Carbon backflip with a double pricing pike

Climate change is no longer the great moral challenge of our time or a great economic catastrophe; it's just a bit of a policy bugger.

It's been 15 years since scientists cajoled the world's politicians into signing the Kyoto Protocol and the politicians have been squirming and procrastinating ever since. But slowly, painfully, emissions trading schemes and renewable energy targets have been sprouting: 191 countries signed Kyoto; 89 have done something about it.

Australia, unusually, has managed a political consensus on the emissions reduction target and an absurdly ferocious argument about how to achieve it.

We almost had a joint policy on emissions trading, but then strangely the conservatives decided they would rather spend money from the budget to buy emissions reductions rather than leave it to the market.

The centre left party, the ALP, also did something quite strange. Instead of just introducing an ETS, like Europe, it started with a tax on emissions for three years, a decision that has never been satisfactorily explained, beyond the need to get the Greens vote in parliament in order to form government.

Actually the reason for the three-year tax is probably quite simple: it provides certainty of revenue and therefore allows fixed dollar household compensation to be announced as pre-election “giveaways” next year.

And now some genius in Canberra has come up with another excellent wheeze: tie our ETS, when it starts in three years, to a place that is going to be in recession at the time and will therefore have cheap permits because of low demand.

Hmm, let's see, where would that be? Europe! Of course. European carbon emissions are coming down naturally and easily as a by-product of the economic disaster unfolding there. They'll probably still be in recession in 2015.

Australia, on the other hand, has an economy that's growing at trend and a resources investment boom that will multiply the normal emissions from electricity and manufacturing.

So we just allow Australian emitters to buy half, rising to 100 per cent, of their permits in Europe and, hey presto, we get boom-time emissions growth with a recessionary price on the permits. Nice.

Critics, including the Leader of the Opposition, Tony Abbott, have been left floundering, flailing at the “backflip” and the fact that the revenue now won't be as great as previously forecast. They should, of course, be welcoming the backflip, because they had previously been assailing the money that would be ripped out of households and businesses by this taxic tox, I mean toxic tax.

What hasn't been revealed is, 50 per cent of what? That is, when the 320 or so affected companies have to buy emissions permits from the market rather than from the government in three years' time, how many of the things will they have to buy? That will depend on the so-called 'trajectory', or the curve at which we reach the 2020 target, and then the 2050 target.

The unconditional 2020 target is 5 per cent below 2000 emission levels. A target of up to 25 per cent is conditional on what other countries do, and there is a good chance that will be required, since there is a lot going on now. That would be tough and require a lot of permits.

The 2050 target is an 80 per cent reduction, and given the base case is a 24 per cent increase between now and 2020 if nothing is done, that looks very challenging indeed.

However the government is populated by Olympic champion backflippers, so goodness knows where the permits might be sourced from by then. Mars, perhaps.

The Liberal Party target is a straight 5 per cent, unconditional – except that it's against the 1990 base, not 2000. That's much harder. What's more, the Liberal plan is to pay for it out of the budget through an Emissions Reduction Fund, the effect of which will be to make a Liberal government responsible for its success or failure, as well as extremely poor.

The thing about emissions trading is that the government merely sets the target; the market sets the price. Reaching the target is a given.

So Mr Abbott has lots of problems, both now – because the government policy he opposes is even less of a problem than it was because the emitters can buy recessionary permits, and many of them will start buying the permits now, just in case – and even more later when he tries to implement a uniquely expensive, difficult policy.

It could be backflip time.

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