Abbott's axe not fatal for carbon trading

Gillard claimed yesterday that she felt the Coalition would back away from its promise to rescind the carbon tax, telling ABC Radio:

"It has been a fast and furious debate but it's done….If the current opposition was ever to end up as the government, then they'd have a little fiddle and a name change and that would be the end of it."

Greg Hunt was quickly onto Twitter with the response:

“Message to PM: we will repeal the Carbon Tax. We will honour our pledges to the electorate.”

In spite of this, and a range of other pretty unambiguous statements from both Hunt and Abbott about their intent to repeal the carbon price legislation, many refuse to believe it.

You regularly hear the optimistic view, ‘Oh he says he'll rescind the carbon tax, but that just means he'll get rid of the fixed price period leaving us with an emissions trading scheme.'

Of course Greg Hunt has made clear in public forums, without any equivocation, that they intend to roll-back the legislated carbon price in its entirety, not just the fixed price period.

Yet hope remains, largely due to the belief that the loss of taxation revenue would be too great.

The tax revenue raised from the carbon price is expected to be $6.6 billion in 2013/14 and $7.3 billion 2014/15. One would have to think long and hard before giving this up, especially when household income tax has been cut and pensions increased.

But the reality is that tax revenue is highly likely to plunge to about half what's currently forecast for 2015/16 once trading commences. Three to four billion dollars in taxation revenue is nothing to be sneezed at, but total taxation receipts during that year are expected to be $416 billion. 

If I was a betting man, I'd put my money on Abbott following through on winding back this carbon pricing legislation.

Nonetheless there is still another glimmer of hope for a carbon price, it's just it won't be built on the government's current emissions cap-and-trade legislation. If you look closely at the 2010 Coalition climate change policy you'll see the following outline of the program that could be readily reconfigured into an emissions trading scheme:

The Emissions Reduction Fund will use the existing National Greenhouse and Energy Reporting Scheme (NGERS) to determine proposed emissions reductions beyond overall base levels already determined for individual firms.

Businesses that reduce their emissions below their individual baseline (‘historic average') will be able to offer this CO2 abatement for sale to the government…

Businesses that undertake activity with an emissions level above their ‘business as usual' levels will incur a financial penalty.

In setting these baselines the Coalition will effectively be setting a total emissions cap, although one that won't be particularly onerous. Initially the lion's share of the heavy lifting for achieving abatement will be borne by the government budget as they pay businesses for reducing their emissions below their baseline, or through funding abatement activities in areas not covered by emission baselines such as tree planting. But over time it is entirely possible for the scheme to be tweaked to operate more and more like a normal emissions trading scheme. 

Firstly, the Coalition could implement a financial penalty that provided a strong incentive for firms to avoid going over their baselines. Once in place businesses would then push the government to allow them to purchase baseline allowances from other businesses which would be cheaper than paying the penalty. This would then create a trading scheme, rather than just a government budget-funded scheme.  

To reduce the cost to the budget the government might then start subtly tightening the cap by not awarding emission baselines to new emitting facilities, such as LNG plants, or only awarding them, say, half of their requirements. Instead, to avoid financial penalties these new entrants would need to purchase emission allowances from firms previously awarded emission baselines.  

Steadily over time the government would become a smaller and smaller proportion of the demand for emission baseline allowances and offset projects. And lo and behold a carbon price green shoot would re-emerge from the stump that Abbott's axe had created. 

Will this happen? Over the dead body of many a member of the Coalition cabinet I suspect. But it is entirely feasible to implement and also eminently sensible if the Coalition is genuinely serious about achieving the 2020 emission targets.