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5 reasons why Kevin Rudd’s carbon move makes us wince

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Within a few milliseconds of the recycling of Prime Minister Kevin Rudd by the Labor Party late last month, it was pretty clear that one of his first decisions would be to accelerate the move from a fixed carbon price to an emissions trading scheme. We were the first to predict just that – albeit within a few milli-hours.

To have an emissions trading scheme is a good thing. It is regarded by just about every economist as the most cost effective way of finding the projects and the technologies to reduce greenhouse gas emissions, and to address the issue of climate change, which is the point of the whole exercise.

The good news is that Labor’s rebound in the polls means that the carbon price is here to stay, even if Tony Abbott and the Coalition scrape over the line (perhaps with a minority government that relies on Bob Katter and Clive Palmer – just imagine).

But is this decision to accelerate the transition from a tax to a trading scheme a sign of progress? Sadly, no, or at least not yet. There are reasons why the manner of Rudd’s move on the carbon price should make us wince, and should sound some alarm bells. Here are five of them.

Cost to households – After spending the past year arguing that the carbon price was having minimal impact on household budgets – a conclusion supported by economists who put the inflationary effect at between 0.4 to and 0.7 per cent – the Rudd team says the primary reason for switching from a fixed price to traded price a year early is to provide relief to households.

For a piece of spin this is badly thought out, and is typical of the Rudd style. NSW’s Independent Pricing and Regulatory Tribunal (IPART) did say recently  that retail prices could fall 6.9 per cent when the carbon price moves to a traded commodity, but this presumes that the wholesale price will fall as predicted (not certain) and can be passed through (also not certain)

Reducing the carbon price means rises in the cost of other components of the electricity price,  such as renewable energy certificates. And any falls could be offset by rises in other components of the retail bill, such as transmission and distribution costs, and retailer margins.

This is about politics rather than policy: This a complaint from the Greens’ Christine Milne and she has a strong point, because it has been ever thus with Labor. Rudd got himself elected with some fine speeches about the importance of tackling climate change and gained kudos by signing up to the Kyoto Protocol. But then he used the CPRS to drive a wedge in the Opposition, and managed to get Malcolm Turnbull turfed out by Tony Abbott.

He baulked at a “climate election” he could have won, and dropped the CPRS on the insistence of Julia Gillard and Wayne Swan. Gillard then promised a people’s assembly but no carbon tax in her election campaign, before agreeing to the Clean Energy Future package, including the carbon price, after striking an agreement with the Greens and the country independents to form a minority government. Labor’s positions reek of political opportunism at every turn.

A low price is not necessarily an asset for Australia: There is nothing wrong with a low carbon price as such, but it’s pointless if it is accompanied by a target that is well short of the science. Australia’s decision to link with the ETS effectively exports its price-setting to the state of the EU economy, and the whims of the Poles, who have vetoed efforts to make climate and clean energy targets more ambitious.  A low price means Australia outsources the effort to other countries, and that might turn out to be a mistake down the track when the world  wakes up to the climate problem and has to reduce emissions everywhere, not just in poor countries.  The choice is: low price, outsourced effort and risk of a sharper adjustment later vs higher price, more effort in Australia and lower risk of high-cost adjustment later.  Australia is clearly opting for the former.

Ambition: This will be the test of Rudd’s leadership. There is no evidence that Labor is going to aim for a more ambitious emission reduction target. It would argue that it will wait for the Climate Change Authority’s report on this matter. But – apart from the Greens – an increase in ambition for either emissions reduction or renewable energy is absent from the national political debate. Contrast this with the situation in Europe, where many countries are pushing for higher targets in both, the California debate over moving to 50 per cent renewables, and the recent progress in China and the US to prepare their economies for more ambition.

The Opposition: Well, they have been wedged and they know it. Tony Abbott’s thunder has been stolen, and he doesn’t have a credible policy to offer. Abbott cannot argue that Direct Action can deliver cheaper abatement that $6/tonne. Climate Change spokesman Greg Hunt is playing Chicken Little and was warning of a carbon price of more than $350. Now, that might occur if the world hits the action button and seeks dramatic reductions in a short period. The question that needs to be put to Hunt is what that price would be in a Direct Action policy environment and all abatement has to be achieved in Australia in such a scenario. Double, triple ….. ?

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  • Name

    Any change to carbon pricing will need to go through the Senate. Greens won’t let pricing fall without a BIG compensatory piece of leglislation in some other area that Labor can’t stomach.
    Giles didn’t mention double dissolution opportunity – if Rudd retains govt, will he double dissolve to make the ETS earlier? Of course not! There’s no upside for Rudd and the polls are too close to risk a swing against him. Same goes if Abbott gains govt despite his rhetoric.
    Interesting to think that if Rudd holds and Turnbull becomes Opposition leader in 2014, whether Libs will do a WorkChoices and wave through an earlier ETS as damage control helping business lobby.

