow price’ of carbon into costings, says independent economist Nicki Hutley

Danielle Le MessurierThe West Australian
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An independent economist says Anthony Albanese should introduce a “shadow carbon price” into captial expenditure decisions.
Camera IconAn independent economist says Anthony Albanese should introduce a “shadow carbon price” into captial expenditure decisions. Credit: David Gray/Getty Images

A leading economist has called for the newly installed Federal Labor government to start factoring in a “shadow price” of carbon into funding decisions, as financial markets continue to exit fossil fuels.

Nicki Hutley, an economics spokeswoman for the Climate Council and a former partner at Deloitte Access Economics, also said big business had been lacking the certainty to invest prior to Saturday’s election victory to Anthony Albanese.

Speaking at a virtual Climate Council event, Ms Hutley said pricing in the externality of greenhouse gas emissions would result in “far more sensible decisions”.

A shadow price is a theoretical value set to cost carbon emissions to help ensure investment decisions reflect all costs, including those related to the environment.

It has already been adopted by the ACT Government, which in October last year become the first Australian jurisdiction to put a dollar value on climate inaction by implementing a “social cost of carbon” at an interim price of $20 per tonne of emissions.

Some companies also apply a shadow price on carbon. For example, Wesfarmers’ shadow carbon price for capital expenditure decisions in Australia starts at $19/tonne CO2e in the short-term and increases to $85/tonne CO2e in the longer-term.

Ms Hutley said funding projects was becoming increasingly difficult due to disruption from climate change in the absence of action.

“We know from research already in developing economies that the cost of capital is around a 1 percentage point premium for both public sector and private sector capital,” she said.

“We’re already seeing super funds saying we’re getting out of fossil fuels. We’re seeing consumers take companies to court.

“A big jump that policy can take is to start factoring in, even if it’s just a shadow price or a social cost of carbon, into all policy decisions. We would start to get better outcomes.”

The Climate Council estimates climate costs related to worsening extreme weather could rise to as much as $94 billion each year for Australia by 2060 and $129b each year by 2100.

Noting the business community was already well ahead of the government on progress to slow the pace of climate change, Ms Hutley said the big end of town were eager to do more but had lacked policy certainty.

“If you talk to those operating in the renewables sector, particularly in infrastructure, there has been a reluctance to invest as quickly as might have been because of the policy uncertainty and the risk to some of the assets,” she said.

However, Ms Hutley said she was optimistic for the future given there was now a “broad church of agreement” across the government and business sector about the need to accelerate climate action.

Labor has committed to net zero emissions by 2050 and a 2030 target of 43 per cent.

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