It is still 12 months away, but a betting person might like to have a punt on the shape of the carbon pricing regime being contemplated by the federal government.

It will likely go some way along the lines of Climate Change Minister Greg Combet’s musings in his speech in Sydney last week: an initial set price followed by a trading scheme — you can pretty much ditch the idea of a long-term carbon tax, and there is little appetite to go headlong into an ETS.

Still, the preferred option a could take several forms: design the trading scheme first and then precede it with a one- or two-year fixed price (as the government had proposed before dumping its CPRS); introduce a relatively high interim tax and design a trading scheme that replaces it later (as favoured by the Greens); or introduce a hybrid where the interim tax becomes the floor price in a subsequent ETS (as proposed by the Grattan Institute).

There are several reasons to favour one of these options. First, it is clear that the government is not going to commit itself to an ambitious emissions reduction in the next 12 months, and will not likely do so until it is clear what intent there is on the international stage — and that might still be five years away. So any ETS starting in 2012-13 will likely have little bite, and the experience with the European ETS — and with the market mechanism supporting Australia’s own renewable energy target — is that a market with little bite is next to useless.

Second, electricity generators need some form of certainty that will allow them to make sensible decisions on how to deploy tens of billions of much needed investment — and they need it soon, which is why you will see a policy presented before parliament before the end of 2011. And as Combet said in his speech last week, a fixed price will allow allow business to understand their carbon liability and begin the transformation that awaits them all in a steady and deliberate manner.

The multiparty committee — which met for the last time this year on Tuesday — released a collection of 11 principles that would guide their deliberations on a carbon price mechanism. There were some notable inclusions.

The first was an obvious one — that any scheme needs to be environmentally effective and has to be able to respond to the science. It shouldn’t need repeating, but given the public debate in this country and elsewhere, a half-baked scheme or box-ticking exercise is pointless.

The second interesting point was the issue of Australian competitiveness. “The overall package of carbon price design and associated assistance measures should take appropriate account of impacts on the competitiveness of all Australian industries, having regard to carbon prices in other countries, while maintaining incentives to reduce pollution,” the committee said.

Is the Labor Party leaning back towards the Garnaut compensation model — which focuses on changes to competitiveness rather than a loss in profits enshrined in the CPRS? One can only hope so.

The other interesting principle was that of flexibility. “Internationally, climate change policy is continuing to evolve,” the principle notes. “A mechanism to price carbon should be sufficiently flexible to respond to changing international circumstances, including improvements in international accounting rules, developments in climate change science, and tangible international action to deliver an effective global solution.”

This ability to respond is crucial, particularly when combined with some of the other principles such as investment certainty, fairness and economic efficiency. It means the country will be best served by a scheme that can be ramped up without putting undue stress on those sections of the economy that did not get huge compensation carve outs in the first round — the major pitfall of the CPRS, which simply transferred much of the obligation from major emitters to other industries.

What will be interesting over the next 12 months is how the Labor government and the Greens converge on some of these issues, and what opportunity there is for the Coalition to deal itself back into the equation.

This time next year, the $10 billion Californian trading scheme will be just 12 months from implementation, and probably poised to bring in a host of US and Canadian states. And Australia’s major trading partners — China, Korea and Japan — will have given firm timetables on the introduction of their own emissions trading schemes, and these countries, along with India, Brazil and South Africa, will have other taxes on fossil fuel emissions on the table too.

In that context, the Coalition’s direct action-let’s-pretend-there-is-no-economic-transition-happening-policy will be as untenable as the position adopted by the Republicans and their Tea Party satellites. The Coalition’s best opportunity to gain relevance may be to exploit the tension that lies between the ALP and the Greens. And that shouldn’t be too hard.

First, there will be tension over the interim price, though this might not be as great as it may seem — if the intent is to instigate the transition from coal to gas, then the price will need to be about $20 a tonne as a starting point. The second focus of disagreement will be over targets, thirdly, and most divisively, over the issue of compensation — particularly to the coal-fired generators, where the owners (and the AWU) will be seeking to exercise considerable pressure.

That might be Tony Abbott’s best opportunity to influence the outcome. It shouldn’t be too much of a leap for a right-of-centre party that purports to support market economics to adapt its taxpayer-funded compensation proposals to a markets-based system. And if it does, Abbott could always justify it in terms of seeking to save industry from “radical green” policies.

What industry will want most of all is bipartisan support from the major parties, but not in a manner that bastardises the outcome and simply flicks the problem to a sector where lobbyists are thin on the ground.

*This article was originally published on Climate Spectator.

Peter Fray

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