Kevin Rudd will abandon the carbon tax. That's the word from Canberra as the Rudd 2.0 Government attempts to reboot Australian politics.
Carbon has not been kind to Labor since 2007. While climate change was a big factor in the election that unseated John Howard, the campaign to price pollution that followed was long and politically bloody. Under Rudd, Labor twice tried and failed to implement an emissions trading scheme, and the failed negotiations with the Coalition over carbon pricing were ultimately the catalyst for the rise of Tony Abbott as Opposition Leader.
Once confronted with an effective campaign against carbon pricing, Labor struggled to craft a strategy and stick to it. In early 2010 Rudd peremptorily abandoned the ETS, a decision seen by voters as a damaging backflip, and moved to tax big mining companies instead. It was the beginning of his decline.
The newly installed Julia Gillard couldn't quite make up her mind about carbon. Labor's 2010 election policy on carbon was a mess of contradictions. The party promised to introduce an ETS. But Gillard also promised a citizens' assembly to give ordinary voters a chance to deliberate on carbon policy. And, notoriously, she told Network Ten that “there will be no carbon tax under the government I lead”.
Once the circumstances of the hung Parliament forced Gillard to commit to carbon action, her record was admirable. Labor's second effort at pricing carbon was much better than its first one, and the final package of carbon legislation featured significant innovations, including strong public investment in renewable energy through agencies like the Clean Energy Finance Corporation and the Australian Renewable Energy Authority.
Indeed, you argue that Tony Abbott's scare campaign has largely come and gone. Whyalla has not been wiped off the map, and the effect of carbon pricing on electricity bills has been overwhelmed by the massive cost increases levied on businesses and consumers by greedy electricity companies passing on the costs of gold-plated infrastructure. Polls show it is not nearly as unpopular as it once was.
Now carbon policy is volatile again. There is widespread speculation that Rudd will dump the tax and move directly to a floating carbon price.
If it's not broke, why fix it? The answer, of course, is politics. Rudd's scheme was never implemented, so he can plausibly claim he never supported the carbon tax. Because carbon policy is so complicated, no-one will bother to check back through the old legislation and remind themselves that Rudd's CPRS also included a fixed-price period. That's right, Rudd's scheme would have been a kind of tax too.
But carbon politics has never had a lot to do with reality. If it did, Australia and the world would be moving to much higher carbon pricing and much tougher pollution regulations, and fast.
However, for Rudd, this very unreality gives him some considerable tactical opportunities. For instance, if Labor did decide to link the Australian scheme to the European scheme immediately, or at any rate very quickly, he could use that manoeuvre to put some real pressure on Tony Abbott and the Coalition. In a stroke, Rudd could turn carbon from one of Labor's biggest liabilities into a weapon with which to beat up on the Coalition.
There's no doubt the Coalition is vulnerable to carbon scrutiny. As we've remarked here before, the Coalition's so-called “direct action” plan on carbon is risible. Because Abbott's overriding priority has been to paint himself as the crusader against carbon taxation, the Coalition's plan is effectively a mirror image of an orthodox emissions trading scheme, in which a pollution permit on carbon provides a price signal for decarbonisation.
Tony Abbott and Greg Hunt's rickety scheme will instead use taxpayers' money to pay big polluters to reduce their current pollution levels, effectively creating a shadow price on carbon anyway. It will be a bonanza for brown coal generators and aluminium smelters, who will probably take the money and run. Few experts believe “soil magic” can credibly reduce Australia's greenhouse gas emissions enough to meet the Coalition's state goal of a 5 per cent reduction.
Indeed, on some estimations, the Coalition's shadow carbon price might even be higher than a floating price on carbon linked to the European ETS. Given how little anyone understands about the whole thing, Rudd could certainly make that argument – it's a lot more plausible than suggesting a regional city will be wiped off the map.
What will the effect of linking to the European scheme be? In a nutshell, lower carbon prices. That's because the international price is effectively set by the European market, which remains in the doldrums. The graph here shows the price of European permits in recent years, which are currently trading at around €4.70. That's about $6.75 and a huge discount on the $24 currently mandated by the Clean Energy Future legislation. 
But here's the catch: most big polluters are not really paying the full price for carbon anyway. The Australian legislation gives big polluters that are “trade exposed” a special discount of up to 94 per cent on the nominal price. On top of that, certain industries have received big cash grants from the Commonwealth in the form of “compensation” for the supposedly dastardly effect of carbon pricing. Brown coal electricity generators, for instance, have received around $1 billion under former energy minister Martin Ferguson. For all but the very dirtiest emitters, carbon pollution is already cheap.
In fact, one of the biggest losers of a cheaper carbon price might be, paradoxically, black coal generators. That's because, due to the complex interaction of the Renewable Energy Target and the carbon price compensation, black coal would suddenly be more expensive than brown coal. Expect plenty of calls for extra hand-outs from that sector if the change does materialise.
While this is being debated, Europe has finally shown signs of propping up its own carbon price, overnight passing legislation to “backload” carbon permits there, boosting the European price. Eventually, Europe may even decide to cancel existing permits that aren't required, which would remove the big supply overhand currently depressing the EU price.
Back home, Rudd and Labor have some tricky numbers to crunch on the matter. If the fixed price is abandoned, Australian carbon prices will plunge, punching a further hole in the government's tax revenues – a development new Treasurer Chris Bowen would hardly welcome.
One of the reasons why the Australian carbon price was set at $23 a tonne, rising gradually each year to 2015, was to try and put a floor under carbon permit prices. The stability would allow companies a period of certainty before carbon was exposed to the volatility of a freely-traded market in 2015. Some companies have now written forward contracts based on the fixed price out to 2015.
They might have to be compensated. It could all get messy fast.
But these are all problems for a third term of government – if Labor gets one. In the meantime, killing off the carbon tax might be too tempting an opportunity to pass up.
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