Repealing the "carbon tax": hidden costs and unanswered questions

21 October 2013

There are reasons Australia has a price on carbon. Let's recap.

The IPCC has released its Fifth Assessment Report stating that the increase in atmospheric concentrations of CO2, methane, and nitrous oxide is unprecedented in the last 800,000 years.

Data sets show a globally averaged combined land and ocean surface warming of 0.85C between 1880-2012. There's a 95-100% probability that more than half of the observed increase in global average surface temperature from 1951 to 2010 is human induced.

By 2081-2100, under the IPCC's best case emissions scenario, temperatures could rise by as much as 1.7C and in the worst case scenario by 4.8C. Our last summer broke 123 extreme weather records in 90 days. Last month was Australia's hottest ever September on record.

So what are our current emissions?

Australia's December 2012 National Greenhouse Gas Accounts show that since 1990, emissions from the electricity sector grew 47.3%, the stationary energy sector 44.5%, transport 47.5%, fugitive emissions (including from coal mining) 30.5% and industrial processes 30.8%.

These sectors are all covered by the carbon price mechanism (CPM).

Let's recap the Abbott government's agenda to reduce our emissions. The Climate Commission has been abolished. The Clean Energy Finance Corporation will be abolished. We no longer have a Department of Climate Change. On Tuesday, the draft legislation to repeal the carbon price mechanism, to be the first item of business for the 44th Parliament, was revealed.

This means, briefly, that if the legislation passes the following will occur.

There will be no annual cap on Australia's escalating emissions.

Financial year 2013-14 will be the last year that the carbon price mechanism applies and all charges for non-compliance will be repealed. The government will not extend what it calls the "carbon tax" even if the Parliament does not pass the repeal bills until after 1 July 2014. If the bills are not repealed at all, the government will be in breach of the law if it refuses to apply the carbon price mechanism and other carbon price legislation. Calling a double dissolution is a possibility.

Until then liable entities must comply with the carbon pricing mechanism and reporting obligations, but can use Carbon Farming Initiative (CFI) carbon credit units to offset their liability. February 2, 2015 is the final date for compliance before unit shortfall charges apply. An entity has to pay shortfall charges if it does not have enough carbon credit units to surrender to meet its liability.

All carbon levies applying to aviation fuels and synthetic greenhouse gases under separate legislation are abolished but 2013-2014 liabilities must be paid.

Once final commitments are met, refunds will be provided for any auctioned units, existing carbon units will be cancelled and over-surrendered carbon farming carbon credits will be re-credited.

The government denies that the repeal of the carbon price mechanism amounts to an "acquisition of property" other than on just terms under the Constitution. If it does, legislative provisions are included to pay a reasonable amount of compensation.

Industry assistance provided under the Jobs & Competitiveness Program (JCP) for Emissions Intense Trade Exposed Industries, under the Energy Security Fund and all assistance to electricity generators, will continue in 2013-14 but will cease thereafter. Any under-allocation of free units, which is expected, will be rectified while over-allocated units must be relinquished, or a levy will apply as well as a late payment penalty. The Steel Transformation Plan will also cease on 1 July 2014.

The Australian Competition & Consumer Commission will monitor prices and prohibit corporations from making false or misleading claims about the effect of the repeal on prices.

The independent Climate Change Authority will be abolished. Instead, the performance of the Renewable Energy Target, the Carbon Farming Initiative and the National Greenhouse & Energy Reporting Scheme will be reviewed by the government's own Department of the Environment.

Legislation such as the National Greenhouse and Energy Reporting Act 2007 will be retained to support the Coalitions' direct action policy.

Consequential changes are made to the current regulation of carbon permits as financial instruments and to tax treatment of various charges.

The income tax cuts scheduled for 2015-2016 to compensate Australians for the shift to an emissions trading scheme on July 1 2015 will be abolished.

All this, according to Mr Abbott, just to "save Australians A$550 a year", or A$45.8 a month.

Yet, the Abbott government conceals so much.

That according to the Australian Energy Market Commission it is network prices that are driving the total prices paid by households for electricity while the price impact of environmental initiatives is moderating. The carbon price has already been factored into wholesale energy costs, and the impact of various state and commonwealth environmental schemes is likely to slow from this year.

That the government seeks to abolish the CPM before it transitions to a market-based price on 1 July 2015, but which could have occurred as early as 1 July 2014. Then, liable entities could have relied on cheaper EU carbon credits, as well as other international credits, to offset part of their liability at a lower price while still using CFI carbon credits. The price of Australian carbon credits would also have been market-based, determined primarily at auction with a price cap in place to prevent the price from escalating in thefollowing three years.

What the refunds, rectifications and potential compensation payments arising out of the CPM repeal will cost taxpayers.

Exactly how Direct Action will work. The Terms of Reference on the design of the Emissions Reduction Fund Consultation Paper, its centre piece, is so underdeveloped that it comprises 7 dot points seeking advice. Compare this with the years of work which preceded the CPM - the Howard government's proposed emissions trading scheme, the Garnaut Reviews, lengthy policy justifications in Green and White Papers, detailed bills, and ultimately legally enforceable obligations to reduce emissions.

Nor are we given any independent assurances that Direct Action can in fact deliver our Kyoto Protocol second commitment period obligation which is to go 5% below our emissions in 2000 by 2020. Rather Mr Abbott has said that Direct Action funding will be capped at $3.2 billion regardless of whether Australia meets its commitments. Remember, Australia's emissions reduction target is likely to increase under a new international agreement expected in 2015 when all countries, including developing countries, take on emissions reduction targets. Failure to comply could have financial consequences for Australia. Australia is the only country in the world seeking to repeal a CPM as others, including China, Brazil, Mexico, South Africa, and South Korea, move towards adopting one.

What it will cost taxpayers to deal with extreme weather events. So far extreme weather events influenced by climate change, including floods and bushfires, have cost Australia billions of dollars. Insurance premiums are rising and areas becoming uninsurable. Before the 2013 floods, Munich Re reported that financial losses from extreme weather events in Australia rose four-fold over the past 30 years.

At this point, one can only speculate on what the legacy of the Abbott government on climate change will look like when that government is voted out.

An earlier version originally appeared in The Conversation.

The views expressed here are the views of the author and do not represent the views of the University of Sydney.