Xenophon will save carbon trading

Recent Nielsen polling analysis suggests the Coalition might be able to gain control of the Senate in conjunction with two conservative leaning politicians – one being John Madigan and the other possibly a member of the Katter Australia Party. If this were to transpire the carbon price would be dead as a dodo.

Madigan takes his science on climate change from Dorothea McKellar’s poetry in preference to the National Academies of Science. Bob Katter’s party is of a similar rural folk-wisdom ilk. 

However it’s reasonably likely the polls would start to narrow as we come closer to the election. This brings into play a far more interesting scenario for the prospects of rescinding the carbon price – Senator Nick Xenophon.

Now this could all be academic if Labor decides to roll over in the Senate in the face of an electoral whitewash. But one needs to remember that of the rump of Labor members left, several of the most influential will be from inner urban seats like Melbourne, Wills, Grayndler and Sydney. In retaining their seats they have as much to worry about from the Greens as the Liberals. Voting with a Coalition government to rescind the carbon price would be like manna from heaven for the Greens.

So that perhaps leaves Xenophon in the box seat. This opens the very interesting possibility that we could see an emissions trading scheme rebirthed, but in an amended form.

Xenophon states on his website:

While I would support the repeal of the current carbon tax, it must be replaced by something more efficient. The Opposition’s plan is to use taxpayers' money to clean up the mess made by polluters. This creates the situation where there is no real incentive for polluters to reduce their pollution because the taxpayer is picking up the bill.

In speaking to parliament on the Clean Energy Act he said:

"It is worth commenting on the Coalition's Direct Action Plan. I believe that plan is grossly inefficient. It carries with it risks to fiscal policy. It carries with it risks to the budget bottom line. It is incredibly clunky. It is about, in a sense, picking winners. I do not support that plan. The only advantage I see of that plan is that you can switch it off more easily and adapt to a much more efficient emissions trading scheme."

And that may well be the end outcome of negotiations. Xenophon has very little to fear from a double dissolution election – it will lower the threshold number of votes required for a Senate seat quota and could even help him gain another seat. He will be happy to play hard ball.

Xenophon’s office recently told the publication CE Daily that the Senator "would want to know what was being proposed as an alternative [to the existing carbon price] before supporting a repeal”.

What isn’t widely appreciated is that the Direct Action policy, as currently vaguely defined, contains the bare bones of what could become an emissions trading scheme. This could be configured to fit with what Xenophon wants – a particular variety of emissions trading promoted by Danny Price of Frontier Economics. This model was promoted not just by Xenophon, but also for a brief period of time by the Coalition, and importantly Shadow Finance Minister Andrew Robb.

It has the following components:

1. Electricity generation is prioritised first. Rather than applying an obligation to buy permits for every tonne of CO2 emitted, generators only pay for their emissions above an emissions intensity benchmark – say 0.6 tonnes of CO2 per megawatt hour of electricity generated. Generators below this benchmark receive a CO2 credit.

High emitting generators end up buying the credits from the low emission generators. Price argues that this would lead to minimal electricity price rises.

2. A separate national energy efficiency target and credits scheme is introduced – this would be along the lines of the schemes in operation in New South Wales and Victoria. Credits from this scheme are not transferable into the core emissions trading scheme, instead they are covered by a separate obligation on energy retailers.

3. Trade-exposed industrial emitters, such as cement and metal smelters, are brought into the scheme as a second order priority but receive free emissions entitlements equal to their historical average emissions.

4. Those planting trees or increasing soil carbon stores can also create credits to sell to generators or industrial emitters that emit above the historical average benchmark.

If you look closely at the Direct Action policy it states industrial emitters would receive an emissions baseline. If they go above their baseline they pay a penalty, but if they emit below it they create a credit. If you allow emitters that go above their baseline to buy credits instead of just paying a penalty then you end up with a model quite close to the Frontier model. 

The way this could play out is Xenophon agrees to vote for repeal of the existing carbon pricing legislation. Abbott can then say he has delivered on his promise to ‘axe the tax’.

However in exchange it is agreed that the process of taxpayers paying polluters to reduce their emissions is a temporary ‘trial’ phase. After say three years, the government withdraws as a buyer of abatement credits. Instead companies have to buy emission credits for any emissions above their baseline, while companies creating credits are free to sell to whomever they want, not just the government.

The Coalition then dresses this up by claiming it isn’t a tax or anything like the prior carbon price because the government doesn’t collect any revenue or auction off any permits. Instead businesses are merely trading amongst themselves.

Voila – emissions trading is reborn. In politics, plenty of crazier things have happened.