The government has confirmed it will move to a floating carbon price from July 1 next year, 12 months earlier than scheduled, in a move expected to cost the budget $3.8 billion a year.

Prime Minister Kevin Rudd announced the decision this morning, disingenuously describing it as “terminating the carbon tax”, and released a series of budget cuts to fund the shift.

The current European Union carbon price is just under A$6 a tonne of CO2, compared to next year’s Australian carbon price of $25.40. The Gillard government announced in 2012 that it would link to the EU trading scheme from 2015 (the European price is expected to rise when the European economy begins to recover).

The cost of Australia switching to an ETS earlier will be funded through a number of measures:

  • $248 million saved from cutting public service senior management and improving IT procurement;
  • An overhaul of fringe benefits tax arrangements for vehicles, to apply prospectively, saving $1.8 billion over four years;
  • Bringing handouts to electricity generators from the Energy Security Fund to an early end, saving $770 million over the forward estimates;
  • Cutting assistance to the coal mining sector ($186 million);
  • A “deferral” of $200 million from the Carbon Capture and Storage (CCS) program;
  • $213 million of unallocated funding returned from the Biodiversity Fund;
  • $143 million of unallocated funding returned from the Carbon Farming Futures program; and
  • Delaying $200 million from the Clean Technology Program and returning $162 million to the budget.

CCS was one of Rudd Mark I’s big commitments. Hundreds of millions were lavished on it, and an international institute was set up for developing technologies that, even if viable, were many years from commercial status — but which had the allure of potentially enabling the continued use of coal, one of the most emissions-intensive sources of electricity.

US President Barack Obama even singled out Rudd for his leadership on CCS. Since then, however, the funding allocated for it has proven an irresistible source of savings, first for the Gillard government, and now under Rudd again.

And another quarter of a billion dollars cut from Australian public service budgets will redouble the pressure on departments and agencies, with many having already cut into middle and senior management ranks and ceased functions to meet recurring efficiency dividends imposed by the Gillard government.

Changes like the FBT savings (which come on top of Wayne Swan’s 2011 FBT changes for vehicles) and deferring spending, as well as bringing forward the shift to an ETS by a year, will require legislation, although it can be introduced after the election given the unlikelihood of Parliament returning before the election. The Greens have already flagged opposition to bringing the floating price forward and concern about the cutting of environment programs to fund it. Gillard had secured the Greens’ support after the 2010 election with a commitment to establishing a carbon pricing scheme.

Peter Fray

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