Australia has many things going for it—a sophisticated economy, breathtaking scenery, a wealth of natural resources of all kinds, and a lot of great people. But its politics are a mess and disputes over climate policy have cost multiple leaders of the major parties their jobs (and twice for one leader). Accordingly, there is much to be learned from their experience for those of us interested in pricing carbon in a sensible and politically sustainable fashion.

First, some background. For many years, the Australian public has been strongly supportive of climate action, at least in opinion polls. In 2006, John Howard’s (Coalition, but essentially Conservative) Government proposed an emissions trading system (ETS), to be implemented in 2012. The Labor opposition promised a faster implementation—by 2010. The Labor party won the 2007 election under its then leader, Kevin Rudd, and while Rudd sought to portray his party as more committed to climate action, polling suggested the electorate did not see much difference between the parties.  Parliamentary and consultative work on the proposed ETS continued under Rudd. The Coalition opposition, now led by Malcolm Turnbull, continued to support the ETS in principle.

However, Turnbull was ousted as opposition leader in 2009 by Tony Abbott, who immediately held a secret ballot of his MPs on the ETS plan. It was overwhelmingly rejected. The next day, the ETS legislation was rejected in the Australian Senate by the Coalition Opposition party along with Independent and Green Senators, who felt the plan did not go far enough. In April 2010, the Rudd government recognized the inevitable, said they would propose new legislation after the next election, and deferred implementation until 2012 (i.e. the date originally proposed by the Coalition in 2007).

In June 2010, PM Rudd was himself defeated in a Labor Party leadership challenge by Julia Gillard, who called an election shortly afterwards. While campaigning, she said that while she was committed to building “community support” for a carbon price, she would not implement one until there was sufficient consensus, and she explicitly ruled out a carbon tax.[1]  The election resulted in a hung parliament, leaving Gillard dependent on the support of the Greens and Independents.  In an effort to build the consensus she sought—and under pressure from the Greens—she formed a cross-party Parliamentary committee to report on ways to introduce a carbon price. The committee proposed that the ETS be introduced in 2012. Emission allowances were to be sold on a fixed price basis, changing to a variable trading system starting in 2015. The government accepted the report, and legislation passed both houses in November 2011. The ETS took effect in July 2012.

The result was a cap and trade system which started with allowances trading at a fixed price (A$23/ton CO2) but converting to a system with variable prices two years later. The hope was that the Australian carbon market would merge with the EU ETS to form an international trading system. The EU had mounted a prominent and well-funded effort to spread their cap and trade gospel, including whispers that this design would allow Australia to position itself as the trading hub for Asia (a claim they’ve subsequently tried on both Singapore and Hong Kong).

Politically, the Opposition (and most of the media) immediately dubbed the fixed price a Carbon Tax, but its problems went well beyond the political. These began with the system giving away a lot of money in compensatory allowances and tax cuts, and some argued that it gave away more than it raised. Second, the price chosen for the fixed phase was two or three times the EU ETS price (this was reputedly decided based on the then-current view of the Social Cost of Carbon, perhaps with the thinking that moving to an ETS would be more politically attractive if it meant reducing the price to EU levels), an easy political target for opponents. Third, the public just did not believe they were being compensated for the increased costs. Electricity companies were accused of adding more than the cost of the carbon price to consumers’ bills. And all of this occurred at a time when the global financial crisis and accompanying decline in purchases of Australian exports was starting to bite, a problem that was easily blamed on the impact of the carbon price.

Less than a year after being inaugurated, Kevin Rudd ousted Gillard from the leadership of the Labor Party, in part because of discontent among Labor MPs about unpopularity of the carbon price. Rudd promised to scrap the fixed price system and move to an ETS as soon as possible. But Labor lost the 2013 election anyway, mostly because of the unpopularity of the carbon pricing regime. The winning Abbott-led Coalition had vowed to repeal the policy and did so in November 2014, replacing it with a system (described below) that was supposed to achieve the same emission reductions, but which their own Treasury felt would do so at roughly twice the cost of the ETS.

So what lessons can be drawn from this experience?

