Bad timing, wrong price: carbon tax risks failure
- by: Paul Kelly, Editor-at-Large
- From: The Australian
- July 04, 2012 12:00AM
LABOR'S principle of carbon pricing is supported by the Productivity Commission as the most cost-effective means of limiting greenhouse gas emissions, but its policy is fatally undermined by changed global arrangements and mismanaged domestic politics.
Despite this week's start-up, there will be no investment certainty in Australia surrounding carbon pricing until a Labor-Coalition bipartisanship is struck. That remains some years away. Tony Abbott will seek a mandate at the next election to abolish Labor's scheme and, provided he secures a reasonable majority, Julia Gillard's policy will be repealed.
Carbon pricing in Australia looms as a project in reform mismanagement. The Prime Minister's triumph has been to implement her scheme but her tragedy is that public support for her policy has largely collapsed. The fact the price impact for most of the economy will be modest and compensation for a majority of households is generous is unlikely to gainsay this story.
The bitter Labor-Coalition polarisation is about means, not ends. Gillard and Abbott have a shared climate change goal to reduce emissions by 5 per cent at 2020 off year 2000 levels.
It is an ambitious target. The dispute between the main parties is not over the science or the targets but the policy.
Pivotal to Labor's problem is the global failure to progress a legally binding international agreement on carbon pricing symbolised by the Copenhagen debacle in late 2009. This was the turning point; Labor has never recovered.
From that moment the debate changed - domestic support for carbon pricing went into a slump and new fears arose in Australian business, reinforced by subsequent economic troubles in Europe and America, that carbon pricing threatened our competitiveness. The key lobbies - the Business Council of Australia and the Australian Industry Group - turned critical.
Such uncertainties made Treasury's assumptions in devising an Australian scheme far more problematic. The fixed price of $23 a tonne across three years is now high by global standards. It is noteworthy in his February leadership contest that Kevin Rudd pledged, if elected, to move to a floating (and lower) price as soon as feasible. Australia risks being stranded with an excessive high price.
Economic and climate change guru Ross Garnaut rejects this, arguing that Australia underrates recent overseas events. Garnaut says the Obama administration has been active and is on track to cut emissions by its 17 per cent declared target by 2020 while China is investing big time in low-emissions technology.
Yet former NSW Liberal premier and reformer Nick Greiner offers a different view, telling Sky News' Australian Agenda "the timing is crazy, the price is crazy". Greiner says that when he recently sat down with the EU Energy Commission, the message was: "Our emissions trading scheme is a non-functioning instrument."
The danger is apparent: does Australia risk its industry competitiveness in a situation of weak global climate change commitment? If carbon pricing is tried in Australia and seen to fail, for either design or political reasons, the long-run consequences will be serious.
In mid-2015 Australia moves to a floating price that Treasury predicts will be about $29 a tonne. This assumes that "governments around the world" are acting on their Cancun voluntary pledges. How accurate will this prove? It is a highly contestable proposition. It assumes that "wish list" pledges by many nations are delivered by law when climate change is not the current political priority.
The risk in the post-2015 era is that the floating price is significantly lower than Treasury predicts, meaning the revenue is lower and, with the compensation fixed, a big "fiscal hole" emerges.
The BCA calculates that should the post-2015 price fall to $15 a tonne the call on the federal budget would be an annual $3 billion loss, creating another fiscal headache. In short, carbon price volatility can play huge tricks on the budget.
The irony of the current debate is that it has become more a cost-of-living issue than a clean energy issue. This is a fatal development for Labor.
From the time of Rudd's 2007 election victory, Labor's success with climate change has depended on the idealism (or religion) for clean energy action. This crusade, more fickle than many grasped, has largely died.
This week's Fairfax/Nielsen poll has a disastrous 62-33 split against carbon pricing.
The recent Lowy Institute poll showed support for action involving "significant costs" was at only 36 per cent now compared with 68 per cent in 2006.
Climate change is no longer the priority in the country that it remains for Labor and the Greens. The values of this parliament are in tension with the mood of the people. It is not a surprise: recall that Gillard pledged to this scheme after the 2010 poll to make minority government work, not because she felt the nation demanded action. The only way carbon pricing will be sold, ultimately, is via public faith in sacrifices to reduce greenhouse emissions. That is unavailable at present.
The upshot is that the current contest is about the hip pocket: how bad is the cost-of-living pain resulting from carbon pricing offset by tax/transfer compensation? Labor points out the average household is better off and overall the price rise is only 0.7 per cent.
Carbon pricing is not, in technical terms, a tax. But the idea of a tax is now entrenched. Labor lost the political battle at that time, long ago.
The public grasps the core concept is to change behaviour by price increases. So it assumes the worse. And in the real world, power costs will keep rising significantly due to a range of factors.
Most people will conclude that Abbott has exaggerated the impact of something they don't like anyway - but Labor's hope the public will turn against Abbott for immoral exaggeration is unlikely to be realised.
The current C-day campaign between Labor and Coalition looms as an anti-climax. It is not like the GST with immediate across-the-board price rises. The main impact will be to confirm existing views.
Sadly for Labor, it cannot escape the epic political blunders that have led to this point: Rudd's climate change retreat in early 2010; Labor's failure to seek a mandate against Abbott for its scheme at the 2010 poll, thereby settling the issue politically; Gillard's immediate post-election reversal as part of a self-interested "breach of trust" deal with the Greens over minority government; and, finally, Labor's blunder in allowing Abbott to walk all over it and brand the scheme a tax.
