THE AUSTRALIAN

MAY 23, 2016

Alan Kohler, Editor-at-large,

The Australian Business Review

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Eraring Power Station, NSW

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Quietly, surprisingly, Australia’s climate change policy has become a bipartisan emissions trading scheme, or ETS … well, almost. The parties might try to manufacture differences for the election campaign, although they haven’t yet, and anyway they don’t really exist.

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From July 1, coincidentally the day before the election, the Coalition’s “safeguard mechanism” within its Direct Action Plan will come into force. One-hundred and fifty companies, representing about 50 per cent of Australia’s total carbon emissions, will be capped by legislation at their highest level of emissions between 2009-10 and 2013-14.

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If they emit less than their caps, they will get credits, called Australian Carbon Credit Units (ACCUs), which were created by the Gillard government’s 2011 legislation; if they emit more, they have to buy ACCUs on the market.

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The caps specifically include the electricity sector and the ACCUs are “financial products” under both the Corporations Act and the ASIC Act, and can be traded, so an ETS market will be established from July 1.

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It is, in short, a classic cap-and-trade ETS, similar in effect to the one legislated by the ALP in 2011, but which unwisely started with a fixed price that could be labelled a carbon tax, and was repealed on July 17, 2014 by the Abbott government, with high-fives and champagne.

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What hasn’t been announced or included in the Coalition’s legislation yet is that the caps will start to be reduced from next year, which will make it even more similar in some ways to the Gillard government’s Clean Energy Act 2011.

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The legislation that included the Coalition’s ETS was passed by the Senate — with the support of both the ALP and the Greens — on its last day of sitting in 2015, in December.

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As it happens, that was the day before the Paris climate conference, called COP 21, got underway, at which an agreement to keep the global temperature increase to 2 degrees was signed by 189 countries, including Australia.

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The emissions caps imposed on 150 companies are described by the government as a “safeguard mechanism” to support the Emissions Reduction Fund that is the centrepiece of the Direct Action Plan, in which companies bid at auction for the right to be paid to reduce their emissions. Those auctions have so far resulted in 143 million tonnes of abatement at an average price of $12.10 per tonne, which is much lower than had been forecast by the scheme’s opponents.

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The Department of Environment’s website says: “The safeguard mechanism will protect taxpayers’ funds by ensuring that emissions reductions paid for through the crediting and purchasing elements of the Emissions Reduction Fund are not displaced by significant increases in emissions above business-as-usual levels elsewhere in the economy.”

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But depending on the gradient of cap reduction that is decided next year, the safeguard itself could end up becoming the central pillar of Australia’s response to the Paris agreement.

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That’s because the government almost certainly can’t afford to pay for enough abatement under the auction system to meet its Paris commitments, given the state of the budget.

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In fact, the safeguard mechanism becomes a way for the government — Coalition or Labor — to adjust the budget deficit: reducing the “safeguard” caps faster would reduce the amount that the ERF would have to pay out.

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The interesting question is why no one is talking about any of this. Obviously the 150 companies involved know about it, and it’s all described in full on the department website, but the fact that Australia has effectively legislated an emissions trading scheme is virtually a secret.

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So far, climate change has been absent from the election campaign and will probably remain so — because fundamentally the parties agree now. The only disagreement is likely to be rate of the reduction in the caps, and no one is ready to talk about that yet.

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In fact, the idea of a cap-and-trade scheme has been part of the Coalition’s climate policy since well before Greg Hunt went from shadow minister to Minister for the Environment in 2013. He made it a condition of his appointment by Tony Abbott that the science of climate change would be accepted and the emissions reduction target would not change.

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Within that, he and Abbott constructed a policy position that could more or less credibly be argued as achieving the abatement targets, while at the same time satisfying three requirements: differentiating their policy from the ALP, not increasing electricity prices and not upsetting the far right of the Coalition.

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When Malcolm Turnbull became leader and Prime Minister last year, amazingly, he did not fully understand his party’s climate policy, and in particular the inclusion of a cap and trade ETS, because Hunt had never discussed it in Cabinet. Apparently, he was pleasantly surprised, but decided to maintain radio silence, as part of his broader efforts to keep the conservatives onside.

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The whole process has been a remarkable strategy by Hunt: he has effectively steered an emissions trading scheme into Australia’s response to climate change through a ferociously polarised political debate.

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It’s arguably a bit like Nixon in China — only a conservative minister could have done it.

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The key has been not talking about the ETS part of the policy and to emphasise the lack of a price on all emissions. He hasn’t exactly kept it secret, since it’s in the legislation, but nor has he talked about it publicly and nor has anyone else.

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Both the Greens and the ALP passed the legislation in December, even though they probably could have blocked it. Why? It’s because they basically agree with it and want to use the mechanism if elected.

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Will it work? That depends on the gradient of the cap reductions when they start. The key is that an ETS has now been legislated in Australia and can be adjusted to fit requirements, either budgetary or political.

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Will it result in higher electricity prices? Almost certainly. Shhh.

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