Now Rudd can build a new, better emissions trading scheme: Kohler

Before yesterday, Australia was going to end up with an emissions trading scheme that is basically the same as the United States’ model; after yesterday we will end up with the same thing, except with more compensation for the losers because they have been handed more political bargaining power.

The political storm that erupted yesterday, with the coalition’s attack dogs now unleashed and barking that it’s just a tax on everything and opposing the whole thing, is nothing but static and noise.

The excessive attention that’s always paid to the opposition in Australia means that it will begin to seem like an even debate as we head into Christmas – that it’s a yes or no question and could go either way – but don’t be fooled. Australia can no more stand aside from the imminent international emissions trading scheme than refuse to send troops to Afghanistan.

President Obama has now committed the US to a 17 per cent reduction in greenhouse gas emissions by 2020; China has announced that it will cut its greenhouse gas intensity (a different thing) by 45 per cent.

Australia’s CPRS legislation, which Kevin Rudd was hoping to brandish in Copenhagen as a law rather than a contested bill, has a 5 per cent target rising to 15 per cent or 25 per cent depending on what the US does.

Rudd came agonisingly close to having this flexible pre-Copenhagen emissions trading legislation, thanks to Malcolm Turnbull’s personal commitment to the idea, but couldn’t quite get it across the line because the political extremes – both the Greens and the Nationals – opposed it.

That everybody is back to the drawing board is no bad thing. In fact, the most dangerous result of yesterday’s Liberal Party change is the possibility of an quick double dissolution election fought specifically over the Rudd CPRS.

The Prime Minister may be tempted, but he should resist. The bill is flawed and compromised – it had to be compromised given the timetable Kevin Rudd set – and despite overwhelming agreement among voters that “something” needs to be done about climate change it might get knocked back because supporters of the principle are split on the detail.

An election defeat over climate change would be quite awkward for this country in the context of an international agreement in 2010 as a result of Copenhagen. Best to just wait and see what happens now, and then openly copy the US scheme.

The big problem with that, however, is that Australia is a much more carbon intensive place than the US because we don’t have nuclear power and we haven’t done anything else to reduce our reliance on coal-based electricity.

That means that meeting the same emissions reduction target will hurt us more than it hurts them.

The price of Australia’s emissions permits will be set in the US, and will be determined by the exchange rate. There are two variables that Australia will have to play with: reduction target and compensation.

As discussed, the target will have to be roughly the same as everyone else’s, so the only issue up for discussion in this debate is compensation – and there is actually a lot of room to move.

According to Michael Hitchens of the Australian Industry Greenhouse Network, every one cent depreciation in the Australia/US dollar exchange rate adds around $1 billion to government revenue in 2020. If the dollar falls to US80c, that would add $10 billion to the budget.

The permit price assumed by Treasury forecasts is $26. The consensus forecast for the price of Certified Emission Reductions (CERs) in 2012 is €16-18, or about $A30. Point Carbon, the emissions trading analysis firm, predicts €25 in 2013, which would be about $A40 per permit.

That higher price would add $55 billion to government revenues by 2020.

And finally, Australia is likely to outperform its Kyoto targets by 7 or 8 per cent, which will give the Australian government 27.5 million international permits to sell. At the current European price for these things, that’s a $737 million windfall.

So to sum up: what happened yesterday was that the owners of the coal-fired power stations and the trade exposed emitters worried about their profit margins got some extra bargaining power.

As a result they will get more compensation. But that’s okay: it can be afforded.

This article first appeared on Business Spectator.