  • Most seriously, the political support for the program proved unsustainable. The reason for the delayed implementation and two-year fixed allowance period was an inter-party squabble about who could act faster, and that fight destroyed the emerging consensus about what to do. At the behest of the Greens, Gillard made—perhaps half-hearted—efforts to rebuild a consensus in 2010, but in the end she went ahead unilaterally.
  • The time and effort needed to design and implement a workable cap-and-trade system was wildly underestimated from the start.
  • The gap between policy approval and implementation was both too long (the supportive majority had evaporated) and too short. It would probably have been better to have had no policy in the interim until the full ETS started, rather than to embrace a high cost regime that kept the policy debate flames burning.
  • Titles don’t matter. The Rudd government called the plan the Carbon Pollution Reduction Scheme, then Gillard renamed it the Clean Energy Plan, but everyone else called it a Carbon Tax from day 1.
  • The carbon price was too high. The fixed price was set far above world (and especially competing economy) levels, and Australians felt they (and more importantly, their economy and jobs) were being taken for a ride by a dogmatic minority. The media pounced on stories alleging that the carbon price was being used as an excuse by companies to gouge consumers, a charge that might have been less compelling had the carbon price been lower. Immediately after the program was introduced, for instance, Australia’s consumer watchdog cautioned two companies that sold solar panels for claiming electricity prices under the tax would rise 400% by 2019. The managing director of a major bakery franchise resigned over a memo in which he told store owners to “let the carbon tax take the blame” for rising prices. A majority in a Per Capita survey blamed the tax for an increase in gasoline prices, even though it did not apply to gasoline.
  • Tax changes designed to compensate companies and citizens were too complex and opaque, which led readily to the charge that the money was being wasted and/or given to undeserving renewable energy projects. In the Per Capita survey, less than half said they had received compensation for the tax, whereas in fact 90% received such compensation.
  • The carbon price probably worked.  While precise causation is still debated, the government claimed in 2013 that the carbon intensity of electricity generation had fallen by 6% since the introduction of the carbon price a year earlier, and overall emissions were down 1%. By 2014, however, it was clear that the program was on the way out.

Where do things go from here? The Abbott/Turnbull government committed themselves at Paris to a target that, not coincidentally, matches the headline U.S. number: a 26 to 28% reduction from 2005 emissions by 2030 (the US is aiming to do this by 2025). Their plan to meet that target has three parts.

First is the Emissions Reductions Fund (ERF). The ERF is a very interesting idea that doesn’t yet seem to be fully effective. It establishes a baseline for each business based on historical emissions, and uses a reverse auction to pay for projects which reduce those emissions. Some A$2.5B has been set aside for the program in the initial years, with an intent to increase it in the future. In the first two auctions, some 93 MMT of annual CO2 emission reductions have been bought at a cost of around A$13/ton. So far so good, but most of the initial projects are for avoiding deforestation and none have been even proposed by Australia’s dominant mining, energy and resource sectors. That is almost certainly attributable to the desperate times in these commodity businesses. Capital investment is drying up, especially where planning is conditional on government support that, in turn, depends on the auction. This is a worrying trend.

Second is a Renewable Energy Target, which requires 23.5% of Australian electricity to come from renewable sources by 2020 (up from about 11% today). Energy Intensive and Trade Exposed (EITE) industries are exempted from the increase in electricity prices resulting from this effort. Interestingly, the vast majority of the capacity brought forward for support under the program is for wind rather than the solar power you might expect.

Last (and most ironically) comes the Safeguard program, which is still in the consultation stage. This covers large emitters—those above 100,000 MT/yr, or about half of Australia’s total emissions (Gillard’s original cap and trade system covered some 60% of emissions).  It requires each emitter to keep its emissions below a baseline set by reference to historical emissions. If the emissions fall below that baseline, they earn government credits which they can sell to those who need to buy them because their emissions are above their targets. Sound familiar? Yes, eight years and four PMs later, we’re back to cap-and-trade.

Oh, and there’s another election July 2.

[1] A reasonable interpretation of this is that she meant she’d only consider cap-and-trade. But it was widely taken as ruling out any carbon price in the next Parliament, absent the consensus she talked about extensively; and the party did not attempt to deny it during the campaign.

Photo by Valeriia Miller from Pexels