Following five weeks of intense negotiations between the Rudd government and the Opposition, the Australian Senate voted once more, by 41 to 33, against bills that would have established the Carbon Pollution Reduction Scheme (CPRS). The Greens, Independent Senator Nick Xenophon, and Family First Senator Steve Fielding joined the Opposition (Liberals + Nationals) in voting down the scheme (SMH 02/12/09).

 The Minerals Council of Australia and the Australian Chamber of Commerce and Industry welcomed the rejection, while WWF and the Climate Institute, called for a double dissolution and joint sitting of Parliament to get the original bills through (SMH 04/12/09).

 Under Australia’s bicameral parliamentary system, both houses must reach majority agreement on proposed legislation before it can go forward into law. Following a vote against a bill it may, however, subsequently be revived or presented again. That is what happened this autumn following a first rejection of the CPRS by the Australian Senate in August (see my previous post). The legislation had been put on the table again by the government in November, passing without surprise the House of Representative on the 17^th.

 The Senate no vote came after an extraordinary few weeks of drama, in which the Opposition reached a deal to support the legislation with big changes, and then reneged after its change of leadership. Indeed, on Monday, former Opposition leader Malcolm Turnbull (who was backing the passage of the Australian ETS) was challenged within its own party, and was ousted as Liberal party leader by right-wing climate skeptic Tony Abbott. The new Liberal leader, who has been portraying the scheme as Kevin Rudd’s “big new tax”, managed to convince most Liberal Senators who would have supported the CPRS to vote down the scheme (except for two who crossed to floor).

 Mr Abbott insists that he will have a credible climate change policy but is making it clear that his policy will not include an emissions trading scheme any time soon. In particular, he said it would be “folly” for Australia to establish an emissions trading scheme before the United States had settled on its model: “The right time for an emissions trading scheme is when the rest of the world is signed up for one.” (ABC 02/10/09). Abbott plans to fight a climate change election using land management and energy efficiency measures instead of an ETS, and would welcome a debate on nuclear power as an option.

 Despite the fact that Prime minister Rudd now has the option to call for a double dissolution election, which he would without a doubt win, he has played down prospects of pulling this trigger. The government has said that in the next Parliamentary sitting period commencing on 2 February 2010, it will introduce bills to establish the CPRS, inclusive of amendments incorporated following negotiations with the Opposition announced on 24 November 2009, to give Parliament a further opportunity to consider and pass legislation. Hopes to portray Australia as a world leader on the issue have now vanished, putting Kevin Rudd in an incomfortable position as a friend of the chair in Copenhagen next week.

After the Government’s Carbon Pollution Reduction Scheme’s defeat in Senate last August, the Australian Opposition, the Coalition (Liberals + Nationals), had until last Sunday to propose amendments before the reintroduction of the bill in November (for previous developments, see here). After a Party meeting lasting more than four hours yesterday, Mr. Turnbull, the Opposition leader, confirmed the partyroom had endorsed his strategy, backing “commonsense amendments” which, if agreed to, “would save thousands of Australian jobs”(The Australian 19/10/09).

Most provisions intend to provide greater exemptions to key industries. Amendments include exemptions for the coal industry, greater assistance to power generators, a permanent exemption for agriculture, greater exemptions for energy intensive industries, and protection for food processing. The detailed list is available on the Liberals’ website. The Coalition won early support for its position last night, with the Minerals Council of Australia backing its amendments. “The proposed amendments will better align the CPRS with other emissions trading schemes around the world, promote investment in low-emissions technologies and provide the necessary flexibility to adjust to the outcome of the United Nations climate change talks in Copenhagen in December,” chief executive officer Mitchell Hooke said. (SMH 20/10/09)

Prime Minister Kevin Rudd, set a six-week timetable for negotiation and debate before a vote in November. The bill will be introduced to the House of Representatives this week, and should reach the Senate by mid-November. The government will push very hard for the passage of the bill by Copenhagen and may extend Senate sittings if necessary (SMH 18/10/09). However, the Nationals and some key Liberals strongly oppose the ETS, and threaten to cross the floor if Mr. Turnbull strikes a deal with the government. The legislation might still pass under this scenario, but Mr. Turnbull will face the embarrassment of a Coalition split on the issue just weeks after declaring he would stake his leadership on success.

Cloud over climate climate change deal in Parliament House, Canberra

On Thursday (13/08/09), the Australian Senate defeated the Rudd Government’s Carbon Pollution Reduction Scheme (CPRS), a legislative package made up of a Carbon emission trading scheme and ten related bills (click here for previous developments). The Opposition, Greens, and the independents, Nick Xenophon and Steve Fielding, voted to defeat the package 42 to 30. Prime Minister Rudd has called the day “a disappointing day for Australia” and accused the opposition of “placing the nation’s future at risk” (ABC 13/08/09).

The Government is determined not to go to Copenhagen empty-handed, and will reintroduce the same legislation in three months. At that time, if the bills are rejected a second time, Labour will have a trigger to dissolve both houses of Parliament and call an early election.

Let’s have look at the opponents’ rationale for rejecting this scheme.

Malcolm Turnbull, the Coalition leader, has managed to save himself some embarrassment by gaining the support of the majority of his party room to keep alive the prospect of negotiating a deal with the Government over the emission trading scheme. Indeed, if Turnbull had directed the Coalition to vote for the Government scheme, his weakness would have been fully exposed. The Nationals, and perhaps even some Liberals, would have defied him by crossing the floor in the Senate.

