CLIMATE SPECTATOR: Five reasons the fixed price will stay

Climate Spectator

The media has been rife with conjecture and opinion about the government dropping the fixed price period and carbon price floor altogether. Amidst all this noise it's hard to know exactly what's going on. But irrespective of all of this, the reality is the government would encounter great difficulty and would be incredibly unwise to try to drop either of these features.

Below are five good reasons why the three-year fixed price period for carbon permits will stay.

1) In a precarious hung parliament you don't want to revisit such contentious legislation

In reality it is near impossible for the government to drop the fixed price period because it is embedded within legislation with little wriggle room. Does anyone really think the government wants to revisit such contentious legislation over such a major feature when the state of the parliament is so precarious?

And in the end they'd never get the changes through parliament anyway, so you'd need to wait until after the election.

2) Revisiting the design of the carbon price gives air to Abbott's scare campaign

Secondly revisiting the legislation would just give further air to Tony Abbott to debate the topic in parliament and in the media based around whatever he can dream-up, rather than what is actually happening. For as long as the shape of the carbon price is still being debated, the focus will be on the government to defend itself from theoretical claims of what might happen. Instead the government needs to shift the focus of media scrutiny away from itself and onto Tony Abbott to justify the claims he's made.

The only real antidote to a scare campaign is allowing people to experience the actual reality of a carbon price. Already as an example Gerry Harvey, head of Harvey Norman, has realised that contrary to his fears, the tax and benefit concessions that the carbon tax has allowed for, have actually notably lifted his sales. He won't be the only one that is now wondering what all the fuss was about.

3) The fixed price period will be too far gone by the time of the election

Some champions of a shift to trading as soon as possible might think the government could go to the election pledging to abolish the fixed price, but this faces practical constraints too.

The election is not due until the latter half of 2013, by which time we're already into the second year of a fixed price. Changing from a fixed price to trading in the middle of a compliance year would cause haywire for the government bureaucracy and companies liable under the scheme to administer.

This then leaves the third and final year of the fixed price period that could conceivably be dropped. However, changing legislation and putting it into effect takes time.

You need to redraft legislation which, believe it or not, can sometimes be more difficult than just scratching out a few lines here and there, and can take considerable time. You then need to get it through parliament, which also takes time. If Labor pulled off the inconceivable and won the next election, they'll still face considerable resistance and stonewalling in the Senate. In addition, both government and business will require adjust systems and processes to support trading 12 months earlier than planned – and will have difficulty getting ready.

Considering all these challenges, it hardly seems worth it to change things for the sake of a single year.

4) Dropping the fixed price period won't change perceptions of the carbon price as a tax

The moment Tony Abbott took over the leadership in late 2009, before the government had even considered negotiating with the Greens, he was labelling the government's carbon trading scheme a "great big tax”. That perception has sunk in with the electorate.

Promising to switch from a fixed price to trading is unlikely to change this, and in fact could backfire as an effort at tricky political semantics. You can bet your house that the Herald Sun and the Daily Telegraph will continue to label it as a tax on the battlers.

5) The fixed price of $23 is not ‘too high'

A view that has been successfully promoted by some industry associations is that because Australia's carbon price is higher than that under the European Union emissions trading scheme, it is therefore ‘too high'. Based on that rather simplistic logic if the EU emissions allowances were trading at $35 per tonne of CO2 (which was the case in 2008), then $23 would be too low. Yet interestingly back in 2008 we never heard that argument from industry lobbyists.

Interestingly, when the targets were set for the EU ETS for phase three of the scheme (2013 to 2020), the European Commission originally expected that the carbon price would average around €32 or about $A40 per tonne of CO2. In fact the European Commission now considers that the EU carbon price is probably too low, and targets should be tightened and supply of allowances withheld.

In the end Australia's carbon price shouldn't be assessed as too high or too low based solely on reference to another country or jurisdiction's carbon price, as this is far too simplistic.

Grattan Institute analysis suggests that an Australian carbon price of $35 to $40t/CO2 could be sustained without carbon emissions leakage, and without major economic fallout, provided both steel and cement sectors were covered by a border tax adjustment.

Also, Australia is the most emissions intensive economy in the developed world based on the amount of CO2 equivalent emissions released per unit of GDP. Prudent risk management would suggest that Australia needs to begin transforming its own economy relatively soon, and not entirely rely on purchasing of international carbon credits. International carbon prices of $5 to $10 are too low to drive such a transformation