Why Kevin’s carbon fix may flounder

Kevin Rudd’s efforts to fix his Party’s carbon policy problems will create a new mess if subsidies to large power plants are reduced.

Probably the worst legacy of Australia’s forty-third parliament is the dreadful mess we have made of carbon policy. Kevin Rudd is trying to fix the problem but the Julia Gillard mistakes will take a long time to overcome.

The high carbon tax was a stupid decision from day one because it coincided with big rises in the price of electricity.  It was clear that given the high dollar, the combination of the tax and the electricity price rises already in train would hit both consumers and business – particularly manufacturing. And that’s what happened.

Now to reduce the carbon price we are racing off to an emissions trading scheme which could easily be just as silly.  We used the carbon tax revenue in part to give money to lower income people – it was in part an income redistribution scheme. That expenditure is to stay. And so we have a budget burden.

The money raised under emissions trading will not only be much less than the Gillard carbon tax but, depending on how trading is structured, most of the money raised will be sent abroad to promote carbon reduction schemes. Some of those schemes will be of dubious worth. 

Meanwhile, benefit to the consumer from the lower emissions trading carbon tax may be reduced by the reduction or elimination of the current “subsidies” to large power generating plants.

But the carbon mess gets worse. We have signed up to export gas from the Gladstone LNG plants, which now requires Australia to use Cooper Basin gas earmarked for New South Wales. And New South Wales is reluctant to develop its coal seam gas on environmental grounds.

So we may get some reduction in power costs but on the eastern seaboard there are big gas price hikes looming.

Australia will end up paying a domestic price for gas related to the export market and shortages may even take domestic gas prices in some areas higher than export prices. Meanwhile the US will have much cheaper gas and so Australian farmers will pay much more for fertiliser than their US competitors. 

Australia’s Incitec Pivot is putting its next fertiliser plant in the US.

And so it goes on.