However, his leadership is seriously threatened as he will have to reassess his position to avoid potentially disastrous elections, and faces an inevitable split among the Coalition. Eventually, Liberals will somehow have to support the legislative package and split from the Nationals, who are not prepared to countenance any emissions trading scheme. In the meantime, Turnbull is trying to win some time in order to offer constructive alternatives. But he is not. Two days before the vote, the Coalition had produced a policy model, commissioned from the consultancy Frontier Economics, and which Climate Change Minister Penny Wong has described as a ”mongrel” (SMH 14/08/09). The model is radically different from Labour’s scheme in that it treats electricity generation less punitively and claims to reduce the negative impacts on Australian employment, one of the main Liberal arguments against CPRS. But Turnbull has little hope of succeeding in negotiating with the Government, which is showing him no mercy.

The Greens rejected the bills because they see the Government’s 2020 emissions reduction targets – between an unconditional 5 per cent and a highly-conditional 25 per cent – as too timid; and generally condemn the CPRS’ easiness on polluters (ENS 14/08/09). Green groups are now using the defeat of the emissions trading scheme bill to urge the Government to separate its renewable energy target from the rejected trading legislation. Indeed, the renewable energy target – 20 per cent by 2020 – is set to reach the Senate next week for a vote, but is not expected to pass unless the Government removes a part of the bill that links compensation to heavy-emitting industries under the target to the passage of its now-rejected carbon trading scheme.

The Greens will move amendments to the target legislation, increasing it and removing industry assistance, and introducing a renewable energy feed-in tariff. The Opposition is also working on amendments, mainly to add extra exemptions for the aluminum and milk pasteurisation industries. Prime Minister Rudd said he would not commit to changes to the renewable energy target but that Labour is likely to separate this question from the carbon trading scheme. Next week’s vote on renewables target will therefore be an important test to see if Australian parties manage to overcome their excessive divisions. All the more so as a recent poll showed that Australians, who by a majority support the CPRS legislation, are losing patience with their politicians on climate change. (SMH 14/08/09)

The economics of reducing greenhouse gas emissions are a complicated business. And this is especially true when you want to set up a domestic cap and trade system in a carbon-dependent economy, a process both the USA and Australia are in the process of beginning to work through.

At the outset there are the problems of setting a floor and ceiling price for carbon; this ensures that it remains scarce enough to be expensive but in supply enough to prevent a domestic economic squeeze from soaring prices.

Another issue is how the permits will be given out to emitters. This is the problem that the new EU climate deal has being grappling with. On one hand, auctioning permits increases the initial price of carbon and so further reduces willingness to pay; at the same time an a

uction also generates funds for other climate change policies, such as grants for clean technology. However, on the other hand, as the EU has found, auctions are politically rather unpalatable–so much so that the EU has agreed to only auction 30% of the second round of ETS permits. As well as economic prices, then, there are political prices to take into account.

Once the price and distribution has been set, there is still the question of coordinating the system. This is emerging as a particularly important variable in the Australian carbon trading scheme. While at the federal level the purchase price of carbon is capped at AUS$40 per tonne, a report released today shows that in New South Wales the state government has been buying permits up from companies at AUS$240 per tonne.

In effect the NSW government has been paying companies a vastly inflated price to force them to reduce emissions. These kind of actions heavily distort national markets, especially those still in their infancy; in this case, they give a competitive advantage to companies in NSW in a low-carbon economy compared to those who have not been injected with capital in this way.

Pricing, Politics, Coordination: three issues that the architects of domestic carbon markets need to tackle in order to get these systems working effectively. As yet the details of soon-to-be President Obama’s domestic cap-and-trade system have not been finalised or released. However, in a country that is traditionally market-driven, with powerful industrial political lobbies, and that is highly geographically diverse and decentralised, the Pricing, Politics, and Coordination questions are big ones to answer.

Following El’s blog a few minutes ago, I wanted to give some details and thoughts that are coming in from those around the EU delegation here in Poznan.

Despite predicted NGO criticisms of not going far enough, this package was not easy to achieve, as evidenced by concessions that have been made to industrial communities as well as the central European states that joined the Union in 2004 and 2007.  These concessions relax the proposed changes to the European Emissions Trading Scheme (ETS) that had been proposed, including:

• Electricity companies can continue to pass the costs from the permits system through to their customers.  Yet, they will continue to receive these permits for free, and so will be passing on false costs to consumers, generating large profits for the companies
• Industry operating in Central and Eastern Europe will not now have to buy emissions permits from 2013.  Instead they will only have to buy 30%, rising to 100% by 2020.
  

  Source: chinadialogue @ flickr

There is also some speculation that heavy industry in Western Europe will also have some exemptions.

While these concessions are indeed a step down from the original plan, passing what is still an ambitious package during the financial crisis is indicative of the EU–and French Presidency’s–determination to deal with climate change and, in doing so, lead on it.

In comparison to the deal being negotiated in Poznan, the EU certainly does have some characteristics in its favour in terms of its leadership.  Policy in the EU, for example, is not only legally binding but also well enforced by the ECJ and Commission; violation of environmental targets has incurred severe fines as well as legal challenges in the past.  In contrast, a major flaw in the UNFCCC process has been its lack of enforcement, leading to accusations of hollow targets.

The EU package is also significant in a wider, global sense.  As I reported yesterday the UN climate change negotiations are a good example of game theory in practice, where a number of parties are required to make early moves in order to incentivise the move for other parties.  This EU package goes some way to addressing the need for this early move in the context of the COP-14 to COP-15 process.  Firm, enforcable targets gives other parties a good assurance that the EU is now committed to this emissions pathway, and so potentially makes the move to global mitigation of climate change more attractive by making the optimal equilibrium of reduced climate change a possibility.

We shall wait to see here in Poznan whether the EU deal has such an impact, although it is widely expected now that tonight’s (said with extreme caution) statement will focus on mechanisms not targets.