In the next month, Kevin Rudd faces a bleak choice — will he backflip on a commitment he made to his favourite global body, the G20, or will he open a new  front in the pitched battle with the mining industry?

The only comfort for the Prime Minister is that the dilemma is over an issue that, while very important in policy terms, has never managed to get much public traction: subsidies to fossil fuels.

In the debate around carbon pricing, here in Australia and globally, one of the elephants in the room has long been the fact that, presently, the playing field is skewed dramatically in the direction of “carbon discounting”, with a multibillion dollar array of fuel tax credits, exploration subsidies, fringe benefits tax concessions, accelerated depreciation, research grants and much more.

It doesn’t make that much sense, frankly, to increase the price on high polluting goods and services to send a signal to investors and consumer to use them less, if we have not first removed all those subsidies that enable cheap production and encourage pollution. We are left with a highly inefficient system for moving money from one pocket into another with little gain for anybody.

The most obviously egregious case is the fringe benefits tax concession, which actively encourages people to drive more. Giving a greater tax concession for the larger distance driven is famous for creating the autumn derby, when those with company cars drive long distances towards the end of the financial year to reap the tax benefits. That brilliant idea costs Australian taxpayers about $1.2 billion a year and increases our greenhouse emissions and our fuel insecurity.

The fuel tax credit for primary producers is meant to bring costs down for farmers and fishers facing rising fuel prices, and this is understandable and worthy in the circumstances. It also applies to public transport, which the Greens welcome. But applying the tax credit to mining and logging companies, subsidising the fuel they use to dig up coal and chop down trees, is intensely perverse. We all subsidise the extraction of massive carbon stores to the tune of about $2.3 billion a year.

There are many more examples, from the direct ($50 million grants from Geoscience Australia to look for geosequestration sites) to the indirect (governments paying for electricity grid upgrades around coal-fired power stations, but requiring renewable energy developers to pay themselves to connect to the grid). We all pay for a concessional excise on aviation fuel and accelerated depreciation on fossil fuel intensive assets. All told, it’s easy to identify in the order of $5 billion a year of perverse subsidies that encourage the use and extraction of fossil fuels.

Some of these were addressed by Ken Henry in his tax review. All were ignored by the government.

After years of being ignored, this issue finally broke onto the global scene last year in the frenetic lead-up to the Copenhagen climate summit. At the G20 leaders’ meeting in Pittsburgh in September, Kevin Rudd joined his peers in committing to “phase out and rationalise over the medium term inefficient fossil fuel subsidies”. The leaders agreed that “inefficient fossil fuel subsidies encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change”.

In what might now become an embarrassing problem for Rudd, he and other leaders called on their “energy and finance ministers to report to us their implementation strategies and timeline for acting to meet this critical commitment at our next meeting”.

That next meeting is in Toronto on June 24-25. And, just last night, Treasurer Wayne Swan jetted off to Busan, Korea, for the final preparatory meeting of finance ministers and central bank governors before the Toronto summit. In Busan, the ministers are supposed to review these plans before presenting them to the leaders a few weeks later. The Toronto meeting, of course, will be only days after President Obama’s expected visit to Australia. In the light of the disastrous oil spill, Obama has ratcheted up his stance on fossil fuel subsidies, promising in a speech this week  to roll back “billions of dollars in tax breaks” for oil companies and invest the savings in alternatives.

With this in mind, I asked Treasury officials in Estimates hearings on Wednesday if they could tell us what plan Australia would be laying on the table. They refused to do so, batting some questions off to other departments and taking others on notice.

This presents a new dilemma for Prime Minister Rudd. Having promoted the G20 as the great hope of middle-power diplomacy, the last thing he will want to do is to treat it as another talk-fest and conspicuously fail to meet his obligation to lay some implementation plans and a timetable on the table.

But, on the other hand, one thing he probably wants even less right now is to open up a new front in the battle with the cashed-up miners.

This is a problem purely of Rudd’s making. If he was serious about fossil fuel emissions he would have seen this conundrum coming and avoided it. The fact that he didn’t speaks volumes.

If Rudd had taken a bold leadership position from the start, including standing up to the rent-seekers over emissions trading, he would now be able to stand up and do what’s right on subsidies  and taxes as well. As it stands, particularly so close to an election, I fear he is most likely to reward bad behaviour again and attempt to have his cake and eat it, pretending to fulfil his G20 commitment by bravely redefining “subsidies” into meaningless oblivion while pretending to stand up to the miners.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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