I should start by stating that the following is not intended as partisan political comment. I have consistently supported a carbon price policy regardless of the Party of the politician proposing it (eg Howard, Rudd, Turnbull and now Gillard).
Much has been said of Gillard’s mandate, or more pointedly, lack of mandate to introduce a carbon price. The fact that the Australian people elected the Parliament, and the Parliament chose to implement a carbon price (via the Multi Party Climate Change Committee) seems to have been lost on most commentators. But what of Abbot’s mandate to pursue his wrecking ball strategy on the soon-to-be law and its instrumentalities? What also seems to have been forgotten is the fact that the leadership spill that installed Abbot as Leader of the Opposition was almost as marginal (42-41) as the 2010 election. That means that just under half of the party room chose, at the time, to support action on climate change via the least cost mechanism of a carbon price. Turnbull has been most articulate on the logic of this, including his well-argued speech to Parliament in February 2010 supporting his position as he crossed the floor.
Both major parties support the objective of reducing emissions by 5% on 2000 levels by 2020. One of the great ironies in this debate is that the left side of politics is supporting a market mechanism to achieve these cuts at least cost to the economy, while the right side of politics is using a direct intervention approach more aligned with centrally-planned government. As Turnbull noted:
Until 1 December last year, there was a bipartisan commitment in Australia that this carbon price, this exercise in reducing emissions, should be imposed by means of a market based mechanism—this emissions trading scheme. At their core, therefore, these bills are as much the work of John Howard as of Kevin Rudd. The policy I am supporting here today as an opposition backbencher is the same policy I supported as John Howard’s environment minister. And why did we in the Howard government believe an emissions trading scheme was the best approach? It was because we as Liberals believed in the superior efficiency of the free market to set a price on carbon.
And later, on “direct action”:
Having the government pick projects for subsidy is a recipe for fiscal recklessness on a grand scale, and there will always be a temptation for projects to be selected for their political appeal. In short, having the government pay for emissions abatement, as opposed to the polluting industries themselves, is a slippery slope which can only result in higher taxes and more costly and less effective abatement of emissions. I say this as a member and former leader of a political party whose core values are a commitment to free markets and free enterprise.
I might add that the other problems with direct action, as opposed to pricing carbon, are that:
(a) It is not scalable. While it may or may not achieve the stated objective of emission reduction to 2020, it cannot possible yield any further reductions, and therefore not equip the economy with the ability to further reduce emissions as would be required. Government budgets are not sufficient to continue to purchase abatement through to 2050.
(b) While government is busy purchasing abatement in a tender and effectively providing a price for carbon abatement, the rest of the economy (all those not tendering to supply abatement to the government) continues as business as usual as if there is no constraint on emissions. The efforts of government in this regard may well be futile while emissions from all sectors (that would have otherwise be covered by a carbon price) effectively accelerate out of control (in the literal rather than metaphoric sense).
The net result of (a) plus (b) is that post-2020, emissions once again accelerate upwards rather than heading downwards. The opportunity to structurally reform the economy to enable it to “peak” emissions this decade and thereafter make longer term reductions would have been lost.
The investment community and major businesses have always been concerned to point out that bipartisan support for the pricing of greenhouse gas emissions is required to reduce investment uncertainty. Abbot’s current wrecking strategy is a good illustration of what happens when this fails. The certainty that was meant to be brought about via the carbon price legislation has been undermined, perhaps even sabotaged, by the threat of repeal of the bills.
The implications for investment decision-making are considerable. It means that, once again, just as the past few years have shown, companies do not know whether to factor in a long term price of carbon or not, with no real clarity until the next election. In the energy sector, one of the unfortunate outcomes of this will be the implementation of higher opex / lower capex plant (ie open cycle gas turbines rather than the more efficient combined cycle gas turbines) than would otherwise have been built. In equity markets, investors will need to price stocks exposed (positively or negatively) to carbon on the basis of probabilities rather than knowns, leading to higher risk and therefore higher cost of capital. Perhaps even exposed companies will be wanting to settle this matter, accept the pricing of carbon and attendant permit allocation as compensation, and move on with certainty, rather than face many more years of policy uncertainty.
The pricing of carbon is a structural reform of the economy costing a modest (~0.1% of GDP). Blocking this reform is really a form of inter-generational selfishness that values more highly our disposable income today to the detriment of next generation’s prosperity.
Perhaps this is the right political strategy for the Opposition. I do wonder how many in the “Liberal” party rooms, particularly the 41, are quietly or secretly dismayed at this approach, or whether they put their convictions aside and revel in the state of the current opinion polls.
Clearly, the political strategy of the government is to have the carbon price commence on 1 July 2012, including providing compensation before then, and let the realities illustrate the vacuousness of the fear campaign run by Abbott. One can only hope that the Opposition’s current view on carbon becomes as irrelevant as Beazley’s “Roll Back” position on the GST early last decade.