28 August 2012

Not With a Bang But a Whimper

So the long-running soap opera called Australian Climate Politics has reached its surprising end. In a surprise move the Australian government has announced that it will abandon its plans to transition its newly implemented carbon tax into an Australian emissions trading system, and sign on the the European ETS.

There is no other way to read the Australian government's decision other than that Prime Minister Gillard crying "uncle" and punting the issue far into the future. How does this play out? Here are a few initial thoughts:
  • Gillard gets to say that she never really wanted the carbon tax, and then claim that joining the EU ETS is a step forward;
  • Abbott gets to claim victory as the carbon tax lasted only 59 days before Labor decided to terminate it rather than transition it to a domestic ETS. The Coalition will have a field day comparing recent Labor claims (e.g., importance of a floor price, C tax as budget revenue) to the new claims (e.g., the Australian Treasury can model the EU recovery and future C price); 
  • The EU gets the prospect of reducing a bit of the "hot air" in its oversupply of carbon credits and can claim some political success due to the high profile decision by Australia to join up;
  • By eliminating the floor price on carbon that was to be part of the proposed Australian ETS, carbon-intensive businesses have years to hedge and stock up on dirt cheap EU carbon credits and CDM offsets, limiting their exposure to the ETS and guaranteeing BAU, and thus reducing their opposition;
  • The environmental activist community (including many academics) will either have to put a brave face on what is surely another huge disappointment, or come out fully against this decision. I suspect that we will see a bit of both strategies; 
  • For the first 3 years (from 2015) Australia will treat the ETS as an offsetting mechanism, which is a "one way" use of the ETS. That is Australia can buy credits from the EU but wil not be formally under the ETS.
  • The proposal is that from 2018 Australia will have full membership in the ETS, which means that unilateral decisions in Brussels could have the effect of increasing energy costs in Australia. If it ever gets this far, then this will be a political nightmare for whomever has to defend it in Australia. Even currency changes could drive price changes. Labor is kicking this can way down the road.
And what won't change? I'll stick with the conclusions that I wrote in a paper last year evaluating the targets and timetables proposed for Australian emissions reductions (here in PDF):
Australian policies for decarbonization could serve as experiments with a clear-eyed recognition that the pace of decarbonization simply cannot be known until those experiments are implemented and evaluated. Departing from conventional wisdom of the international process would take bold leadership and a willingness to clearly explain the simple mathematics of emissions reductions, such as presented in this paper. From this perspective the renewable energy package passed by the Australian government in August 2009 likely offers far more prospects for learning about the practical challenges of decarbonization and meeting aggressive goals for stabilization of atmospheric concentrations of carbon dioxide than does an Australia ETS, whatever its eventual fate. The political challenges thus far facing passage of emissions reduction legislation in Australia, and its almost certain destiny to fail to achieve emissions reduction targets of the magnitude described here, should serve as an important lesson to climate policy makers around the world.
The Australian soap opera provides some clear lessons on efforts to price carbon at a high level to drive behavioral change. 

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