September 01, 2013

Political turmoil and the fate of Australia’s greenhouse gas pricing scheme

Editor’s Note: As this article was in final preparation, the Australian election was held on September 7, 2013. The governing Labor Party lost to its rival, a coalition group headed by Tony Abbott. This article discusses some possible changes that Mr. Abbott and his coalition group may make to Australia’s current regulation of greenhouse gases.

Political turmoil in Australia has created great uncertainty as to the fate of the country’s greenhouse gas (GHG) pricing scheme. In late June 2013, the governing Australian Labor Party replaced Prime Minister Julia Gillard with her Labor Party rival, former Prime Minister Kevin Rudd. This switch came fewer than three months before federal elections now scheduled for September 2013. The Labor Party made the replacement because the opposition party’s ascendancy looked near-certain if Gillard had remained the Labor Party leader.

The leader of the opposition party, Tony Abbott, has vowed to repeal the GHG pricing scheme if he comes to power, although it appears unlikely his coalition will win decisively enough to do so. Short of fully repealing the scheme, Abbot could take steps to weaken or alter it. One distinct possibility is that Abbot—or Rudd—could quickly transition the pricing scheme from its current carbon-tax approach to the cap-and-trade scheme that, under the current design, will begin in 2015. Mr. Rudd declared that he intends to begin the transition to a cap-and-trade system in July 2014, a year ahead of schedule.

If Australia’s GHG pricing mechanism remains in effect in its present form, it is expected to significantly reduce GHG emissions and will be linked with the European Union’s Emissions Trading Scheme (EU ETS) in 2015. As such, the current political turmoil could result in a setback for the globally coordinated effort to reduce GHG emissions or the accelerated transition of Australia’s carbon pricing mechanism into a cap-and-trade scheme.

Overview of Australia’s greenhouse gas pricing mechanism

Australia had the highest per capita GHG emissions of any developed country in 2009. In response, the Australian government developed the Clean Energy Plan (Plan) and Parliament passed a legislative package aimed at reducing GHG emissions by 5 percent below 2000 levels by 2020 and 80 percent below 2000 levels by 2050. The legislative package includes the Clean Energy Act 2011 (Act), which creates a GHG Pricing Mechanism, and the Carbon Credits (Carbon Farming Initiative) Act 2011, which allows for the generation of offsets through certain voluntary activities that reduce GHG emissions.

During the first stage of the GHG Pricing Mechanism, which began last year and is designed to run until July 2015, a set emissions credit price and unlimited supply of credits effectively function as a carbon tax. The carbon tax was initially set at $23 per tonne of carbon dioxide equivalent (CO2e). The Act requires the price to increase by 2.5 percent in real terms each year.

In the second stage, which is set to begin on July 1, 2015, liable entities will be required to purchase credits either from the government through an auction process or the international carbon credit market. The regulated entity will then have to surrender a sufficient number of those credits to account for its CO2e emissions each year. The Act originally imposed a price floor of $15 per tonne during the second stage, but the price floor was abandoned in order to facilitate international linkage with other carbon markets. The Act also contains a price ceiling provision that will be in effect until 2018. Under this provision, the government will set a price ceiling by May 31, 2014, for the upcoming year, which will be $20 above the expected carbon credit price for 2015–2016, and will increase by 5 percent in real terms until 2018.

The GHG Pricing Mechanism applies to most entities that generate over 25,000 tonnes of CO2e emissions annually. Entities facing a compliance obligation include the stationary energy sector, industries engaged in industrial processing (including mining and steel production), the waste management industry, the transportation sector, natural gas suppliers, and industries that incur fugitive emissions, such as the oil and gas industry. As of June 7, 2013, the government estimated that 376 entities would be liable under the GHG Pricing Mechanism. The Act excludes from coverage emissions from agricultural activities, light on-road vehicles, and legacy-waste (waste deposited in landfills before July 1, 2012). The covered entities are anticipated to account for approximately 60 percent of Australia’s carbon emissions.

The GHG Pricing Mechanism addresses concerns about potential rising carbon costs via offsets, free credits, and tax cuts. The Carbon Farming Initiative allows for farmers and land managers to create carbon credits for use in the GHG Pricing Mechanism by voluntarily engaging in activities that capture carbon or avoid emissions. A variety of activities are currently approved to earn such offset credits, including the combustion of methane and the addition of biochar to soil. All activities generating offsets must capture carbon or reduce emissions that are not otherwise covered by the GHG Pricing Mechanism.

The Act’s Jobs and Competitiveness Program provides subsidies for a wide variety of industries classified as emissions intensive and trade exposed, such as petroleum refining; lime, manganese, nickel, and copper production; iron and steel manufacturing; and glass, paper product, and aluminum production.

The Act also distributes approximately 50 percent of the revenue raised by the GHG Pricing Mechanism to Australian households to defray anticipated increases in the cost of living. These funds are distributed as tax cuts with 60 percent of taxpayers projected to receive tax cuts of at least $300 annually.

