Carbon price politics in the new paradigm

19 Oct 2010Archived News Climate Change Matters

Australia has a new political landscape for the politics of carbon pricing to be played out. On Monday, the day before the opening of the 43rd Parliament, Prime Minister Gillard announced the make up of the new multi-party Climate Change Committee established to determine the best way to put a price on carbon.

As we wait for the mud to settle in the murky waters of the 43rd Parliament, this edition of "Climate Change Matters" considers the views of the main players and the possible elements of a new climate change policy, including the issues up for deliberation by the Climate Change Committee. We also outline our recommendations for business.

Some positions shift, others reaffirm

The Gillard-Labor government went to the polls with a promise to lead a debate on the introduction of a price on carbon and to gain support for legislation providing a broad-based carbon emissions trading scheme. In an election-eve interview with The Australian, the Prime Minister stated that she did not rule out the possibility of legislating a market-based mechanism in the 43rd term, but that she did rule out a carbon tax.

The new Climate Change Committee, however, is the outcome of an agreement Labor struck with the Greens. One of the four principles underpinning the agreement through which Greens would provide confidence and supply to a Gillard-Labor government was that they would work together to address climate change, and specifically form a multi party committee to consider the implementation of a price on carbon.

An invitation has been extended to the Coalition for two representatives to join the new Climate Change Committee, however Tony Abbott has rejected the suggestion stating, "This repugnant because it has a test that somebody must sign up to a preordained outcome."

Prior to the election Tony Abbott stated "There will be no carbon price on consumers under a Coalition government, none whatsoever". The Coalition instead advocated a direct action policy where carbon abatement actions were funded from consolidated revenue via a new Emissions Reduction Fund and awarded through a competitive tender process. The primary focus of the scheme was carbon sequestration projects in agriculture.

The Climate Change Committee is not working to a timetable with pre-determined milestones. They will meet monthly through to the end of 2011 after which the purpose of the committee will be re-considered. The Committee will report to Cabinet, through the Minister for Climate Change and Energy Efficiency, presenting a range of possible policy positions as they are developed.

With Labor re-elected only through the support of four of the six cross benchers in the lower house, the chance of a price on carbon in the current term now appears to be pretty fair; as is the chance of some form of interim carbon tax.

Support from independents Wilkie, Oakeshott and Windsor

All three independents have made clear that they believe pricing carbon is an appropriate domestic policy response.

In voting for the Government's Carbon Pollution Reduction Scheme (CPRS) Bill in 2009, Rob Oakeshott commented that he thought it was "a furphy to say that the world needs to wait, and that countries need to wait for Copenhagen".

Tony Windsor stated that he voted against the CPRS because he thought the 5 per cent by 2020 reduction target was "too low to rearrange the economy. If you are serious about climate change you've got to do something serious about it". Tony Windsor has accepted an invitation to join the new Climate Change Committee.

One of Andrew Wilkie's 20 demands prior to throwing his support behind the Gillard-Labor Government was the urgent introduction of a price on carbon. Although this demand is not in the final agreement he made with Labor. Since then Wilkie has commented "there has to be a price on carbon, so much revolves around that, and this carbon price may or may not be part of an emissions trading scheme. Until polluters have to pay to pollute - until there's a price signal in the marketplace - we won't see much change. Other things are just around the margins".

New climate change minister

With Greg Combet sworn in as the new Minister for Climate Change and Energy Efficiency , we can expect a fairly hard-headed prosecution of the case for a carbon price. Combet has articulated his priorities as to "continue the government's strong support for renewable energy, to promote greater energy efficiency in industry and households, and to work towards the introduction of a carbon price".

Coalition digging in

Since the election, the Liberal-National Coalition has been consistent in its opposition to any form carbon price and has continued to advocate for their direct action plan. The Coalition has also vowed to boycott the Climate Change Committee process.

With a new senate from July 2011, and the Greens holding the balance of power, the Coalition will not have a deciding vote on legislation in either house. In political terms the role of the Coalition will be limited to advocating its own policies as an alternate government, and undermining community support for the need for a carbon price. Unlike the development of the CPRS, the Coalition now seems unlikely to be directly involved in climate change policy negotiations with the Government.

