Isra-Mart srl: Carbon tax for the price of a broken promise

www.isra-mart.com

Australia's latest, and probably its last, climate change scheme is the child of a marriage between unstoppable bureaucratic momentum and political desperation.

Sometimes politicians act ahead of the curve with economic reforms - Bob Hawke did it in 1983 when he floated the dollar - but most of the time the momentum for reform becomes unstoppable and the politicians simply run out of excuses to avoid it.

That's what happened with emissions trading, although it's pretty ironic that four years after a bureaucratic task force first recommended emissions trading, and 11 years after Kyoto, it gets up during a flimsy hung parliament.

The key shift that occurred in the so-called Multi Party Committee on Climate Change (basically the real Federal Cabinet) is that the dial has been turned towards "tougher on business", through a high starting price and a higher long-term abatement target.

That's where the marriage with desperation comes in: Julia Gillard's only real innovation on previous schemes is to stretch the fixed price period from one to three years so that big tax cuts can actually be budgeted in time for the election. And she needed the Greens to get that through Parliament.

Apart from that, the cap and trade scheme as proposed is broadly the same as Peter Shergold's group of bureaucrats and business leaders put up in 2007.

The three-year fixed price of $23 per tonne allows fixed compensation - actual dollars that can be announced and delivered before the election through the miracle of Treasury modelling.

That's why Julia Gillard broke her "no carbon tax" promise: given the way the polls were responding to the way she took power from Kevin Rudd, the cash provides the only possible chance of winning in 2013.

Meanwhile the force of momentum from the bureaucratic, business, economic and scientific classes had become a steam-roller.

There have been enough overlapping reviews and task forces to sink a coal bulk carrier, starting with the Inter-jurisdictional Working Group on Emissions Trading in 2004, then the Shergold task group in 2006, bringing together bureaucrats and business leaders, then Ross Garnaut's mammoth project, originally commissioned by state governments in 2007, followed by the Productivity Commission.

With the bureaucracy, business groups, economists and scientists all chorusing for a reform, no government can resist for long. In fact it's probably fair to say the only serious policy group in Australia against the idea of an ETS now is shadow cabinet, and only out of political opportunism: the Coalition went into the election before last as the first party to actually propose an ETS and most of its leaders would believe in their hearts that it's the right way to go.

The other big change since the 2007 taskforce reports, apart from lengthening the fixed price period to three years, is the increase in the 2050 greenhouse gas reduction target from 60 to 80 per cent, which is the result of the Greens gaining the balance of power in the Senate and a seat in the Lower House.

A smaller change is that the final scheme covers less of Australia's carbon emissions than earlier drafts - less than 65 per cent, versus 75 per cent in all previous schemes (mainly because petrol is now out), although some of the difference will be made up by reductions in diesel fuel rebates that are outside the ETS but have the effect of putting a "price on carbon".

This scheme differs from the CPRS that came out of Ross Garnaut's first report by offering to buy out 2,000 megawatts of brown coal power generation - about one-third of LaTrobe Valley's output. Presumably this means the two big critics of the CPRS - International Power (Hazelwood) and TruEnergy (Yallourn) - will shut up while they compete with each other for the money.

The LaTrobe Valley generators were a power voice against the CPRS because of their convincing prediction of power shortages.

The money for International Power and TruEnergy has not been quantified so they can't tailor their demands, but the Government has also put aside $13.2 billion in cash for all power generators to finance renewable energy. As various analysts have pointed out, this sort of money is almost always wasted, but the announcements sound nice and chunky.

The steel industry gets 94.5 per cent of their permits free (the same as with the CPRS), plus $300 million cash. Is that enough to keep Port Kembla and Whyalla going? Maybe, but it will take a while to figure that out.

And there are various other sprinklings of cash to keep other vested interests quiet, plus, of course, the big package of tax reforms centred around increasing the tax-free threshold to $18,000.

It is a "loaves and fishes" performance aided by bringing $4 billion extra in from the budget over the forward estimates, or around $1.2 billion a year once things get going.

So business gets certainty but the price is extra risk. The bureaucrats, economists and scientists get emissions trading, but their price is an agonising three-year wait, with an unpredictable election in the middle.

And Julia Gillard gets the chance of a tax-cut election, at the cost of a broken promise.

Alan Kohler is editor in chief of the Business Spectator and the Eureka Report, as well as finance presenter on ABC News and presenter of Inside Business.