Australian Carbon Tax in Limbo as Election Fever Escalates

18 July 2013

Australian Prime Minister Kevin Rudd has announced plans to move his country's controversial carbon tax to an emissions trading scheme (ETS) a year early, in an effort to answer complaints over increased costs of living and lost competitiveness. The shift from a fixed-price to floating-price system comes as the country prepares to hold its federal elections later this year.

"The government is moving in this direction because a floating price takes cost-of-living pressures off Australian families and still protects the environment and acts on climate change," the Prime Minister explained to reporters in Cairns earlier this week.

However, Rudd stressed that the move to "terminate" the tax is not a sign of Canberra backing down on its commitment to tackling climate change.

"I just add on that, on climate change, this is the government that ratified Kyoto, this is the government that brought in the 20 percent mandatory Renewable Energy Target, this is the government which has also brought in a carbon price," he added.

Given that the Australian government stands to lose A$3.8 billion under the proposed changes, Rudd has pledged that shifting the ETS date forward to July 2014 would need to be "budget neutral." To do so, treasury officials have outlined a series of savings in other areas aimed at offsetting the revenue loss.

The government will, however, keep in place its programmes for providing families and low-income earners "special assistance payments" to help compensate for the impact of carbon pricing.

One year in

The Australian carbon tax only just began its second year, having entered into force in July 2012. (See Bridges Weekly, 4 July 2012) It targets nearly 400 of the country's biggest polluters, and was instated with the goal of cutting 160 million tonnes of carbon emissions by 2020.

Since its inception, the tax has been criticised by its opponents as having increased energy and living costs for consumers, and made it difficult for businesses to remain competitive under the financial burden. Moving to an ETS early, Rudd says, could save average Australian families A$380 per year, and will also reduce pressure on businesses.

The tax was set at A$23 (€16.15, at current exchange rates) per tonne for the first year, increasing to A$24.15 earlier this month. Under the current scheme, this was originally set to rise once more to A$25.40 in July 2014, before transitioning to an ETS in 2015 and allowing the market to determine the price of permits - which many expect will bring these prices down considerably. Rudd has suggested that prices could drop to as low as A$6 per tonne once the ETS enters into effect.

In comparison, carbon permit prices in the EU - which has had an ETS since 2005 - have been regularly averaging at €5 per tonne, down from the original €30. Australia's scheme is eventually set to be linked to Europe's, which many Australian businesses say would ease their load by allowing them to buy lower-priced permits from overseas. Whether the planned shift to a floating price system in 2014 instead of the original 2015 will also lead to Canberra bringing forward its linkage with Brussels' programme is currently unclear.

The low prices of the EU permits, however, has posed its own set of problems in the 28-country bloc, with the European Parliament recently backing a plan to delay the auction of millions of carbon allowances in order to boost these prices. (See Bridges Weekly, 4 July 2013) The current levels, many fear, are insufficient to support low-carbon investment and a transition to cleaner methods of energy production, and has raised questions by analysts and officials alike over the ETS' long-term future.

Election politics

Bringing the ETS start date forward will require new legislation; the Rudd government, however, has indicated that this will likely occur after the impending federal election, should the Labor Party remain in power. Elections must be held sometime between August and November, with Rudd to set the date.

Rudd only returned to office last month, having displaced fellow Labor politician and then-Prime Minister Julia Gillard in a surprise party leadership vote. Gillard had previously ousted him in a similar fashion in 2010.

The Prime Minister is now locked in a tight election race with opposition leader Tony Abbott of the Liberal Party, with Rudd's return having narrowed the previously sizeable polling advantage that Abbot had held over Gillard.

Abbott has long promised that, should his party win the upcoming elections, one of his first changes will be to eliminate the carbon tax - and planned ETS - entirely.

Rudd's proposal to shift the ETS date forward, Abbot says, will only provide Australians with "very modest relief," and is little more than a "one-year fiddle."

"Just ask yourself what an emissions trading scheme is all about," the opposition leader said. "It is a so-called market in the non-delivery of an invisible substance to no one."

The Prime Minister, for his part, has noted that Abbot had previously campaigned for an ETS during the 2007 election, which Rudd ultimately won against the Liberal Party's John Howard.

ICTSD reporting; "Rudd Seeks to Ditch Carbon Tax With Eye on Election Campaign," BLOOMBERG, 14 July 2013; "Abbott under fire for attack on ETS," AAP, 15 July 2013; "Why Kevin Rudd will never ‘terminate carbon tax'," THE AUSTRALIAN, 17 July 2013.

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