By Leon Gettler
OVER the past two weeks, many have said that climate change policies wiped out two prime ministers, John Howard and Kevin Rudd, and loused up two opposition leaders, Brendan Nelson and Malcolm Turnbull. What are the prospects for Julia Gillard?
Gillard, who reportedly pushed Rudd into shelving the emissions trading scheme, has said that her goal is to put a price on carbon. What exactly does that mean? Is this carbon price fixed, floating, or both? Labor's backdown on the mining tax suggests we may never have the answer. Gillard's government showed the world that it can be bashed up by aggressive companies that can run expensive advertising campaigns and get the media onside. Vested interests will be taking notes for future reference in the inevitable battle over a carbon price and emissions trading.
For now, some have interpreted Gillard's sudden enthusiasm for a carbon price as meaning she wants a carbon tax; others see it more as an endorsement of carbon trading. Some say a market in carbon, where it can be bought and sold, would reduce emissions. Others insist that a cleaner and more efficient way is through a carbon tax. A true political animal, Gillard is playing to both sides.
The reality, however, is that we need a tax and trading operating simultaneously. Carbon prices can be volatile so a carbon tax should be in place if the price falls below a set floor. That would create certainty and stability and encourage longer-term investment in renewable energy, which is what emissions markets are meant to do.
Why is carbon volatile? First, it tracks those notoriously elastic oil prices and German power prices, Germany being the largest and most influential market for power in Europe. Second, the economics of climate change is interconnected with such issues as geopolitics, energy prices, the regulatory environment, weather patterns, industry and economic development, energy security, renewable energy, population and biodiversity. Many of these are imponderables: we simply don't know what the future holds.
With this complexity and uncertainty, the spot and futures markets for emissions are unpredictable. They do not conform to standard price analysis for commodities. That creates a problem for governments, which need to guarantee that the cost of emitting carbon would never fall below a certain level. In a perfect world, the carbon price remains high and the floor is never reached. Markets, however, are never perfect, so a tax would provide both the necessary certainty. It's an insurance payment.
A tax and trade combination would also give investors, manufacturers and utilities the confidence to invest in renewable and low-carbon energy. Just as importantly, it would give governments the confidence that the revenue from carbon emissions would never vanish. That revenue, in turn, could be invested in low-carbon infrastructure
The European experience shows how a range of other factors - extreme weather, rainfall patterns and political decisions affecting hydro-electric and nuclear plants and political decisions - created massive swings in carbon prices. The European carbon trade market has stabilised over the past six months, but James Cameron, the vice-chairman of London-based investment group Climate Change Capital, says a carbon tax in Europe and here would control future volatility.
Cameron says the prospect of a tax liability could also be turned into a rebate by companies choosing to invest in particular ways during the cycle to reduce their exposure and to cash in on credits. "The point I want to make, which doesn't often get made in Australia, is that what this does is it encourages expertise to grow and enables business creativity and innovation and drive to be turned to the advantage of the public interest in dealing with the problem,'' Cameron says. "If you face the tax, you work to minimise it and if you're faced with the opportunity to make money and be successful in investing, you do that too."
For sure, a volatile carbon derivatives market will make big profits for investment banks but it will defeat the social purpose of reducing emissions. The addition of a carbon tax would give that market the necessary assurance to a market that only exists to take carbon out of the atmosphere. The key to that is investment in low-carbon technology. Combining tax and trade increases the likelihood of that investment.
Of course, a carbon tax has its own problems. First, no one knows how big the reduction in emissions will be. It might take years to discover that the taxes did not reduce demand. Also, these taxes need to be global, which will never happen without a world forum. And finally, politicians are reluctant to go down that path because of the political fallout of introducing a tax.
Still, that tax is essential to ensure a trading scheme achieves its aim. One without the other will not be enough. Can Labor achieve this reform? It will need to avoid the mistakes it made with the mining tax. If it just counts on public opinion wanting to reduce Australia's footprint, as it relied on the public's envy of rich mining companies, and if it fails to explain the complexities, we can again expect no real reform.