The Coalition’s hidden carbon tax

It would be unfair to compare the Government’s cornerstone ‘direct action’ climate policy to the Hindenburg. The Hindenburg had a problem with landing, direct action has a problem getting off the ground.

Direct action is currently designed to give away billions of dollars of tax payer revenue to carbon abatement projects implemented by polluting businesses and landholders on the one hand through the ‘Emissions Reduction Fund’ (which works like a grant program). And one the other hand, it is supposedly designed to ensure that emissions don’t grow elsewhere in the economy through a ‘Safeguard Mechanism’ which requires Australia’s largest emitting facilities to keep their emissions equal to or below a determined emissions ‘baseline’ level.

It has been over 7 years since Environment Minister Greg Hunt first attempted to float the policy from opposition, and two and a half years since the government came into power. Somewhat embarrassingly though for the Minister, the policy remains only partially implemented, with the safeguard mechanism still not in place.

With direct action still only partially implemented and Labor’s ‘carbon tax’ scrapped, it’s no surprise that Australia’s emissions are rising again. This was confirmed on the 26th of February by the Commonwealth Clean Energy Regulator, with its 2014-15 National Greenhouse and Energy Reporting data showing that reported emissions to atmosphere rose by 2 per cent compared to the 2013-14 financial year. The recorded increases were largely attributable to emission increases in the electricity sector.

With emissions increasing, the climate policy headache for the Turnbull Government is also growing because Australia’s emissions reduction targets have just increased dramatically. Specifically, last year – under considerable diplomatic pressure before the Paris COP 21 convention – then Prime Minister Tony Abbott pledged the unthinkable; to reduce Australia’s emissions by at least 26-28% by 2030 (from 2005 levels).

With emissions growing under the Government’s direct action policy, this 2030 emissions reduction target is now drifting further and further out of reach. And as the Climate Change Authority’s chart below shows, the emissions reduction task that must be driven by climate policy is only getting larger.

Emissions reductions needed to meet Government’s 2030 target (2014‑15 projection)

Not wanting to admit direct action’s failings pre-election, Minister Hunt is quick to point out that direct action can’t be judged until it is fully implemented, and that the safeguard mechanism will finally be in place by next financial year. And yet the introduction of the safeguard mechanism still won’t fix direct action because the mechanism was deliberately designed to be ineffective.

Specifically, the Abbott Government (having promised corporate Australia that it would not create a punitive mechanism) designed the safeguard mechanism as ‘trompe-l’œil’ policy. With a series of quirks and concessions integrated into its design, the mechanism gives major polluters plenty of wriggle room to further increase their emissions without incurring any financial penalty. Essentially it is a safeguard mechanism in name only.

Cross-bench senator Nick Xenophon cottoned on to this last year and with Abbott (sort of) gone, he pressured the Government to announce that direct action, and its safeguard mechanism, would be up for wholesale review in 2017, within just one year of its implementation. The scope of the review is broad, but it’s understood that the intent of the review will be to legitimise not only a strengthening of the safeguard mechanism’s design, but its metamorphosis into something well beyond a ‘safeguard’ mechanism.

This is not speculation. Minister Hunt, in an interview late last year with The Guardian stated that meeting Australia’s 2030 emissions reduction target would now be contingent on the safeguard mechanism itself delivering 200m tonnes of emission reductions in the 2020’s. This is not something that the current safeguard mechanism is designed to do.

The only feasible way for the safeguard mechanism to achieve 200m tonnes of abatement in a decade is to re-calibrate down the existing baselines. In simple terms this would mean that covered facility will be more likely to exceed their annual emissions allowance, thus obliging them to source carbon credits at a cost to them. The emissions allowance would have to decline year-on-year if we were to meet our 2030 target, thereby increasing the financial penalty on facilities that were not able to ratchet down their emissions profile in line with their shrinking allowance.

That sounds a bit like a ‘carbon tax’ of sorts. Oh dear…

Perhaps oblivious, Tony Abbott is still busy chastising Labor for its emissions trading scheme proposal, labelling it one of Labor’s ‘five toxic taxes’. And yet at the very same time, Australia’s other Prime Minister, Malcolm Turnbull, is slowly but surely paving the way for the development of the Coalition’s own emissions tax.

Logically, this impending hypocrisy should be something that Labor would pounce on, but they’re also in a bind.

Bill Shorten is leading the charge on an emissions trading scheme, but he does not enjoy widespread support from his party for this policy. Many in Labor fear that taking an ETS policy to this year’s election would be like pouring acid over its campaign. Some are preferring a more bi-partisan approach, which would focus on revising and strengthening direct action, and using this as the blueprint for moving forward collectively. But with Shorten’s on-going commitment to an ETS, a bi-partisan outcome is currently off the table.

Paradoxically, because both major parties disagree on policy we probably won’t hear anything substantial about climate change in this election campaign. The Coalition won’t want to talk in detail about direct action in fear that voters might cotton on to their impending ‘carbon tax’. And Labor will be reluctant to blow the whistle for fear that it too might be exposed for being so internally conflicted on its own climate agenda. It suits both major parties, therefore, to keep climate policy on the down-low for this campaign.

This might sound like a sad state of affairs but there are some real positives. Both major parties, aware that government spending has to be drastically reined in, are now quietly aligned in their support for one or another type of punitive mechanism to ratchet down Australia’s emissions. And with obvious support for this approach from The Greens, and the Coalition’s far right losing their influence with Abbott’s ousting, it seems that the major parties are all now on the same side of the divide.

There’s good reason to believe that this new dynamic will see the toxicity come out of the domestic debate on climate policy, thus facilitating constructive negotiations. Whilst that might be true, there is still much work required to find common ground between the parties and to design a policy that works and that can be implemented.

Some despair that this will take many more years of tedious negotiating. I disagree, and think that the answer is just around the corner. Watch out for another surprise press conference from Clive Palmer & Al Gore. These guys always have the answers …

Evan Stamatiou is managing director of Carbon Risk Management.