The first three instalments of Professor Ross Garnaut’s update to his Climate Change Review have been a welcome boost to the government’s ability to press its case for a carbon price.

The essential message has been this: Australia is in not danger of leading the world in carbon abatement; emissions locally and globally are still going up; and it is important — and will be cheaper — for Australia to act now, rather than play catch-up later.

None of this should have been a secret, but Garnaut’s (and the government’s) ploy to drip-feed the chapters has been deliberately designed to maximise the effect — and the level of public discussion. And as one observer wryly noted yesterday, the discussion is badly needed: “I wouldn’t overestimate the reading age of some of those involved in the negotiations,” he said.

The next two chapters — on the potential for bio-sequestration, and the latest on the science — will be similarly useful for the government. But then, alas, it could get tricky for the ALP, because the messages contained in the last three chapters will not be so convenient — or at least not to those within the party, who are wedded to the idea that the CPRS should form the basis of the new hybrid carbon pricing scheme.

It is clear — it always was so, but the volumes of certain newspaper headlines in recent days underline the point — that the key political battles are to be fought over ambition, price (and transition to a market-based one), and compensation. And these battles will not be easily won. It seems that some will be debated and may even be resolved before the Garnaut updates are made public.

It is expected the multiparty committee will begin talks on the framework of the proposed scheme — the period and the form of transition from a fixed or based price to a market mechanism — at its next meeting this Friday. Discussions on the form and extent of compensation — an equation critical to the trade-exposed electricity and energy export industries — could follow soon after.

The critical point here is the intent and political strategy of Prime Minister Julia Gillard and her Climate Change Minister Greg Combet. Having put the carbon price on the agenda following the election, there is recognition that failing to deliver has the potential to be the final straw for this government.

But if their intention is clear, what is their strategy to gain political agreement? The ALP knows that it must give the multiparty committee due respect, or it will not get the bill through parliament, particularly with the Coalition looking elsewhere. But some also suggest that it must not give the impression that its policies are being dictated to by the Greens and the independents, because it may not get it through cabinet.

And this is where Garnaut’s view becomes problematic for the ALP. The Greens views on compensation are painted, irresistibly in some circles, as extreme, but in many respects they are singing from the same songbook as Garnaut in his original review. And it’s ironic to note that on the issue of ambition and price, the Greens position is closer to that of the world’s leading industrial groups and banks than it is to the ALP, or the coalition. This has been acknowledged by RBA board member Warwick McKibbin.

Garnaut’s last three chapters will focus on three key issues: innovation, carbon pricing, and compensation. Garnaut believes that innovation is the bit that went missing in the CPRS — too much money going into the hands of vested interests in the form of an unnecessary short-term sop, and not enough invested in technologies that can help the transition to a low-carbon economy. This will remain a key point of contention.

The treatment of Australia’s emission intensive trade-exposed sectors (EITES) is often cited as a great divide, but it is not as big as some would make it out to be. Neither Garnaut nor the Greens thought the EITES should be left to fend for themselves, it was more an issue to avoid the possibility of windfall gains — a likelihood raised by many market analysts in their summation of the CPRS.

The really difficult, but most economically crucial, points will come on the start-up price, the timing and pace of transition into a market system, and the level of compensation to the electricity industry — areas into which Garnaut will go in some detail.

Observers say that the government is finding itself between a rock and a hard place in these negotiations, and are worried about how it might work its way through to a compromise. Not all are convinced by the manner in which Gillard sealed the deal with the states over health care.

Of course, some business groups simply want the compensation package negotiated in the CPRS to be served as an encore. The absence from the negotiations of the coalition makes that extremely unlikely.

There are two potential circuit-breakers here: one, a broader strategic move; and the other a narrower tactical ploy. The latter revolves around the idea to push for a sort of Reserve Bank of Carbon, that would allow many of the considerations to be dealt with by an independent body and take the issue beyond the ebb and flow of the political cycle. The former is the emergence of a long-awaited united business voice that can speak to the need for a robust price signal and the disastrous consequences of more years of delay.

If the more progressive of the power companies, banks, industrial groups and even some resource companies were to speak with a common voice, the effect on political negotiations, not to mention the public debate, would be dramatic.

*This first appeared on Climate Spectator.

Peter Fray

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