Here we go again - carbon tax, ETS or hybrid?

Both previous Rudd/Gillard-Labor and Howard-Coalition governments had a clear preference for an emissions trading scheme model over a tax as a means of pricing carbon. This preference is also apparent in the Garnaut Review, and in the positions of groups such as Business Council of Australia.

Others such as the Australian Industry Group are more ambivalent about the ETS versus tax question.

In announcing the new Climate Change Committee, Prime Minister Gillard emphasised the importance of a price on carbon to give business certainty. She said, "This isn't easy but we intend to work through and tackle the question of reducing carbon pollution and how we deal with a price on carbon."

For a good summary of the relative merits of trading schemes versus taxes, read Appendix D of John Howard's Task Group on Emissions Trading - Final Report.

What's up for grabs in the development of the new policy?

Almost everything. Some of the key considerations will be:
The Model: will the Climate Change Committee favour an ETS-based approach over a tax? Will transitional arrangements such as initial permit price caps, as was proposed under the CPRS, effectively make for a tax in the initial stages?

Coverage: will agriculture be covered on a mandatory vs voluntary basis?

Distribution of costs: how will costs be distributed in terms of consumers vs industry, regions vs cities, sector versus sector, high vs low income earners?

International offsets: will the Greens drop their opposition to international offsets to give business groups greater comfort around permit price risks?

Transitional assistance: what proportion of tax/permit revenue will be channelled into complementary programs versus compensation for the inevitable inflationary impacts of carbon pricing?

EITEIs: what level of assistance will be provided to emissions-intensive trade-exposed industries?

Timeframes: will a carbon price find its way into law in the current Parliamentary term? Given the makeup of the parliament this appears at least plausible.

Targets: The Government recently reaffirmed its target range (5 to 25%) but we have yet to see whether this will be acceptable to the Greens and the Independents.

Compared to the CPRS, any new scheme is likely to go further and provide less compensation for industry. That will create political opportunities for the Coalition sitting outside the policy development/negotiation process. This opportunity will be limited by the extent to which the new policy is framed as having multilateral support: a luxury the CPRS only fleetingly enjoyed.

Other energy and carbon measures

A range of new energy efficiency measures are also coming into effect. Mandatory disclosure of energy ratings for commercial buildings (CBD) will be in place from November 2010. Check out the new CBD website.

The Energy Efficiency Opportunities program will be tightened and extended to include power generators.

With the election out of the way, the PM's Task Group on Energy Efficiency is expected to release its recommendations in the coming weeks. The previous Prime Minister, Kevin Rudd established the Task Group to advise the Australian Government on options to improve Australia's energy efficiency by 2020.

Key initiatives may include:

  • A national energy efficiency target,
  • A national energy efficiency trading scheme to replace state based schemes in ACT, Vic, SA and NSW,
  • Increased support for cogeneration and trigeneration, and
  • Greater requirements on electricity network operators to invest in demand management.

The introduction of a national energy efficiency trading scheme is not generally regarded as a substitute for a price on carbon. Having such a scheme in place however, can be expected to further muddy the waters of carbon price politics in the coming months.

We are also waiting on announcements about the implementation of a number of new Labor Party policy commitments made in run up to the election. Read Energetics' summaries and implications for business on three initiatives: The Green Building Fund, Credit for Early Action and Tax Breaks for Green Buildings.

Energetics' advice to business

  • Plan for a price on carbon within two years. It will probably be in the order of $10- $23 per tonne initially. It may start focused on the electricity generation sector and as such will largely be another pass-through price increase.
  • Expect that the government will provide compensation to emissions intensive, trade exposed exporters and low income earners.
  • Price increases arising from electricity grid network investment will be more significant than the impact of a new carbon price.
  • It makes even more sense to identify and pursue energy efficiency measures to minimise both your exposure to the price placed on carbon and the impact of energy price rises.
  • Expect the government to provide incentives and other complementary measures, utilising the revenue raised from the carbon price.

Energetics will keep you informed of developments as they occur.

Written by Jon Sibley, Principal Consultant. 

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