Xenophon won't back down on carbon trading

Tony Abbott’s plan to ‘scrap the tax’ has a big hole in it: Independent Senator Nick Xenophon, who's batting for a Frontier Economics-style carbon trading scheme over ‘clunky’ Direct Action.

A vote for Tony Abbott is a vote against carbon trading, right? Wrong.

As Senate numbers tighten (The huge price of Abbott's 'minority' government, August 31), it is becoming clearer that Abbott's plan to repeal the 'carbon tax' faces an unmovable roadblock.

That roadblock is Nick Xenophon, who has confirmed he will be digging in his heels on Direct Action, which he has called "clunky and inefficient". He told Business Spectator on Sunday: "I will not support the repeal [of Labor's carbon tax legislation] unless there is a Frontier-style scheme on the table."

Xenophon is referring to a plan worked out by Frontier Economics in 2009 as an alternative to the eventually doomed Carbon Pollution Reduction Scheme legislation that brought opposition leader Malcolm Turnbull undone, and was the beginning of the end for Kevin Rudd version 1.0.

Reading back through the history of this policy, I note that Climate Spectator editor Tristan Edis wrote a prophetic article in this policy way back in May, well before the return of Kevin Rudd (Xenophon will save carbon trading, May 22).

The Frontier scheme involves carbon trading, but cuts out the government as the broker of permits. It required companies who increase their emissions intensity to buy permits off those that manage to reduce them.

By contrast, Direct Action uses tax dollars to reward polluters who cut emissions, and fines companies that go above their baseline emissions.

Also in contrast to the Frontier model, the Labor scheme charges all polluters (though many at heavily subsided rates – including up to 95 per cent free permits) for emissions. With the proceeds it distributes half to taxpayers and pensions (which has the effect of changing the relative price between fossil-fuel power and renewables) and uses the other half to help finance renewable capacity (which is needed to replace carbon-emitting power sources over time).

What appeals to Xenophon about the Frontier model is that the government is largely kept out of the process, with carbon trading taking place between market participants to meet the regulations set by the government.

And Xenophon will insist on such a scheme before backing a carbon tax repeal.

While Xenophon wrote recently in the Financial Review that "[Direct Action] could be modified to provide a transition to the Frontier scheme", yesterday he told me that he would demand, "for a start, a scheme that hits the [5 per cent emissions reduction by 2020] target".

That leaves Abbott in an invidious position – he simply must repeal Labor's legislation, as he has promised to make the repeal bills the first pieces of legislation introduced into parliament. But if Xenophon insists on a scheme that will hit the target, it could cost the budget bottom line at least $4 billion extra by 2020.

Moreover, as Tristan Edis has pointed out (Abbott's $4 billion climate budget blow-out, August 15), the $4 billion claim is based on very conservative assumptions – last week's Reputex study points to a much larger cost in the order of $35 billion (Direct Action – could it be a $35b budget blow-out?, August 30).

Abbott's next logical move would be to negotiate his way out of this bind via other policy issues. However, Xenophon says he's in no mood to bargain.

I asked him on Sunday if he could be tempted by concessions in other areas of policy he is passionate about – primarily gambling reform.

However, the South Australian Senator, not one for compromise, said: "I won't be horse trading. The problem with horse trading is you often end up with a donkey, or end up looking like an ass."

Tony Abbott, having staked his career on repealing the carbon tax, will, if the Senate numbers fall out as currently expected, have to play Xenophon's game.

The rest is rhetoric. Abbott can claim there is no 'carbon tax' anyway, because it was abolished by Rudd. Or he can claim that Direct Action was always going to be reviewed, and bring that review forward three years. Or he could claim that the Frontier model isn't 'carbon trading'.

But it is. And the likelihood is that, thanks to Nick Xenophon, that's what a vote for Tony Abbott will deliver in the end.