The Australian government and the European Commission announced in 2012 an agreement to link the EU ETS and the Australian GHG Pricing Mechanism. The agreement establishes a phased-in linkage starting July 1, 2015, the same date the carbon price is set to become flexible. Starting on this date, Australian entities will be able to satisfy up to half of their carbon liabilities with EU credits, called allowances. The intention is to have the systems fully linked, meaning credits between the two systems will be fully interchangeable, by 2018. The agreement requires that Australia drop its floor price for carbon emissions and that both systems work to create a joint registry.

The August 2012 announcement allowed for Australian entities to purchase immediately EU allowances for future compliance on a speculative or investment basis. In order to enter the EU ETS market before a joint EU-Australian registry is created, Australian entities must open a registry account in a member country of the EU ETS scheme. Due to weak demand and excess supply in the European carbon market, the price for EU ETS allowances has been dramatically lower than the carbon credit price in Australia during the fixed price phase of the GHG Pricing Mechanism. This may have incentivized liable Australian entities to buy EU ETS allowances before the Australian GHG Pricing Mechanism becomes flexible—although when the Australian price becomes flexible in 2015, it is expected to mirror directly the EU ETS market price.

The Australian government has stated that it intends to link with other emissions trading schemes but has not announced any agreements other than with the EU ETS. Two potential future partners for Australia are California and Quebec.

The future of Australia’s GHG Pricing Mechanism is uncertain

Political developments threaten the viability of the GHG Pricing Mechanism. When the Act was passed in 2011, opposition leader Tony Abbott swore a “blood oath” that he would repeal the carbon tax should his coalition come to power. Then-Prime Minister Julia Gillard scheduled a federal election for September 14, 2013, but on June 26, 2013, the Labor Party voted to replace Gillard with former Labor Prime Minister Kevin Rudd. Rudd is not bound by the previously scheduled September date and has now advanced the date for the election to September 7, 2013. Polls conducted to date suggest a close election, and it is impossible to predict a certain winner at this juncture. The polls conducted during Gillard’s tenure gave Abbott’s Coalition (a long-standing amalgamation of the Liberal and National parties) a statistically significant lead over Gillard’s Labor party. However, Rudd is more popular than Gillard, and should he win the upcoming national election the Act’s chances of survival will improve.

Were Abbott to win, he would need to repeal the Act in order to meaningfully dismantle the GHG Pricing Mechanism. In order to do so, Abbott’s Coalition would have to capture a majority of the Senate in addition to the House of Representatives. Because only half of the Senate seats are being contested this electoral cycle, however, it will be difficult for the Coalition to win a majority in the Senate.

Abbott has also threatened to call for a “double dissolution” should the Senate refuse to repeal the Act. A double dissolution would oust all members of Parliament from both houses, and require another national vote, this time with all the seats in both houses in contention. This complete turnover of both houses would present an opportunity for either of the major parties to gain a parliamentary majority, and thereby select the prime minister. The Green Party, aligned with Labor on the Act, vowed to fight repeal and called on Labor to do the same. Although the Green Party is a minority political force, currently occupying 9 of 76 Senate seats, and 1 of 150 seats in the House, its alliance with the Labor Party was a necessary component of the formation of Gillard’s government.

A double dissolution would be a risky move for Abbott; only six have happened in Australia’s history, and two of those failed to return the sitting government to power. Adding to that risk is the fact that, although once wildly unpopular, the GHG Pricing Mechanism is gaining public support. Indeed, a poll of undecided voters indicated that less than 20 percent want the Act repealed. Should the Coalition pursue the double dissolution successfully, the earliest projected date for repeal would be early 2015. This delay would mean that repeal would come just before the carbon price is projected to fall dramatically due to the beginning of the flexible price period and full linkage with the EU ETS.

Although Abbott has made his opposition to the GHG Pricing Mechanism clear, he has also proposed an alternative plan, which seeks to reduce carbon emissions by 5 percent below 1990 levels by 2020. Abbott’s “Direct Action Plan” creates a fund that would distribute $3.2 billion over four years to support business and industry activities that reduce emissions. The plan would not require businesses to reduce emissions but would penalize businesses that increase emissions. The Direct Action Plan has gotten pushback from Abbott’s own party and some business groups.

A compromise approach—one that either Abbott or Rudd will face great pressure to consider—is to speed up the transition from the carbon tax phase to the cap-and-trade phase. Doing so would likely reduce the Australian carbon price significantly, given that the EU market price is much lower. Abbott may need to take this step to fulfill his “blood oath.” But it could also make political sense for Rudd, as taking this step could neutralize the carbon question in the upcoming elections. Indeed, in late July, Rudd announced that he would pivot away from the carbon tax to the cap-and-trade scheme a year early to “help cost-of-living pressures for families and to reduce costs for small business.” Given the projected close nature of the September federal election, however, only time and electoral politics will reveal the future for Australian efforts to regulate GHG emissions.