Carbon pricing's poison pill

As Robert Gottliebsen points out in the column yesterday Abbott has won control of the Senate, the prime minister can now draw upon a group of like-minded, conservative cross-bench senators to execute his agenda. This will be made even easier given the announcement that the Palmer United Party will enter an alliance with another senator.

In spite of this, however, there is a poison pill within the carbon pricing legislation that suggests the scheme will be in place until June 30, 2015. 

Carbon and energy market analysts, Reputex, have released a report which shows that if the government abolished the scheme part-way through a compliance year (same as the financial year), it would crystalise a cash payment of as much as $2 billion from government to polluters with free permits. 

To explain, under the carbon pricing scheme high emitting coal generators and emissions-intensive trade-exposed industry receive a significant amount of their carbon permits for free. There is a clause in the legislation which allows these holders of free permits to cash them in to the government at the fixed carbon price prevailing at the time (between $24.50 and $25 per permit). For example, a coal generator might decide to shut down for part of the year, just as Northern and Playford have done, and so they don’t need all their free permits to meet their compliance obligations. Consequently, the government allowed for such circumstances by providing for a buyback facility.

Now the thing is that the government provides a large proportion of these permits in advance of when companies emit CO2 into the atmosphere, and a liability to surrender a permit to government is incurred. Free permits are issued to companies in two tranches: the first are provided early in the compliance year covering 75 per cent of direct emissions as well as various other incurred carbon costs. Permits to cover the remaining 25 per cent of direct emissions costs are issued at the start of the following financial year (which is after the liability is incurred).

Both the prospective Labor leaders in Bill Shorten and Anthony Albanese have ruled out Abbott’s repeal of the carbon price in the Senate. So in combination with the Greens they can block repeal until the new senators elected in last month's election take their seats in July.

Now Abbott might be able to go to a double dissolution election before the new senatatos takes their seats but, given he faces a relatively repeal-friendly new upper house, he’d have trouble justifying such a move to the electorate. So this seems unlikely.

Reputex suggest that, provided he can pass the repeal bill through the new Senate in August next year, the carbon price could cease operation as early as October 2014. 

At this point Reputex estimate that polluters would have a surplus of 86.9 million free permits in excess of their emissions liability to that date. With repeal self-evident, the holders of the free permits could act in advance of repeal to cash-in their surplus free permits at a price of around $24.55 per unit. This would grant them a tidy windfall of more than $2 billion dollars at the expense of the government budget.

Even if the government were to cease operation of the scheme later in December they would still face a free permit payout of $1.14 billion.

From a political perspective Abbott can publicly claim he has axed the tax when the repeal bill passes the Senate. The electorate are unlikely to notice or greatly care if the scheme does not formally cease until July 2015.  It would be an incredible act of ideological masochism if the government was prepared to incur a cost to taxpayers of $2 billion, just so it could cease the operation of the carbon price as soon as it possibly could.