Canberra comes back to climate change

by Tony Wood

Published by The Australian Financial Review, page 47, Wednesday 17 July 2013

The government is reducing funding for environmental programs in order to pay compensation for pain that won’t be inflicted, writes Tony Wood

Prime Minister Kevin Rudd has moved to address one of the clear failures of his previous term in the job.

In moving to an emissions trading scheme with a floating price a year earlier than the Gillard government had planned to do, he has put climate change back on the political agenda, while promising that households and small businesses will pay less than under his predecessor’s plan. Yet the actual benefits are small, uncertain and probably overstated.

There are at least three reasons why the Prime Minister had to take this action. First he can differentiate his government from that of his predecessor by addressing the most obvious problem of a fixed price – that is, what happens when it is so high that it makes Australia’s carbon price one of the world’s highest, and far above that of the European Union scheme to which it is to be linked.

Second, despite the counter-claims by the opposition, Mr Rudd can neutralise the “carbon tax” argument, and try to turn the political debate toward the real areas of policy difference. Third, it provides a basis for him to rebuild bridges with the business sector, and support his claim that his government can work with both business and the unions.

The political value of the proposed move is considerable and the negative aspects relatively small and manageable. There is some administrative work to be done. An emissions cap will have to be set a year earlier, although the Climate Change Authority is already working on setting caps from July 1, 2015, and it should not be too hard to bring the task forward by a year.

The process of auctioning permits to liable businesses will also have to be brought forward, as will the linkage with the European ETS. This step is critical for liable Australian emitters to gain access to the European permits, which are currently trading at about $7 a tonne.

In the short term, the political pain is not too bad. The Greens’ opposition to a lower carbon price could make it hard to get the changes through the Senate. Yet that problem seems a long way off at present and a Coalition government would have a similar challenge. Finally, the savings needed to address the revenue shortfall created by the forecast lower price seem to have been found reasonably easily.

Things become less certain

The proposed change does deliver modest but good news for households and small business, if only for a year. But this is where things become less certain. Despite the apparent precision of Mr Rudd’s estimated savings of $7.30 per week for the average household and other calculations for businesses, the estimates seem to depend on the carbon price being $6-10 a tonne in 2014-15.

This may very well come to pass. Yet the actual price of permits from July 1, 2014, will be largely determined by the European permit price. There is a political ocean to be crossed before then and it is possible that the European Parliament will change its ETS to create prices much closer to $20 to $30 within a relatively short time period. In that case, all the businesses and consumers who will benefit from a floating price now will be facing a much higher bill. Indeed, Australian Treasury forecasts have the floating price at $38 a tonne by 2019-20.

Both the government and the opposition say they will retain the Household Assistance Package, which was introduced to compensate for a fixed price. With either party in power the households covered by the package will be better off than they would have been without the carbon price in the first place! The government is reducing funding for environmental programs in order to pay compensation for pain that won’t be inflicted. The opposition has not specifically identified how it would fund the retention of the Package. These commitments seem to set a low point in Australian policy making.

Many businesses will see the change as a battle won in a longer war. We are already seeing renewed calls for carbon pricing to be scrapped altogether and for the renewable energy target to be scrapped or at least significantly weakened. Business lobbyists were among those just a few years ago calling for a fixed price to provide “certainty”. They wanted a price much lower than the final figure of $23 a tonne. It will be ironic if the European price by 2015-16 is back to the $20 or more range. Will businesses revert to calls for a fixed (low) price?

The Prime Minister says his policy is much cheaper than the Coalition’s Direct Action Policy. While the government’s figures are uncertain, the Coalition has not published forecasts at this level of detail. The lack of detail is one of the key criticisms directed at the policy. We risk having a battle of rubbery figures around which no one can agree.

At least climate change policy is back on the main political agenda. We seem to have forgotten what it is supposed to be about. The emissions reduction targets of both sides are the same. Both accept that Australia must contribute to the long-term objective of keeping global average temperature increases to less than 2 degrees.

The debate should now be which policy is likely to achieve the target most efficiently and which prepares Australia for the long haul of addressing the climate change challenge.