Rudd ignites carbon trading time bombs

I must be psychic. In March when the Australian Industry Group demanded the Australian government immediately move from its fixed carbon price to its planned future emissions trading scheme (ETS), I wrote that “I was very pleased to see the AIG proposal met with tripartisan categorical rejection” but “I remain[ed] vigilant, even pessimistic” because of rumored leadership challenges. Since last month when Kevin Rudd was reinstated as Australian Labor Party leader and Prime Minister, I’ve been dreading such an announcement. Sure enough, news outlets reported this morning that Cabinet has approved the decision to bring forward the ETS transition (previously scheduled for July 2015) to July 2014. Just four months from tripartisan categorical rejection to government policy – I wonder if that’s a record?

New Treasurer Chris Bowen says the details will be announced in coming days. But unless the issues I list below are addressed, the outcome is likely to be a disaster for Australian climate policy.

In contrast to the government, I have argued for extending the fixed price beyond 2015, because it appears to be helping cut emissions and complementing other climate policies like the Renewable Energy Target, whereas the planned ETS contains fatal flaws which would actively prevent climate action in Australia. I have described these flaws as “time-bombs” because they are set to go off when the carbon price becomes an ETS. Unless the time-bombs are defused before the ETS begins, they will stop the present emissions reduction in its tracks and allow emissions to rise instead. Indeed, observing the ongoing failure of the EU ETS, I am increasingly convinced Australia should abandon emissions trading altogether and instead focus on the fixed carbon price and other more direct measures. An ETS that is anything less than perfect may be worse than nothing, and the sabotaging influence of the fossil fuel lobby means perfection is unlikely to be achievable.

The main time-bombs are:

  • The lock-in of the ludicrously weak 5% emissions target until 2020, the end of the critical decade for cutting greenhouse gas emissions, would actively prevent ambitious climate action in Australia. No target should be set before the independent Climate Change Authority has completed its Caps and Targets Review, which is presently underway and due to report in February 2014.
  • International offsets would displace domestic emissions cuts, unfairly shift the burden of Australia’s emissions target to other countries, and (particularly in the case of baseline-and-credit schemes) be a breeding ground for flawed or fraudulent accounting. International offsets only appear cheap because they allow Australian companies to go on polluting.
  • Allowing international offsets, combined with the present state of international carbon markets, would cause the Australian carbon price to crash to merely a few dollars per tonne, undermining the incentive to decarbonize. A higher carbon price is superior to a lower one, because it means a more stringent penalty for pollution and a stronger incentive for investment in zero-carbon technology and energy efficiency. The international carbon markets to which many business lobbyists compare Australia have collapsed because they are badly designed, which is no reason for Australia to follow their example.
  • As currently designed, Australia’s ETS would treat non-equivalent types of emissions and abatement as equivalent, and is unlikely to deem the most important places to cut emissions as the cheapest. It is most important and urgent to phase out fossil fuel CO2 emissions, the largest and longest-lived cause global warming.

It remains unclear whether the Caps and Targets Review will continue. But even if the review is allowed to report and recommends ambitious targets, it looks unlikely to recommend any improvements to the design of the ETS.

Bowen has already said the carbon price will fall to the European price, indicating the government intends to proceed with its plans for international offsets. This means whatever target is chosen would not need to be met in Australia.

The expected lower carbon price also raises the issue of whether the reduced revenue will mean cuts to climate change spending. Bowen says there will be no cuts to household compensation (though he did intriguingly hint there might be some changes to the industry compensation).

The first thing Rudd did in his second Prime Ministership, announcing a new Cabinet, included implementing the Liberals’ policy of combining the departments of “environment” and “climate change”. This new portfolio has been taken on by Mark Butler, an obscure minister previously responsible for mental health and with unknown views on climate change. (Gary Gray remains the energy minister, having only been appointed in March.)

I notice Labor is spinning the move to an ETS as a reduction in the cost of living. Bowen says Labor “understand… very deeply” the “cost of living concerns in the community”. Apparently this deep understanding does not extend to the cost-of-living impacts (eg. food price rises) of failing to respond to climate change.

By framing the decision in this way, Labor is buying into the opposing Liberal Party’s false narrative that a carbon price is costly. If they think this is going to neutralize the Liberals’ anti-carbon-tax campaign, they are kidding themselves. Liberal leader Tony Abbott today reiterated in unequivocal terms his party’s opposition to either a fixed carbon price or ETS:

The announcement today that the Government will bring forward planned changes to the carbon tax by one year is just a Kevin Rudd con job – fixed or floating, it is still a carbon tax…

Only the Coalition offers Australian families and businesses the certainty of no carbon tax.

Rudd will need to pass legislation to turn his early-ETS policy into law. Unless Labor gains control of both houses of Parliament (which seems very unlikely), he will need the support of either the Liberals or of crossbenchers. Like the Liberals, the Greens are opposed to bringing forward emissions trading, and in any case new Deputy Prime Minister Anthony Albanese has said Rudd does not intend to consult the Greens. Any other crossbenchers are likely to be conservative and opposed to climate action generally. All in all, it’s shaping up to be a rerun of 2009, when the Liberals and the Greens both stood in the way of Rudd’s attempt to lock in a weak ETS.

It’s instructive to recall a couple of points from the 2009 ETS debate. Firstly, Rudd almost succeeded when he did a deal with then Liberal leader Malcolm Turnbull, until the Liberals replaced Turnbull with Abbott, who repudiated the deal. Given Abbott’s campaign has been almost entirely based on opposing an ETS or carbon tax, he seems unlikely to back down (unless the Liberals lose the election, in which case they might consider that a mandate for the carbon price). On the flip side, however, I’m concerned that if Turnbull is ever reinstated the Liberals might again support an ETS. Secondly, Rudd would probably have won the public debate if instead of shelving the legislation he’d called a double dissolution election. He’s since stated that it was a mistake to shelve the legislation. Maybe Rudd believes he can regain his old popularity by fighting the unfinished battle to its conclusion?

Instead of trying to weaken Australia’s climate policy, the government should strengthen it to ensure it drives decarbonization in the long term. In this context, that means either extending the fixed carbon price, or fixing the ETS time bombs by:

  • Setting much deeper emissions targets, unconditional on international action.
  • Allowing zero international offsets.
  • Reinstating a carbon floor price.
  • If possible, compartmentalizing the ETS by sector and/or greenhouse gas and prioritizing fossil fuel CO2 emissions cuts.

The ETS time-bombs are like a genie in a bottle: once the lid is off, it will be extremely difficult if not impossible to put the genie back in the bottle. Meaningless targets will have been locked in for years and dodgy carbon permits will have flooded the Australian market. We should be considering very carefully whether we want to open that bottle and how to prevent the genie wreaking havoc. Instead Rudd is rushing to take the lid off the bottle, apparently convinced emissions trading is a magic bullet that will cut emissions at the lowest possible cost.

Either that, or he believes the greatest moral challenge of our generation is to appease the business lobby, no matter how destructive their demands.

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