"It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong." Richard P. Feynman

Saturday, November 12, 2011

Carbon Tax set in stone as world shifts!

With the Climate Change minister Greg Combet using economic basket cases such as Europe and California as fine examples of carbon pricing in action it is not surprising that concerns are being aired about the inflexible Australian tax now legislated. Paul Kelly has more:


WITH the euro's future in jeopardy, the EU confronting recession and the tremors leaping the Atlantic to further damage the US economy, Australia was living in a parallel reality this week with its passage of a high fixed carbon price for the next three years.
For Australia, the law is the law is the law. We are now committed, regardless of how bad the European and global meltdown becomes. There is no escape. By law the scheme starts on July 1, 2012, and by law the price is $23 a tonne, adjusted for inflation each year in the fixed three-year period.
There is no flexibility and no floating price until 2015. Yet flexibility is the need in a globe of risk proliferation.
Anybody who thinks this scheme can be modified by law in the current parliament is deluded because there is no way this delicate Labor-Greens alliance will re-open any aspect of the package.
Regardless of whether Julia Gillard or Kevin Rudd is prime minister, alternative options this parliamentary term are gone.
There will be no delay, no change in the price or no shift towards the earlier floating price as envisaged in Rudd's 2009 scheme, a design that now looks far more appealing.
The law is set. Only an election can change it.
Australia, in the worthy cause of fighting global warming, has legislated a scheme that looks brave and dangerous amid a European crisis with the potential to destabilise the global economy. This is one of Labor's boldest and greatest gambles in a half-century.
The contrast with the rest of the world is jaw-dropping.
Europe, home of climate change activism, is sinking into an institutional, financial and political crisis that will make carbon a second-order issue for some time. There is no prospect of any cap-and-trade scheme passing the US Congress for many years. There is no hope at the upcoming Durban climate change meeting of any global binding agreement beyond the Kyoto period.
In Australia, however, free from any post-2008 recession arising from the global financial crisis, the dominant issue for the political class has been carbon pricing. This is because of two factors: the luxury of resources-driven prosperity and the politics of Gillard's minority government.
The European Commission has cut forecasts for next year's growth to just 0.5 per cent pointing to a likely European recession. "Growth has stalled in Europe and there is a risk of a new recession," the commission's economic chief, Olli Rehn, says.
The storm's epicentre has moved from Greece to Italy, a bigger domino.
Financial guru Nouriel Roubini says Italy may "need to exit the monetary union and go back to a national currency thus triggering an effective break-up of the eurozone". Italy is too large an economy for a bailout package. Its debt levels scale the point of "no return".
In the self-defeating cycle now under way sheer austerity cannot work. The crisis nations must grow to discharge their debt but cannot grow because they lack competitiveness. The political values that drove the great European project are crumbling.
International Monetary Fund head Christine Lagarde says the world risks "a lost decade" and "Asia is not immune". Nor is climate change action. It is idle to think a lost decade or even a lost three years with the pain this involves for Western democracies will not compromise climate change action or carbon pricing.
The alarm of our business lobbies is driven by the certainty of Australia's carbon price compared with the growing uncertainty in the rest of the world. They see the world moving in one direction and Australia moving in another.
In early October the Business Council of Australia called for amendments and has been repudiated. Likewise the Australian Industry Group. This week the BCA warned about the risk to competitiveness and lack of progress on a global carbon price. The AIG said our price was "close to double those in major international markets", that our industry will be put "at a marked disadvantage" and that overseas offsets would not be available until the floating price in 2015.
This scheme and its design  originate in the minority government story. If Gillard had won the 2010 election in her own right this scheme would not have been legislated this week. Gillard's cautious election policy was for a political consensus before any carbon scheme.
The reason carbon pricing is now law was documented by Greens deputy leader Christine Milne in the Senate debate.
She said: "This is a power sharing parliament and, as a result of an agreement with the government, there was an undertaking to deliver a carbon price mechanism in this period of government."
Exactly. But the world of September 2010 and the post-election Labor-Greens deal was different from the world of November 2011. At that earlier point it looked as though the world was recovering from the 2008-09 financial crisis, a diagnosis now untenable. Gillard's carbon scheme originated in her political survival requirements, far distant from any thought of a eurozone financial crisis.
The scheme's design, notably the three-year fixed price, now a liability, came directly from the Labor-Greens deal.
At the outset Climate Change Minister Greg Combet opted for the fixed price model to avoid the central tension between Labor and the Greens with the former backing a 5 per cent reduction target and the latter wanting 25 per cent to 40 per cent. Combet's move deferred this decision.
It made the deal possible but its unintended consequence is to lock Australia into a pricing model that looks ill-suited to the unfolding global dilemma. Given this situation, Australia would have been better placed to move straight to an emissions trading scheme with a floating price that reflected global macroeconomic vulnerabilities.
Quizzed on ABC Radio National this week about the European crisis, Combet said: "We've got to take a bit of a longer term view of this." He hoped and anticipated "that in the course of the next 3 1/2 years the crisis in Europe is overcome."
He's right that climate change policy is long-run. The problem, of course, is that Labor's scheme in its design and its price was devised before the current global crisis and such decisions cannot be easily undone.
Labor correctly brands carbon pricing as a historic economic reform. But unlike other reforms it cannot stand on its own right. Its validity depends upon similar action being taken by other nations.
Tony Abbott's success to this point derives from the powerful simplicity of his campaign: that Gillard's policy is a breach of trust with the Australian public. But Abbott is developing an almost equally powerful argument: that this policy exposes Australian industry at a time of economic crisis when neither Europe and America nor the G20 nations as a group are making the same commitment. This mirrors the alarm of business and industry. In short, Abbott will recruit to his flag the global economic uncertainty.
For Gillard, legislating her scheme is a singular triumph that turns into ashes unless she carries the next election. Her strategy, in the interim, is to win investor confidence for her scheme. How, pray, can this happen?
Australia, more than any other Western democracy, is polarised and torn by climate change politics. Gillard's policy was legislated on Labor-Greens votes but this alliance cannot deliver investment certainty.
That requires a Labor-Coalition political settlement and a shake-out only obtainable after the next election.
AIG chief Heather Ridout identifies the problem. "With Australia further from a political consensus on carbon than it has ever been, this legislation may not do much to reduce the policy uncertainty that is strangling long-term investment in efficient electricity generation," she says.
"Further, with potential 'rollback' of this legislation and 'roll-in' of the Coalition's alternative, uncertainty will not end soon."

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