Beyond carbon chaos, does compromise loom on Direct Action?

RepuTex Market Insider

It seems to be a fitting finale for the Carbon Price Mechanism, with chaos yesterday as the Palmer United Party backed out of its agreement to support the government’s carbon tax repeal bills, seeking a last minute amendment to include penalties for companies that fail to pass on the full savings from the carbon tax repeal.

The government will introduce a set of amended bills to repeal the carbon tax to the House of Representatives on Monday. The bills are then expected to go to the Senate, where debate is likely to be guillotined to force a vote prior to the end of the week.

The risk of a further process block remains, with the tabling of a ‘new’ repeal bill triggering new debate and voting in each house. As a result, the repeal may be delayed until August 26, the commencement of the spring parliamentary session, however this is highly unlikely, with the bills expected to pass both houses next week.

So ... what next?

While the chaos will continue to play out next week, the numbers for the carbon tax repeal will ultimately fall in the government’s favour, from which point all eyes turn to the likely ‘replacement policy’ to control domestic emissions growth and meet our 5 per cent emissions target.

With the carbon tax repeal dragging into next week, this may encroach on the time previously allotted for debate on the Climate Change Authority Abolition Bill, along with the government’s CFI Amendment Bill (Emissions Reduction Fund), potentially delaying any meaningful action on these bills until the spring session in late August. 

Xenophon extends the olive branch on Direct Action

Despite concerns over the effectiveness of the Direct Action Plan, signs are emerging that the Palmer Untied Party and independent Senator Nick Xenophon may be softening their stance towards the Emissions Reduction Fund, with potential for some progress on Australia’s short-term climate policy, accentuated by the looming threat of a climate policy vacuum.

In outlining his recommendations on the CFI Amendment Bill as part of the Senate Environment and Communications Legislation Committee, which reported on Monday, Xenophon noted that, “while this bill is a step in the right direction in terms of Australia's climate change policy, it does require refinement... The legislation should be amended to allow for longer contracting and crediting periods as well as an immediate and effective safeguard mechanism.”

Xenophon also noted that that the government's Emissions Reduction Fund would “go some of the way to reducing greenhouse gases”, however, uncertainty remains over the scheme’s overall effectiveness.

As a result, Senator Xenophon has commenced dialogue with the Coalition, seeking amendments to the ERF, including:

– longer contract periods

– changes to the objectives of the act to establish its intention to meet international objectives, and

– more information on emissions safeguards.

Palmer ETS and support for Direct Action stopgap?

In parallel to Xenophon’s activity on the CFI Amendment Bill, the Palmer United Party is finalising the details of its Emissions Trading Scheme policy, which is expected to be brought forward as an amendment to the Climate Change Authority Abolition Bill over the next sitting week (not contingent on PUP support for the carbon tax repeal bill).

The PUP amendment will seek to extend the life and funding of the CCA to enable it to effectively govern PUP’s new ETS plan, as outlined by Clive Palmer and former US Vice President Al Gore.

On Monday, PUP leader Clive Palmer told the National Press Club that his party would support the government's Direct Action policy on the condition it also implemented his alternate ETS plan, with Direct Action acting as a policy stopgap as a stepping stone to a more dynamic price on carbon.

The issue is likely to shortly come to a head, with the CCA abolition Bill (to which PUP will ultimately attach its ETS amendment) the next cab off the rank following the carbon tax repeal. However, with Coalition support for an ETS unlikely, the future of the bill appears hazy, and is likely to be blocked by the government in the lower house upon the commencement of the spring session on August 26.

With the Coalition unlikely to support PUP’s ETS proposal, PUP’s reciprocal support for the government’s Direct Action Plan is unlikely to be forthcoming, leaving the parties at a stalemate, whereby the key players (Coalition, PUP bloc, Xenophon bloc) will need to find common ground over the five week winter break in order for an outcome to be negotiated when parliament resumes in late August.

Baselines deferred – ERF compromise looms?

With a compromise between the Coalition, PUP and Xenophon on the ETS versus Direct Action debate unlikely in the short-term, a scenario appears to be emerging for the parties to agree to ‘split’ negotiation on Direct Action in line with the government’s proposed legislative plan, dealing with the ‘Emissions Reduction Fund’ as a first step, in isolation to the more politically controversial safeguard scheme.

An agreed truce on the design of the ‘safeguard’ scheme is likely to provide the parties with time to negotiate a preferred baseline and penalty mechanism, and enable debate on PUP’s ETS (along with Xenophon’s concerns over emissions baselines) to occur in parallel to the release of the government’s own draft ‘safeguard’ mechanism in March.

More immediately, enacting the ERF as a policy stepping stone – be it next week, or in August – would provide the market with short-term policy assurance, and give PUP and the Coalition political coverage against any policy vacuum risk as broader ‘safeguards’ debate continues.

Should the government continue to be frustrated in its attempts to legislate a replacement scheme, it may seek to implement its ERF via a ‘back door’, avoiding crossbench input. This remains a real risk for the new Senate, and provides the government with leverage upon the resumption of debate on the CFI Amendment Bill.

With just one week left in the extended sitting period, there is much water to flow under the bridge; however, the prospect of the Emissions Reduction Fund playing a role, in some shape or form, continues to remain a likely prospect – assuming that the government ultimately gets its way on the CPM repeal in the Senate.

Wishful thinking?  

RepuTex’s Market Insider publication is a monthly review of the key events and activity shaping the Australian emissions markets. It was originally published by RepuTex under its Australian emissions markets research service. For more information please click here.