Two cheers for Gillard's carbon call

For Labor and the Greens, the ceremonial part of agreeing on a framework for a fixed carbon price will be the easy bit. Prime Minister Julia Gillard and climate change minister Greg Combet, with their counterparts from the Greens and two of the country independents, gathered together in Canberra for an upbeat photo shoot and to congratulate themselves on the government’s political back-flip and the Green’s forward pike. Hereafter, lies nothing but potholes.

An agreement to impose a carbon price on the Australian economy should not be downplayed. It is as momentous, if not more so, than any other structural reform to the Australian economy, including the floating of the dollar and the introduction of the GST.

The Australian economy is powered by heavy-emitting fossil fuels – both for the energy that drives its industry and its transport, and the exports which are driving its wealth – but from now on, if all goes according to plan, businesses will have to take the cost of carbon into account in their investment decisions, if they hadn’t already done so. Australia, just about the world’s largest emitter per capita, will finally be seen to be Doing Something.

But what exactly? Despite the hoopla, this is effectively an agreement to have a discussion. And most people thought that was what had already been achieved by setting up the Multi-Party Climate Change Committee in the first place. In that respect, it follows the path set by Europe, but it also bears an unsettling resemblance to the recent pace of international negotiations – let’s agree to say that we’ll work to save the planet, and sort out the details later.

There is an agreement on a “framework” to introduce a fixed price from July 1, 2012,  but we don’t know any of the details – any of the tricky bits. The discussion paper that was released today has options at every turn, a weasel word in every clause. We do not know the price; how long it will last; when, how, or if it will transition to a market price; which sectors are covered (there are options to opt in or opt out); the levels of compensation; or even if the electricity sector will have to deal with a carbon price or some sort of white certificate scheme based on emissions intensity – a policy last heard of when Malcolm Turnbull raised it before becoming engaged in discussions about the ill-fated CPRS, and an idea that had hitherto been thought to be dead and buried.

This agreement is mostly about clever politics and powerful symbolism. It will get much press attention and is designed to rile and wedge the Opposition (shades of 2009). But it defers the really tough decisions, like the scope of Australia’s emission reduction target, until some time in the future.

This suits the Greens more than it does Labor. The party can be seen to be constructive without having to back-track on its own calls for an "economy killing" 25 per cent reduction target, a critical breakthrough. Ironically though, the cap may well be decided when the Greens no longer have the balance of power. If they are still holding that position after the next election, then they will be hoping that international talks, and individual and regional action, would be sufficient to justify an ambitious target. Only once a cap is agreed upon is it worth considering an ETS.

But, as Reserve Bank board member and ANU economist Warwick McKibbin ventured today, we have crossed a major threshold, and having a fixed price is better than nothing, which at least is more than could be said of the CPRS. “There’s not much here,” said McKibbin, echoing the comments of many analysts and observers. “We are still a long way from where we need to be. And we need transparency about where he are heading if we want to unlock long-term investment.”

And here lies the crucial division between the business folk, who seek “certainty” so they can write down the cost of carbon on the debit line and work out how to defray or pass on the costs, and those who seek “clarity” – who want to understand the long term rules and price signals so they can make intelligent decisions about the tens of billions of dollars of investments that will be needed to transform the Australian economy. The former will find some succour in today’s press release, the latter less so.

And on this point, it’s not entirely clear that Gillard “gets it”. In today’s press conference, she talked about the importance of imposing a carbon price so that consumers will moderate their consumption of certain products. Er, that’s a dangerous line to follow because it would be playing directly into the hands of Tony Abbott and Greg Hunt’s “great big new tax” scenario. And its doubtful Gillard would ever have the political courage to lift the carbon price far enough to have such an impact. A more sensible idea is to send a strong signal business to either make different products, or make the products differently, because that is where the real emissions reductions will be achieved.

As Origin Energy CEO Grant King remarked today: “To drive a switch to lower carbon options in the electricity market, the fundamental requirements are a clear and credible long-term pricing framework and a carbon price that makes a real difference to investment decisions. Today’s announcement is a very positive start in defining a credible long-term framework and signalling a sense of urgency in addressing these issues.”