Mike Rann: C-Day in Australia

10 July 2012

Hon. Mike Rann, Former President of South Australia and CNP Fellow for Democracy and Development blogs about Australia's new price on carbon, as part of his series of posts for CNP

Last Sunday, July 1 was C-Day, the day carbon pricing began in Australia following one of the most bitter political divides in the nation’s history.

Until recently in Australia, state governments were the policy innovators as well as the ‘test beds’ for climate change action. Nationally we lagged behind the rest of the world, refusing to embrace an emission trading scheme of the type we have seen operate in the European Union, in parts of the United States and in our nearest neighbour, New Zealand.

The former Conservative Government, led for more than a decade by John Howard, had aligned itself with the Bush Administration in first denying the scientific evidence for global warming and then decrying action to address climate change as contrary to the national interest.

This made no sense because Australia is among the nations at greatest risk from global warming. Much of the hot, dry Australian continent faces the potential loss of high production farming land that remains a foundation pillar of the economy. Climate change poses a serious threat to Australia’s precious water resources because of the already marginal nature of much of its rainfall.

Australia is also the highest per capita emitter of CO2 on the planet.

Yet at climate change conferences and meetings of leaders around the world, Australia dragged its feet. Australia’s catch-up began with the election of Kevin Rudd’s Labor Government in late 2007. One of its first acts was to ratify the Kyoto agreement, but it was blocked in the Senate from introducing an emissions trading scheme designed to reduce our CO2 emissions.

Late last year Rudd’s successor, Julia Gillard and her Climate Change Minister Greg Combet, secured the passage through a bitterly partisan Federal Parliament of legislation to set a price on carbon. This wasn’t easy. Following an election in 2010, Labor was now in minority, relying on a small number of Independent MPs to remain in office.

In a package of measures, the legislation that came into force on July 1, is designed to cut greenhouse gas emissions as well as drive investment in clean energy. The new law will make Australia’s biggest polluters pay for the greenhouse gas emissions they create. In other words, they have been given a clear incentive to reduce their emissions intensity, in a transition to an emissions trading scheme.

The new carbon pricing mechanism now being rolled out is designed to minimize its impact on business, jobs and on the Australian economy. Economic modelling by the Federal Treasury has shown the carbon price will increase Australia’s CPI by around 0.7%. Australian families will be compensated for consequent price rises through a combination of tax cuts and pension increases.

To put this into context, the carbon price is expected to increase household electricity prices by 10% in 2012-13 which, for the average Australian household would amount to an extra $3.30 a week. However, the Gillard Government is providing an average of $10.10 a week in tax cuts and increases in family payments, pensions and benefits, particularly targeted at vulnerable low income households. In fact, about 90% of Australian households will be financially better off or fully compensated following the introduction of carbon pricing.

To prevent carbon leakage – in which trade exposed, emission intensive industries would be ‘forced to shut up shop’ and move to countries with lax pollution standards – a carefully designed industry assistance package to support jobs and competitiveness will be implemented. This assistance includes programs promoting innovation, investment and energy efficiency in manufacturing

The Australian Federal Government has expanded the nation’s renewable energy target to ensure that 20% of Australia’s electricity will come from renewable sources by 2020. South Australia exceeded this target last year but nationally renewable energy accounts for only 5% of our electricity generation. A new Carbon Farming Initiative (CFI) will also provide economic opportunities for Australian farmers and Indigenous communities while supporting productivity and enhancing the resilience of the Australian landscape. This will give an opportunity for ecological sequestration projects I wrote about in a recent blog.

The Government has also legislated to create a $10 billion Clean Energy Finance Corporation to support the commercialization of renewable and low emissions technologies. It has a charter to drive innovation through commercial investments in clean energy, involving loans, loan guarantees and equity investments.

The conservative Opposition, currently way ahead in the polls, argues that the new carbon pricing arrangements will be a wrecking ball for the Australian economy. Its leader, Tony Abbott, claims there will be “unimaginable” price rises due to the carbon price. He has pledged to scrap the ‘carbon tax’, the Clean Energy Finance Corporation and other parts of the July 1st policy package if he is elected Prime Minister late next year.

The scare campaign has so far been effective with the majority of Australians opposing the ‘carbon tax’ according to opinion polls. However, since the announcement of the carbon price, Australia’s GDP has increased by 3%, as has household consumption. Despite claims of a massive hit on jobs, new business investment has increased by 20% in a nation that has largely avoided the horrors of the GFC experienced in the US and Europe.

Significantly, senior business leaders haven’t ‘bought’ the scare campaign. Last year, GE’s CEO Steve Sargent said: “Australia is a laggard. We’ve seen that an ETS is already in place in 32 countries, with others on the way… Additionally, despite our challenges, the Australian economy is in far better shape than most other economies around the globe…Now is the time to take action, not continue to defer.”

Michael Fraser, CEO of Australia’s largest energy utility, AGL, also spoke out: “AGL supports the introduction of a price on carbon emissions as soon as possible to provide investment certainty for the energy industry as Australia begins the transition to a low carbon economy.”

Alan Oster, the highly respected Chief Economist for the National Australia Bank, scotched claims of an investment strike by the mining industry saying, “Is the mining industry going to stop investment because of a carbon tax? The answer is no. We just don’t see that happening.”

At Rio+20, Australia for the first time was seen as a leader in tackling climate change. It is now respected internationally for ‘biting the bullet’ rather than the ‘talk and defer’ approach that has bedevilled real progress on climate change internationally.

If we believe the hype, Australians, convinced by an Opposition and a shrill press that the economy and their lifestyles will suffer a catastrophic hit, are now bunkering down to see what happens after C-Day.

Some commentators believe that a continuation of Australia’s low unemployment, strong economic growth plus the rollout of tax cuts and benefits linked to carbon pricing, are likely to make the Opposition’s Armageddon claims appear hollow. Significantly, on the eve of carbon pricing, Tony Abbott pulled back his rhetoric saying that the impact of the carbon tax would be a “python squeeze rather than a cobra strike”.

Whatever the local politics, US legislators and the Obama Administration are likely to be closely watching the political, as well as economic aftermath, of C-Day in Australia.

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