Road to Nowhere

Those observing the current state of federal climate policy in Australia – as judged by policies released by Julia Gillard’s Labor and Tony Abbott’s Liberals ahead of the 21 August federal election – might find themselves inadvertently humming Talking Heads’ 1985 song Road to Nowhere.

Meanwhile across the Tasman, New Zealand’s ETS has made a fairly ho-hum start with neither fanfare nor catastrophe. NZ’s largest power supplier, Contact

Energy, said in a statement that electricity price rises would not surge in double figures, as feared, but average residential energy prices would lift by around 3.2 per cent – less than the government’s estimate of 5 per cent.

Australia, of course, came very close to legislating for an economy-wide ETS under the Rudd Labor government – the Carbon Pollution Reduction Scheme (CPRS) – but in the end the Abbott-Liberals’ “great big tax” scare campaign has seemingly killed the prospects of an ETS in Australia until 2013 at the earliest – assuming even then that Labor is returned to power on 21 August.

So where to for Australian climate policy?

We will again see Australian state governments taking action to fill the policy vacuum that has been left with the sinking of the CPRS – just as they did under the Howard government some years back. Already Victoria’s Labor Premier John Brumby has stolen the limelight in this regard by announcing some ambitious plans.

Yet while the prospects for an economy-wide ETS in Australia remain slim before 2013, a price of sorts on carbon will slowly emerge regardless of who wins the election. This won’t start out as the top-down, economy-wide price under an ETS, but more informal pricing in certain sectors in response to the mixed bag of federal policies to be put in place over the coming three years.

Labor has announced that all new coal generators would face tougher emissions standards and would have to be “carbon capture and storage ready”. This will require the adoption of best available technology, clawing back the competitive price advantage that traditional coal-fired generation has had over gas and renewable energy sources. There is also an expectation that Labor will soon announce the establishment of mandatory energy efficiency targets, potentially coupled with a tradeable energy efficiency certificate scheme.

Whilst Labor’s promise to reward early movers remains vague, it provides some hope that companies won’t sit on their hands in undertaking abatement until 2013. Perhaps

more ambitiously, the Abbot-Liberal “direct action” plan envisages a fund that will support businesses and industries that reduce emissions below a historic baseline

– by buying abatement with government revenues at a competitive tender price.

With sustained public support for action on climate change, pricing of carbon in the voluntary market will push on. Here, we will see renewed demands from the sector to expand the National Carbon Offset Scheme (NCOS) to enable accreditation of forestry and other “CPRS covered sector” projects – NCOS currently only recognises non-Kyoto offsets on the assumption that Kyoto sectors would have been covered by the CPRS.

We can expect the greatest pressure on the government to move to price carbon to come from the business sector itself. According to the Energy Supply Association of Australia, investment in energy infrastructure is set to slump partly due to uncertainty over climate change policies. Only this week debt held against one of Australia’s most emissions-intensive coal generators, Loy Yang B in Victoria, has been downgraded by Standard & Poor’s to one step above junk because of carbon policy uncertainty.

Clearly neither Gillard’s citizens’ assembly on climate, nor Abbot’s army of environmental volunteers doing green projects across the country, will do anything to turn this investment uncertainty around. So expect then increased pressure on the next government from business – in particular the energy and finance sectors –to finally tackle this issue with a proper policy to price carbon. Even the Business Council of Australia has warned that unless investment in electricity generation is encouraged, then “we’re heading for real problems”. But hopefully not a on a road to nowhere.