Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: Australia tiptoeing towards carbon tax

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Australian Prime Minister Julia Gillard. Photo / AP
Australian Prime Minister Julia Gillard. Photo / AP

The Australian Government plans to introduce a carbon tax from the middle of next year, as a precursor to an emissions trading scheme three to five years after that. What will this mean on this side of the Tasman? At this stage the only realistic reply is a shrugged "who knows?"

It is not clear what price, or price path, they are talking about. That has yet to be thrashed out. Nor is it clear what the sectoral coverage of the scheme will be.

It will not include agriculture - a point that will no doubt be made emphatically to our own ETS review. But will it include transport fuels?

Julia Gillard's Government has rebuffed attempts by the Greens to make it clear that it will. It remains non-committal.

The statement released by the Multi-Party Climate Change Committee two weeks ago only says the tax "could" encompass transport, stationary energy and industrial processes.

The whole document, in fact, is full of coulds and mays, but light on wills.

Another crucial area of uncertainty is the extent and nature of compensation and assistance, not only for households but industry and perhaps electricity generators.

But the biggest uncertainty of all is whether Gillard's minority Government will be able to get a carbon tax passed by both houses of Parliament.

She is seen as having reneged on an electoral undertaking. She has announced a new tax while leaving people guessing about how much it might cost them and to what extent they will be compensated.

Not surprisingly she has taken a hammering in the polls.

The high-level document released on February 22 has the support of the Australian Greens, whose votes Gillard will need to get a carbon tax through the Senate.

But the position of two independents in the House of Representatives which she is likely to need, Tony Windsor and Rob Oakeshott, was much more guarded.

They agreed "that the proposal be released to enable consideration by the community and to demonstrate that progress has been made".

The Herald's Australian correspondent, Greg Ansley, reports that both men face serious opposition to a carbon tax in their constituencies, extending to death threats in Windsor's case.

When New Zealand's Climate Change Minister, Nick Smith, announced just before Christmas the terms of reference of a legally required review of the ETS, they included a requirement to give careful consideration to progress made on climate change by our trading partners, including Australia.

Smith has welcomed the Australian plan to put a price on carbon. "The New Zealand and Australian economies are closely integrated and it makes good sense for us to work closely together on climate change and carbon-emission pricing."

But this is only true up to a point.

The industry structure of the two economies is very different, and so are their emission profiles and opportunities to reduce emission.

It would, for example, be progress in Australia, as in Europe, to switch from using coal to natural gas to generate electricity.

New Zealand, by contrast, has only one, elderly coal-fired power station and gets about 70 per cent of its electricity from renewable sources - a proportion that is set to rise.

Nonetheless, Australia is our largest trading partner. Differences in carbon-pricing policy between the two countries can affect the competitiveness of New Zealand firms in the Australian market, Australian firms in the New Zealand market and both in third markets.

It is the reason trade-exposed emitters, including farmers, are protected so heavily from the impact of the ETS.

Rio Tinto, which did not shrink from shroud waving when the New Zealand ETS was under design, is running similar arguments in Australia.

"Businesses unable to pass a carbon price through to customers, which is most businesses competing in international markets, would simply have to absorb it," Rio Tinto managing director David Peever said.

"Depending on the magnitude of the carbon price, this may be manageable when market conditions are favourable and margins are healthy. But when the cycle turns down it will inevitably be disastrous."

It is not only in product markets that the two countries compete. They also compete for investment.

And having a relatively settled climate policy may give New Zealand an advantage.

The ETS was enacted by the Labour government, albeit in the last few days of its ninth year in power.

It was watered down immediately but nonetheless, and crucially, was kept by the incoming National Government, even though much of its political base would have happily seen it scrapped and the global financial crisis could have provided an excuse to do so. But the Government recognised first of all that the challenge of climate change itself is real and is not going to go away.

It recognised the merits of a price instrument in responding to that challenge, rather than relying on regulatory fiat - this is forbidden, that is mandatory.

It recognised that it would be hard to maintain the clean, green national brand while not lifting a finger to curb emissions. It recognised inaction would pose some risk to the country's trade, either official or from consumers.

And it seems to have wanted to take the issue off the table as a major point of difference between the two main parties.

Labour cannot say: "These guys don't care about the environment. Look, they have scrapped our ETS."

It can only say: "These guys don't care about the environment. Their ETS is even weaker than ours was going to be."

It doesn't have the same ring to it.

The review, chaired by David Caygill, is not to revisit whether to have an ETS. Its remit is only to consider whether some of the parameters need to be adjusted in light, particularly, of what is happening or not happening in the rest of the world.

Should the entry of agriculture into the scheme be pushed back from the current statutory date of 2015? Should the transitional policy where oil and power companies are only liable for every other tonne of emissions be extended beyond 2013?

That sort of thing.

The review is to release a draft issues paper tomorrow for consultation.

By contrast the Australian politics around climate change, viewed from this side of the Tasman, look downright feral and ferocious.

One way or another Kevin Rudd, Malcolm Turnbull and arguably Brendan Nelson have lost their footing, and their leadership, over the issue. Julia Gillard may go the same way.

With Tony Abbott leading the Liberals and Australia having among the highest per capita emissions in the world, that would be a pity.

- NZ Herald

Brian Fallow

The Economics Editor of the NZ Herald

Brian Fallow is the New Zealand Herald's economics editor. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.

Read more by Brian Fallow

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