  • Chris Fraser

    Another potential problem of linking to supereconomies is their price setting power. You have little control over the price except for complementary things such as RET. I wonder if everybody linked up, would they ever concede to giving the abatement demand – and therefore the price – to the IPCC, the IEA, or someone else ?

  • RobS

    1 reason it doesn’t make me wince:
    1. The alternative is Abbott with his direct action handouts to big emitters.

    • Joe

      whilst I agree that the Abbott alternative is worse Rob, unfortunately many of the big emitters already get permit handouts via the ‘Jobs and Competetiveness Scheme’ and the ‘Coal-fired generation assistance’ scheme, amongst other things. See http://www.cleanenergyregulator.gov.au/Carbon-Pricing-Mechanism/Industry-Assistance/Pages/default.aspx

      • RobS

        Those are handouts to partially offset the carbon price on the biggest emitters. If brown coal generators had to pay the full carbon price they would go out of business overnight, neither renewables nor any other form of generation could fill that gap immediately, what we need is a slow tight squeeze not a decapitation to give replacements a chance to ramp up to fill the gap. Essentially they are paying x dollars in carbon tax and receiving 1/2 back as compensation. Abbott’s plan is to scrap the carbon price so they pay nothing then give them handouts if they promise to try really really hard to reduce emissions, like the carbon capture and storage trial at Heazlewood which captures 0.1% of the plants carbon emissions…

        • Joe

          True, but in many cases the free permits outweigh the emissions, and that’s for the big smelters as well as the coal guys, so it’s more that they pay the square root of bugger all. I’m looking into it at the moment but don’t have the exact figures yet. I agree with your point on principal though, and also agree that the Abbott option is ridiculous. I would just argue that many of the big guys can cope with a higher price/ more ambitious target/ less freebies, and that will be exacerbated if the move the lower price comes in.

  • James Wight

    I think rushing to an ETS is likely to be a disaster for Australian climate policy.

    Whereas the fixed carbon price appears to be helping cut emissions and complementing other climate policies like the Renewable Energy Target, the planned ETS contains time-bombs which would actively prevent climate action in Australia. The time-bombs include locking in the meaningless 5%-by-2020 emissions target and allowing international offsets. Unless the time-bombs are defused before the ETS begins, they will stop the present emissions reduction in its tracks and allow domestic emissions to rise. That would arguably be an even worse outcome than the Liberals simply repealing the policy.

    Observing the ongoing failure of the EU ETS, I am increasingly convinced Australia should abandon emissions trading altogether, instead extending the fixed carbon price beyond 2015 and introducing other more direct measures.

    See my blog post: http://precariousclimate.com/2013/07/14/rudd-ignites-carbon-trading-time-bombs/

  • Michel Syna Rahme

    5 positives from Labor’s decision to bring forward the ETS:

    1. The people get to witness first hand how bipolar the media and journalists in Australia have become, and how unrealistic, fragmented and partisan the green lobby is acting on our behalf. Hopefully the disenfranchised public will demand more from our environmental leaders, including a unified front!

    2. The majority of ordinary Australians who do not have much interest in the details of carbon pricing will be less influenced by seedy Coalition propaganda around the Carbon ‘Tax’ therefore reducing the Coalitions chances of winning.

    3. Green voters such as people like you and me, should all realise that it’s basically impossible for the Australian Green Party to secure more than 50% of the vote at the next election to become the governing party. Hopefully this realisation will bring Green voters and leaders back down to Earth to find a way to work with the actual power we do have, in a progressive, positive and pragmatic way.

    4. Abbott now has much less chance of becoming the Prime Minister of this land and winning with a landslide and taking over the senate which we are all aware would be a catastrophe.

    5. The Greens will likely have one more chance to redeem themselves and their past mistakes from 08/09 and have one last chance to work with Kevin and the Labour Party in establishing an ETS, with the condition perhaps that the target be revised, reviewed and recommended by an independent authority every few years in return for their support to Labor.

    I personally have had enough of journalist putting forward opinion like they are somehow detached from their personal preferences and beliefs, I do not believe that is possible – be straight be clear. Journalists are not kidding anyone by making out they themselves are neutral and do not vote for one particular party or another – may I please remind them that its actually illegal not to vote in Australia, not that I understand the logic of not voting voluntarily whether that is for Labor, Greens, Sex Party, or The Wikileaks Party. I have a serious question, what would you do Giles if you were Rudd and going into the election that far behind in the polls against a man that can be safely described as the biggest threat to Australia in all it’s history?