Paying for carbon politics

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Details are emerging on how the Rudd government will pay for its carbon politics:

The Rudd government will impose a new public service efficiency dividend, slash at least $750 million from climate change programs and possibly tighten fringe benefits tax concessions for ­salary-sacrificed cars to help cover the $4 billion bill for dropping the fixed ­carbon price.

Sources told The Australian Financial Review the proposal to tighten or remove the fringe benefits tax concessions for cars, which is widely used in corporate Australia, was be disputed in cabinet late Monday because it could hurt the struggling car-manufacturing industry.

…The government say the move will erase up to $420 from a family’s power bill that year. The Australian Competition and Consumer Commission will have a role in ensuring the reductions are delivered.

To avoid a hit to the budget from the lower price that carbon permits will be sold to industry, the senior levels of the federal public service will be required to become more efficient.

Sources said there would be an extra 1 per cent efficiency dividend imposed at the executive level and a 0.5 per cent extra dividend at senior executive level, delivering combined savings over the four-year budget forecasts of about $250 million.

As reported in Monday’s Financial Review, climate change programs funded by the carbon tax will be hit hard. They include the $1 billion Biodiversity Fund for abatement projects in the land sector, which, sources said, would be hit by around $400 million, and the Clean Technology Program, which provides grants to manufacturers to invest in clean technologies, will be hit by about $350 million.

The most interesting tidbit here is the ACCC will ensure cost savings are passed on. How exactly? The Australian Energy Regulator (AER) doesn’t have the power to fix prices, only to approve price change proposals, and how is it going to argue that price cuts should even be passed on given the inevitability of future carbon price rises regardless of whether the price is fixed or floating? As the Grattan Institute’s Tony Wood argues:

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“Those looking for a low carbon price may be surprised at the outcome,” said Tony Wood, the energy program director with the Grattan Institute.

Europe over-allocated emissions and with the economic downturn, emissions there have fallen, he said. Now, it is seeking to get rid of the excess.

“If the European plan goes ahead, by 2015/16 the Australian [carbon] price could go back up again,” Mr Wood said. “So, those looking for a low price may be surprised by the outcome.

To legitimately cut prices you would have to argue that Europe’s commitment to carbon pricing is as weak as our own.

Meanwhile, a clearly recalcitrant Tony Abbott undermined his own commitment to climate change mitigation, yesterday declaring that emissions trading is a:

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‘so-called market in the non-delivery of an invisible substance to no one”

His own more much more expensive “direct action” plan for change is for ad hoc interventions in various markets. As the budget remains under pressure in the next term of government, how likely are any of his policies to stand the test of time with such weak commitment underpinning them?

So, we have a weak-willed party on one hand aiming to dupe us with carbon price spin and a strong-willed atavist at risk of nothing. The election is alive with possibilities!

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.